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1. General Observations Concerning the Theory of Rent
In the frame of Ricardian economics the idea of rent was an attempt at a treatment of those problems which modern economics approaches by means of marginal-utility analysis.1 Ricardo's theory appears rather unsatisfactory when judged from the point of view of present-day insight; there is no doubt that the method of the subjective-value theory is far superior. Yet the renown of the rent theory is well deserved; the care bestowed upon its initiation and perfection brought forth fine fruits. There is no reason for the history of economic thought to feel ashamed of the rent theory.2
The fact that land of different quality and fertility, i.e., yielding different returns per unit of input, is valued differently does not pose any special problem to modern economics. As far as Ricardo's theory refers to the gradation in the valuation and appraisement of pieces of land, it is completely comprehended in the modern theory of the prices of factors of production. It is not the content of the rent theory that is objectionable, but the exceptional position assigned to it in the complex of the economic system. Differential rent is a general phenomenon and is not limited to the determination of the prices of land. The sophisticated distinction between "rents" and "quasi-rents" is spurious. Land and the services it renders are dealt with in the same way as other factors of production and their services. Control of a better tool yields "rent" when compared with the returns of less suitable tools which must be utilized on account of the insufficient supply of more suitable ones. The abler and more zealous worker earns a "rent" when compared with the wages earned by his less skillful and less industrious competitors.
The problems which the rent concept was designed to solve were for the most part generated by the employment of inappropriate [p. 636] terms. The general notions as used in everyday language and mundane thought were not formed with regard to the requirements of praxeological and economic investigation. The early economists were mistaken in adopting them without scruple and hesitation. Only if one clings naively to general terms such as land or labor, is one puzzled by the question why land and labor are differently valued and appraised. He who does not allow himself to be fooled by mere words, but looks at a factor's relevance for the satisfaction of human wants, considers it a matter of course that different services are valued and appraised differently.
The modern theory of value and prices is not based on the classification of the factors of production as land, capital, and labor. Its fundamental distinction is between goods of higher and of lower orders, between producers' goods and consumers' goods. When it distinguishes within the class of factors of production the original (nature-given) factors from the produced factors of production (the intermediary products) and furthermore within the class of original factors the nonhuman (external) factors from the human factors (labor), it does not break up the uniformity of its reasoning concerning the determination of the prices of the factors of production. The law controlling the determination of the prices of the factors of production is the same with all classes and specimens of these factors. The fact that different services rendered by such factors are valued, appraised, and dealt with in a different way can only amaze people who fail to notice these differences in serviceableness. He who is blind to the merits of a painting may consider it strange that collectors should pay more for a painting of Velasquez than for a painting of a less gifted artist; for the connoisseur it is self-evident. It does not astonish the farmer that buyers pay higher prices and tenants higher leases for more fertile land than for less fertile. The only reason why the old economists were puzzled by this fact was that they operated with a general term land that neglects differences in productivity.
The greatest merit of the Ricardian theory of rent is the cognizance of the fact that the marginal land does not yield any rent. From this knowledge there is but one step to the discovery of the principle of valuational subjectivism. Yet blinded by the real cost notion neither the classical economists nor their epigones took this step.
While the differential-rent idea, by and large, can be adopted by the subjective-value theory, the second rent concept derived from Ricardian economics, viz., the residual-rent concept, must be rejected altogether. This residual-claimant idea is based on the notion of real or physical costs that do not make any sense in the frame of the modern explanation of the prices of factors of production. The reason [p. 637] why the price of Burgundy is higher than that of Chianti is not the higher price of the vineyards of Burgundy as against those of Tuscany. The causation is the other way around. Because people are ready to pay higher prices for Burgundy than for Chianti, winegrowers are ready to pay higher prices for the vineyards of Burgundy than for those of Tuscany.
In the eyes of the accountant profits appear as a share left over when all costs of production have been paid. In the evenly rotating economy such a surplus of the prices of products over and above costs could never appear. In the changing economy differences between the prices of the products and the sum of the prices that the entrepreneur has expended for the purchase of the complementary factors of production plus interest on the capital invested can appear in either direction, i.e., either as profit or as loss. These differences are caused by changes which arise in the prices of the products in the time interval. He who succeeds better than others in anticipating these changes in time and acts accordingly, reaps profits. He who fails in his endeavors to adjust his entrepreneurial ventures to the future state of the market is penalized by losses.
The main deficiency of Ricardian economics was that it was a theory of the distribution of a total product of a nation's joint efforts. Like the other champions of classical economics Ricardo failed to free himself from the Mercantilist image of the Volkswirtschaft. In his thought the problem of the determination of prices was subordinated to the problem of the distribution of wealth. The customary characterization of his economic philosophy as "that of the manufacturing middle classes of contemporary England"3 misses the point. These English businessmen of the early nineteenth century were not interested in the total product of industry and its distribution. They were guided by the urge to make profits and to avoid losses.
Classical economics erred when it assigned to land a distinct place in its theoretical scheme. Land is, in the economic sense, a factor of production, and the laws determining the formation of the prices of land are the same that determine the formation of the prices of other factors of production. All peculiarities of the economic teachings concerning land refer to some peculiarities of the data involved.