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9. Production: Particular Factor Prices and... > 2. Land, Labor, and Rent

A. Rent

We have been using the term rent in our analysis to signify the hire price of the services of goods. This price is paid for unit services, as distinguished from the prices of the whole factors yielding the service. Since all goods have unit services, all goods will earn rents, whether they be consumers’ goods or any type of producers’ goods. Future rents of durable goods tend to be capitalized and embodied in their capital value and therefore in the money presently needed to acquire them. As a result, the investors and producers of these goods tend to earn simply an interest return on their investment.

All goods earn gross rent, since all have unit services and prices for them. If a good is “rented out,” it will earn gross rent in the hire charge. If it is bought, then its present price embodies discounted future rents, and in the future it will earn these rents by contributing to production. All goods, therefore, earn gross rents, and here there is no analytic distinction between one factor and another.

Net rents, however, are earned only by labor and land factors, and not by capital goods.1 For the gross rents earned by a capital good will be imputed to gross rents paid to the owners of the factors that produced it. Hence, on net, only labor and land factors—the ultimate factors—earn rents, and, in the ERE, these, along with interest on time, will be the only incomes in the economy.

The Marshallian theory holds that durable capital goods earn “quasirents” temporarily, while permanent lands earn full rents. The fallacy of this theory is clear. Whatever their durability, capital goods receive gross rents just as lands do, whether in the changing real world or the ERE. In the ERE, they receive no net rents at all, since these are imputed to land and labor. In the real world, their capital value changes, but this does not mean that they earn net rents. Rather, these changes are profits or losses accruing to their owners as entrepreneurs. If, then, incomes in the real world are net rents (accruing to labor and land factors) and entrepreneurial profits, while the latter disappear in the ERE, there is no room in either world for the concept of “qua-sirent.” Nowhere does this special type of income exist.

A wage is the term describing the payment for the unit services of a labor factor. A wage, therefore, is a special case of rent; it is labor's “hire.” On a free market this rent cannot, of course, be capitalized, since the whole labor factor—the man—cannot be bought and sold for a price, his income to accrue to his owner. This is precisely what occurs, however, under a regime of slavery. The wage, in fact, is the only source of rent that cannot be capitalized on the free market, since every man is necessarily a self-owner with an inalienable will.

One distinction between wages and land rents, then, is that the latter are capitalized and transformed into interest return, while the former are not. Another distinction is purely empirical and not apodictically true for mankind. It has simply been an historical-empirical truth that labor factors have always been relatively scarcer than land factors. Land and labor factors can be ranged in order of their marginal value productivity. The result of a relative superfluity of land factors is that not all the land factors will be put to use, i.e., the poorest land factors will be left idle, so that labor will be free to work the most productive land (e.g., the most productive agricultural land, urban sites, fish hatcheries, “natural resources,” etc.). Laborers will tend to use the most value-productive land first, the next most productive second, etc. At any given time, then, there will be some land—the most value-productive—under cultivation and use, and some not in use. The latter, in the ERE, will be free land, since its rental earnings are zero, and therefore its price will be zero.2 The former land will be “supramarginal” and the latter land will be “submarginal.” On the dividing line will be the poorest land now in use; this will be the “marginal” land, and it will be earning close to zero rent.

It is important to recognize the qualification that the marginal land will earn not zero, but only close to zero, rent.3 The reason is that, in human action, there is no infinite continuity, and action cannot proceed in infinitely small steps. Mathematically minded writers tend to think in such terms, so that the points before and after the point under consideration all tend to merge into one. Using marginal land, however, will pay only if it earns some rent, even though a small one. And, in cases where there are large discontinuities in the array of MVPs for different lands, the marginal land might be earning a substantial sum. It is obvious that there is no praxeological precision in terms like “close,” “substantial,” etc. All that we can say with certainty is that if we arrange the MVPs of lands in an array, the rents of the submarginal lands will be zero. We cannot say what the rent of the marginal land will be, except that it will be closer to zero than that of the supramarginal lands.4

Now we have seen above that the marginal value product of a factor decreases as its total supply increases, and increases as the supply declines. The three major categories of factors in the economy are land, labor, and capital goods. In the progressing economy, the supply of capital per person increases.5 The supply of all ranks of capital goods increases, thereby decreasing the marginal value productivities of capital goods, so that the prices of capital goods fall. The relative MVPs of land and labor factors, in the aggregate, tend to rise, so that their income will rise in real terms, if not in monetary ones.

What if the supply of capital remained the same, while the supply of labor or land factors changed? Thus, suppose that, with the same capital structure, population increases, thus expanding the total supply of labor factors. The result will be a general fall in the MVP of labor and a rise in the MVP of land factors. This rise will cause formerly submarginal, no-rent lands to earn rent and to enter into cultivation by the new labor supply. This is the process particularly emphasized by Ricardo: population pressing on the land supply. The tendency for the MVP of labor to drop, however, may well be offset by a rise in the MPP schedules of labor, since a rise in population will permit a greater utilization of the advantages of specialization and the division of labor. The constant supply of capital would have to be reoriented to the changed conditions, but the constant amount of money capital will then be more physically productive. Hence, there will be an offsetting tendency for the MVPs of labor to rise. At any time, for any given conditions of capital and production processes, there will be an “optimum” population level that will maximize the total output of consumers’ goods per head in the economy. A lower level will not take advantage of enough division of labor and opportunities for labor, so that the MPP of labor factors will be lower than at the optimum point; a higher level of population will decrease the MVP of labor and will therefore lower real wages per person.6

Recognition of the existence of a theoretical “optimum” population that maximizes real output per head, given existing land and capital, would go far to end the dreary Malthusian controversies in economic theory. For whether a given increase in population at any time will lead to an increase or decrease in real output per head is an empirical question, depending on the concrete data. It cannot be answered by economic theory.7

It might be wondered how the statement that increasing population might increase MPP and MVPs can be reconciled with the demonstration above that factors will always be put to work in areas of diminishing physical returns. The conditions here are completely different, however. In the previous problem we were assuming a given total supply of the various factors and considering the best method of their relative arrangement. Here we are dealing, not with particular production processes and given supplies of factors, but with the vague concept of “production” in general and with the effect of change in the total supply of a factor. Furthermore, we are dealing not with a true factor (homogeneous in its supply), but with a “class of factors,” such as land-in-general or labor-in-general. Aside from the problem of vagueness, it is evident that the conditions of our present problem are completely different. For if the total supply of a factor changes and it has an effect on the productivity of the labor factor, this is equivalent to a shift in the MPP curves (or schedules) rather than a movement along the curves such as we considered above.8

Because we are accustomed to viewing labor implicitly as scarcer than land factors, we speak in terms of zero-rent land. If the situations were reversed, and lands were scarcer than labor factors, we would have to speak of zero-wage laborers, submar-ginal labor, etc. Theoretically, this is certainly possible, and it might be argued that in such static societies with institutionally limited markets as ancient Sparta and medieval or post-Medieval Europe, this condition actually obtained, so that the “surplus labor” earned a below-subsistence wage in production. Those who were “surplus” and did not own invested capital were curbed by infanticide or reduced to beggary.

That submarginal land earns no rent has given rise to an unfortunate tendency to regard the very concept of rent as a “differential” one—as referring particularly to differences in quality between factors. Sometimes the concept of “absolute” or pure rents is thrown overboard completely, and we hear only of rent in a “differential sense,” as in such statements as the following:

If land A earns 100 gold ounces a month, and land B earns zero, land A is making a differential rent of 100.
If laborer A earns 50 gold ounces a month, and laborer B earns 30 gold ounces, A earns a “rent of ability” of 20 ounces.

On the contrary, rents are absolute and do not depend on the existence of a poorer factor of the same general category. The “differential” basis of rent is purely dependent on, and derived from, absolute rents. It is simply a question of arithmetical subtraction. Thus, land A may earn a rent of 100, and land B a rent of zero. Obviously, the difference between 100 and zero is 100. In the case of the laborer, however, laborer A's “rent,” i.e., wage, is 50 and B's is 30. If we want to compare the two earnings, we may say that A earns 20 more than B. There is little point, however, in adding to confusion by using “rent” in this sense.

The “differential rent” concept has also been used to contrast earnings by a factor in one use with those of the same factor in another use. Thus, if a factor, whether land or labor, earns 50 ounces per month in one use and would have earned 40 ounces in some other use, then its “rent” is 10 ounces. Here, “differential rent” is used to mean the difference between the actual DMVP and the opportunity forgone or the DMVP in the next best use. It is sometimes believed that the 10-ounce differential is in some way not “really” a part of costs to entrepreneurs, that it is surplus or even “unearned” rent acquired by the factor. It is generally admitted that it is not without cost to individual firms, which have bid the factor up to its MVP of 50. It is supposed, however, to be without cost from the “industry point of view.” But there is no industry “point of view.” Not “industries,” but firms, buy and sell and seek profits.

In fact, the entire discussion concerning whether or not rent is “costless” or enters into cost is valueless. It belongs to the old classical controversies about whether rents are “price-determined” or “price-determining.” The view that any costs can be price-determining is a product of the old cost-of-production theory of value and prices. We have seen that costs do not determine prices, but vice versa. Or more accurately, prices of consumers’ goods, through market processes, determine the prices of productive factors (ultimately land and labor factors), and the brunt of price changes is borne by specific factors in the various fields.

  • 1. Net rents equal gross rents earned minus gross rents paid to owners of factors.
  • 2. Its capital value will be positive, however, if people expect the land to earn rents in the near future.
  • 3. As Frank Fetter stated in “The Passing of the Old Rent Concept,” Quarterly Journal of Economics, May, 1901:
    The last unit of product of any finite amount would ... have to pay its corresponding rent. The only product obtained, in the strict theory of the case, without paying rent, would be one unit infinitesimally small—in plain Anglo-Saxon, would be nothing at all. No finite unit of product can be shown to be a no-rent unit. (p. 489)
  • 4. The terms “marginal,” “supramarginal,” etc., are rather differently used here from the way they are used above. Instead of dealing with the supply and demand for a homogeneous good or factor, we are here referring to one class of factors, such as lands, and comparing different qualities of the various factors in that class. The near-zero-earning land is “marginal” because it is the one just barely put to use.
  • 5. Here we shift the definition of progressing economy to mean increasing capital per person, so that we can contrast the effects of changes in the supply of one type of factor to changes in the supply of another.
  • 6. There is, of course, no reason to assume that maximum real income per head is necessarily the best ethical ideal; for some, the ideal might be maximum real income plus maximum population. In a free society, parents are free to choose their own ethical principles in the matter.
  • 7. Economics can say little else about population and its size. The inclusion of a corpus of “population theory” under economics instead of biology or psychology is the unfortunate result of the historical accident that the early economists were the first to delve into demographic problems.
  • 8. The Lausanne way (of Walras and Pareto) of phrasing this distinction would be to say that, in the former case (when we are moving along the curve), we implicitly assumed that “(the supply of) tastes, techniques, and resources remains given in the economy.” In the present case, we are considering a change in a resource (e.g., an increase in the supply of labor). We would amend this to say that only tastes and resources were considered given. As we saw in the previous section, techniques are not immediate determinants of production changes. The techniques must be put to use via saving and investment. In fact, we may deal with tastes and resources alone, provided that we include time preferences among the “tastes.”
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