Some Aspects of the Theory of Rent
SOME ASPECTS OF THE THEORY OF RENT
Few economic theories have been more often introduced of late into the discussion of practical affairs than the theory of rent; and, among the causes which have contributed to this result, two are perhaps especially prominent. On the one hand, the attention of Parliament has been largely directed to agrarian matters. The questions, indeed, raised by the Agricultural Holdings Acts and the condition of the Highland crofters have differed in detail and degree from those connected with Irish land legislation; but these differences have been compatible with a broad similarity in the theoretical issues involved. It is true that such differences may be an important consideration for the practical legislator, and that he may refuse to concern himself very seriously with similarities of theoretical principle, if, after the most comprehensive survey that he has been able to make of the conditions of the immediate problem before him, he has reached the conviction that the solution he favours satisfies the demands of practical exigency. But his action is generally regarded by himself, or by others, to be founded on the application, or misapplication, of a theory; and it can scarcely fail to attract attention to the theoretical principles with which it is supposed to conflict, or to be in fundamental agreement in spite of an appearance of discord. Nor would the theorist, who had formed his theories most carefully, be unwilling to admit the advantage of allowing due weight to the limiting conditions of practice in their application. Although, then, the question has presented itself to Parliament in a different shape, with different antecedents and surroundings, on different occasions, yet certain similar theoretical issues connected with the theory of rent have been brought into recent discussions on the practical relations of landlord and tenant; and, where the support of the theory has not been enlisted, its dismissal as erroneous or inapplicable has been persistently urged.
But there is another cause, which seems also to have been specially responsible for the appearance of the theory of rent in recent discussions. It can scarcely be questioned that the only part of the propaganda of modern socialism, which has as yet obtained any wide currency in England, is that known as the 'nationalisation of land.' At any rate, it will not be disputed that this side of the socialistic agitation has been brought into greater prominence than the other, which is more comprehensive in its aims, and proposes the 'nationalisation' of capital (including land), or the means of production. Different explanations might be furnished to account for the phenomenon that this more limited form of socialism has hitherto found greater favour in England, while enthusiastic support has been given on the Continent to the larger scheme. The 'illogical' character of the English temper might be urged by those unwilling to recognize that quality of 'animated moderation,' which Mr. Bagehot once described as the typical characteristic of a 'great practical Englishman.' The comparative difficulty and expense of the transfer of English landed property might be advanced by those who maintain that in the past, and, in spite of recent legislation, in the present also, these causes, pressing with greater weight on the small than on the large purchaser, have tended to strengthen those influences of legal tradition, or social prestige, or political power, or economic advantage, which, it is argued, have promoted the concentration of the ownership of land in the hands of a smaller number of persons than in Continental countries. The lingering effects of the struggle between the old privileged landed gentry and nobility and the new manufacturing and mercantile classes might be held responsible by a third set of persons. But, whatever the true reason may be, of the fact there can be little doubt. Whether it be due especially to one or more of the causes which have been noticed, or perhaps in part also to the influence of Mr. George's Progress and Poverty, which was written in the English language, and addressed in the first instance to the English-speaking peoples, the proposal for the 'nationalisation' of land has unquestionably met with the more considerable support. The popularity of Mr. Bellamy's Looking Backward, which promises to rival that of Mr. George's book, may possibly result in the withdrawal of part of that support in favour of the larger scheme of socialism described in its pages; but for the present it remains true that the 'nationalisation of land' is the more popular part of the socialist programme.
Of the intimate connection of this proposal with the theory of rent there can be no question. Just as the more comprehensive form of socialism, which aims at the 'nationalisation' of capital, purports to be based on Ricardo's theory of value, so the proposal for the 'nationalisation of land' is avowedly put forward as a practical deduction from Ricardo's theory of rent. In the one case, as in the other, the theory may be unduly strained or perversely misinterpreted, and the details of the practical schemes founded upon it may differ in particular cases. But these different schemes are characterised by the common element of the conception of an 'unearned increment' attaching to the ownership of land, and that conception is regarded as a corollary of the theory of rent.
Perhaps, however, the chief form of landed property, against which the criticisms and proposals of writers and speakers have been more recently directed, is that found in urban districts. Although, by a coincidence, which might be quoted as a fresh illustration of the 'irony of fate,' the popularity of Mr. George's book has been simultaneous with the occurrence of a serious and prolonged depression in the agriculture of the old world, which has rendered the landed classes, generally so-called, a specially distressed rather than a prosperous section of the community, yet the increasing tendency of the inhabitants of old and new countries alike to gather together in towns has resulted in a marked rise of urban rent. Such questions as 'leasehold enfranchisement,' the 'taxation of ground rents,' and the application of the principle of 'betterment,' show that the attention of the Legislature, like the criticisms of socialistic and other writers, may be directed more persistently in the future to the consideration of urban than agricultural land.
But, while the action of legislators and the proposals of reformers have been thus busy on matters connected with the theory of rent, economic students have been actively engaged in the examination of that theory, and it has certainly participated as largely as any other theory in recent extensions and improvements of economic knowledge. It will be the aim of the present article to consider some aspects of the relations borne by this theoretical criticism to discussions on matters of practice, without venturing further than may prove to be inevitable on controversial ground.
The economic theory of rent is generally known as the Ricardian theory. It is true that Ricardo himself stated in the preface to his Principles of Political Economy and Taxation that the theory might be found in the pages of other writers. 'In 1815,' he wrote, 'Mr. Malthus in his Inquiry into the Nature and __PAGESEPARATOR__Progress of Rent, and a Fellow of University College, Oxford, presented to the world, nearly at the same moment, the true doctrine of rent.' Later research has added to the names of Malthus and Sir Edward West, who was the anonymous 'Fellow of University College,' that of an earlier writer, Dr. Anderson, who stated the theory in 1777 in his Enquiry into the Nature of Corn Laws; and it has also shown that in some respects Malthus' exposition may be considered superior to that of Ricardo, as in others it is inferior. Mr. Bonar in his Malthus and his Work has urged that here, as on other points of general economics, Malthus anticipated some of the conclusions of later writers and their criticisms on Ricardo's doctrines. Both in his definition of rent and his enumeration of the causes of its increase he seems to have been more comprehensive, and later inquiry has tended to justify this largeness of view. But the connection of the theory with the name of Ricardo does not require any formal or laboured justification. His treatment of it has exercised a predominant influence, and his whole scheme of economic doctrine was founded upon it. He gave it the most prominent place in his preface; he discussed it in his second chapter, immediately after the question of value, and he connected with it his theories of wages and profits, and of the incidence of various forms of taxation.
This connection of Ricardo's name with the theory suggests of itself some important considerations respecting its application to practice. Ricardo's writing has been generally regarded as the type of an abstract, deductive method of inquiry; and the criticisms of economists of the historical and inductive school have been chiefly directed against his doctrines. If the theories of any one economist were to be selected as an illustration of divergence from fact, the choice of many persons would at once fall on Ricardo, and the opinion of Malthus that the 'main part of his structure would not stand' would be considered as being at least as successful as any prediction in hitting the mark. This criticism may be erroneous, or it may be unduly severe; and the recent publication of Ricardo's Letters to Malthus may perhaps tend to moderate the rigorous treatment, which he has sometimes received. But these letters also furnish an instructive commentary on the application of his theories to practice. We have in them a statement from his own lips of the purpose, which he had in view in writing his Principles, and a frank confession of deficiencies of composition.
We might have known, before Mr. Bonar edited these letters, that Ricardo's Jewish nationality, and his occupation on the London Stock Exchange. were likely to have nourished a fondness and capacity for abstractions. We might have made ourselves aware that the actual phenomena of industry when he wrote presented a scene of confusing stir and bustling change, which almost seemed anarchical, and that, in arranging these phenomena in an intelligible order, and interpreting them by the assumption of the pervading presence of competition, he formed a conception of society, which did not appear to differ widely from actual fact. We might have informed ourselves that the subject on which he first wrote—that of money in its connection with the foreign exchanges—had since been recognised as so perplexing in its intricacy that it would be futile to attempt to unravel its tangled web without the aid of an abstract, deductive method. Nor were we without the opportunity of learning that the publication of a systematic treatise by Ricardo was due to the pressure of friends belonging to the school of thought, which centred round the name of Bentham, and believed in the exclusive advantage of rigid analysis and deduction from a few simple principles. So much as this might have been known; and Senior, who was an acute observer, had uttered the pregnant remark that Ricardo's own 'sagacity prevented his making sufficient allowance for the stupidity or carelessness of his readers, and he was too earnest a lover of truth to anticipate wilful misconstruction.'
But the publication of Ricardo's Letters to Malthus has made important additions to this available knowledge. They disclose in a vivid and unmistakable fashion the real intention of his work and the true character of his mind. They show at once in what lay his peculiar strength and his special weakness. 'Our differences,' he writes to Malthus in one of these letters, 'may in some respects, I think, be ascribed to your considering my book as more practical than I intended it to be. My object was to elucidate principles, and to do this I imagined strong cases, that I might show the operation of those principles.' And on another occasion he remarked: 'You have always in your mind the immediate and temporary effects of particular changes, whereas I put these immediate and temporary effects quite aside, and fix my whole attention on the permanent state of things which will result from them, Perhaps you estimate these temporary effects too highly, while I am too much disposed to undervalue them.' It would be difficult for a writer to explain more clearly the object which he had in view; but these passages are contained in Ricardo's Letters and not in his Principles, and they form part of the contribution made by recent economic research to the correct appreciation of the bearings of his theories on practice.
Nor, again, would it be easy to discover in any writer a more candid avowal of faults of composition than that furnished in some other extracts from this same correspondence. 'My speaking,' he states, 'is like my writing too much compressed. I am too apt to crowd a great deal of difficult matter into so short a space as to be incomprehensible to the generality of readers.' 'I am but a poor master of language, and therefore I shall fail to express what I mean.' 'I am fully aware of the deficiency in the style and arrangement; those are faults which I shall never conquer.' In the light shed by such passages as these it becomes easier to understand why his Principles have the appearance of a collection of detached notes rather than a formal treatise, and why he is often content with an isolated statement, unexplained and unrepeated, of the conditions which he assumes. But it also becomes more improbable that the characteristic theory of such a writer can with advantage or success be immediately applied to practice. It is even more likely than the theories of other writers to stand in need of limiting qualifications. It is more certain to be marked by a nicety of distinction, to which only a rough parallel can be found, or established, in fact. It subjects the student, who would understand its delicate refinements, to a stern intellectual discipline, which might naturally beget an extreme caution in practice.
Professor Sidgwick has remarked, that in what is 'commonly known' as 'the Ricardian theory of rent' three different theories are combined, based on 'different kinds of evidence, and relating to different' inquiries. The first is a 'historical theory as to the origin of rent,' the second a 'statical theory of the economic forces tending to determine rent at the present time, and the third a 'dynamical theory of the causes continually tending to increase rent, as wealth and population increases.' Although these three theories are, as Professor Sidgwick shows, distinct from one another, there is some bond of connection between them, and, at any rate, the considerations, which bear on their respective relations to practice, are similar in general character. It will, however, be convenient to examine the assumptions involved in Ricardo's reasoning from the standpoint, in the first instance, of the 'statical theory.' That seems to follow as a corollary from the market-price of the produce of land, which is determined by the expenses of producing and placing on the market that portion of the supply for which there is a demand, which is produced and placed on the market at the greatest expense.
On the hypothesis of free competition this result will follow. Producers cannot continue to produce at a loss; and, therefore, if the demand for the produce of land is to ensure a supply sufficient to meet it, a price must be offered, which will recoup the expenses incurred by those producers, who are situated in the most disadvantageous position. They cannot afford to produce at a loss, and, if they asked for more, fresh competitors would, on the hypothesis of free competition, leave some other industry and enter theirs. But the market-price thus determined will be the price for the whole of the supply of the same quality which is forthcoming. There is no reason, on the hypothesis of free competition, why the producers, who enjoy greater advantages of production, should be content with a lower when they can obtain the higher price, which the buyers must offer, if all the supply they demand is to be forthcoming. And so the producers, who are more favourably placed, obtaining the same price as those who are less advantageously situated for commodities which have cost less to produce and to place on the market, have a surplus in hand, which competition for the enjoyment of their advantages compels them to hand over to those who have their control and disposal.
It is this surplus which is termed 'rent': it is, broadly defined, a payment for differential advantages. Regarded thus broadly, it seems to involve certain conclusions. In the first place, a similar surplus may arise in the case of other kinds of wealth but land. In the second place the differential advantages, of which it is a measure, may conceivably vary in different degrees and opposing directions, according to the special form of advantage which is under consideration; and, thirdly, the theory postulates the action of free competition. We may conveniently confine our attention for the present to the second and third of these conclusions, and, in the first instance, to the circumstances of agricultural land used for farming purposes.
Some of that land is more fertile than other land, and, therefore, the expenses of raising tarm produce are less from some than they are from other land. The farmers of the least fertile land must secure for the sale of its produce in the market a price sufficient to cover their expenses of production; and the farmers of the more fertile land, obtaining the same price and incurring less expense, have a surplus in hand, which competition for the enjoyment of their position compels them to transfer to the landlords as rent. This surplus will vary according to the extent to which the fertility of their land exceeds in each case that of the least fertile land, the produce of which must be forthcoming to meet the demand.
But not only has farm produce to be raised—it has also to be placed on the market. The term 'production' is sometimes so interpreted as to cover the production of any utility, and to embrace the effort of labour and expenditure of capital undertaken by retail distributors. But, in any event, it comprises the effort and expenditure needed to place commodities on wholesale markets. The expenses of production, then, in the case of farm produce, include its carriage to the market as well as the cultivation of the land from which it is raised. Some land is situated nearer, and some at a greater distance from, the market where the produce is sold. The farmers of the most distant land, if their produce is needed to meet the demand, must secure such a price as to cover their expenses of production, including the cost of carriage. The farmers of the nearer land, obtaining the same price for what costs less to convey to the market, have a surplus in hand, which competition for the enjoyment of their advantages compels them to transfer to the landlords as rent.
To these two reasons for differential advantage in the cultivation of agricultural land Ricardo, who recognised the second, but laid greater stress on the first, added a third, connected with the law of diminishing returns. After a certain point has been reached in the cultivation of land, the returns of produce yielded to each fresh application of capital and labour will tend, ceteris paribus, to diminish and not to increase proportionally. Were this not the case, the whole of the food required might conceivably be raised from a single field, and there would not be any necessity to cultivate poorer land. As it is, the returns to different applications of capital and labour tend, ceteris paribus, to vary. Some are made under more, and some under less favourable conditions. A farmer will not knowingly engage in the least advantageous of each applications unless the price realised will cover the expenses of production; and from the more advantageous, obtaining the same price for what has cost less to produce, he will have a surplus in hand, which competition will compel him to transfer to the landlord as rent.
In a broad sense, then, rent is a payment for differential advantages, which may thus proceed from different sources. It is only by taking all sources of advantage into account that it can be determined whether one piece of land or another is a more productive instrument of wealth; and to this point we shall have to return. What we have now to notice is that the whole of the reasoning rests on the assumption of competition. The expenses of production, which the sale of the farm produce must cover, are the wages and profits paid to all who have co-operated in placing the produce on the market. Sometimes it is convenient to regard the farmer as incurring the expenses of cultivation and carriage, and receiving, in addition to those expenses, ordinary farming profits; sometimes it is more convenient, and it is perhaps more accurate, to look at the whole process from the outside, and to include in the expenses of production the profits of the farmer himself. But in either case the price at which the produce is sold in the market must be sufficient to afford 'normal' wages to all who have contributed their labour, and 'normal' profits to all who have given capital and management to the entire process of production, including the carriage to the market. It must form an adequate reward for all the effort and expenditure which have been devoted to the undertaking. It must furnish sufficient earnings of labour and interest of capital. So much as this it must yield in the case of those producers, who are placed under the greatest disadvantages, and furnish the last, or, as it may be called, the 'marginal' part, of the supply for which there is a demand; and it is the surplus above this amount which competition transfers to the landlords as rent.
All this reasoning, then, rests on the assumption of competition. It is assumed that, if wages or profits fell below the points, which, on a comparison of the advantages and drawbacks, pecuniary and other, of farming and other occupations, are considered to be normal in the farming industry, some labourers and farmers would seek some more advantageous employment, and that, if they rose above, some fresh competitors would enter the ranks of agriculture. It is assumed that landlord and tenant are actuated by competitive considerations alone, the one trying to obtain the highest and the other the lowest rent. The landlord is not supposed to be influenced by kindly feeling, traditional claims, long connection, or political obligation. The tenant is not supposed to be affected by a sense of attachment to a peculiar farm. But it has generally been recognised that such an assumption may be at variance with fact, and that other than competitive considerations may enter into the determination of the bargain. Land, in England at least, is a species of property, which is considered to be more subject than manufacturing or mercantile wealth to obligations of a customary and non-competitive character, and to the influence of kindly, personal considerations. And hence it is generally admitted that, taking a broad view of agricultural land, English rents have not reached an extreme competitive limit. But these considerations, however instructive, are not perhaps of such importance in the relations of the theory to practice as others which are more easily overlooked.
The assumption of competition implies that landlords and tenants are independent, intelligent agents, able to carry their services and commodities to the best market. It implies, therefore, that farmers are able and willing to move to any county or trade where they will secure more favourable conditions, that they know, and can compare, the different advantages of different soils and districts and trades. But it is not always the case that tenants are thus independent, intelligent agents; and, even if they are, they may yet be unable to take their wares and services to the best market. They may have given hostages to the land, which they cultivate, by investing capital in its improvement; and this is one theoretical justification of the Agricultural Holdings Acts of 1875 and 1883. Those Acts have recognised the inability of a tenant to remove his improvements, and provided for compensation for such part as may be 'unexhausted' at the close of a tenancy. It would not be difficult to show that they are not in conflict, but rather in harmony, with the theory of rent in making such a provision; for the tenants have sunk capital in the cultivation of land, which they cannot withdraw and offer for sale in the best market.
Again, the theory of rent assumes that tenants cultivate with a single eye to the sale of the produce in the market; for it is only by starting with the conditions determining the selling-price that we arrive at the establishment of differential advantages enjoyed by different producers, and the consequent existence of rent. It has sometimes been argued that it is difficult to bring the case of peasant proprietors within the comprehension of the theory, because they combine in their own person the functions of landlords, tenants, and labourers. But for the purposes of theoretical inquiry we may separate what are sometimes conjoined in fact; and one of the most important of recent advances in economic theory has been due to the distinction established between the functions of the employer and those of the capitalist, although these functions are, sometimes indeed, and to some extent usually, exercised by different persons, but are also, often entirely, and generally in some degree, combined in the same individual. The existence of a peasant proprietary is not incompatible with differential advantages in the cultivation of land, although the peasant may pay a rent to himself and not to another man. The chief difficulty of applying the theory to the case of peasant proprietors seem rather to arise from another source. They do not always cultivate with a single eye to the sale of the produce in the market. They may intend to consume part of that produce themselves, and they may then be content to cultivate at a cost, which they would not incur, if they regarded only the realisation of a profit in the market. They are so far uninfluenced by the competition with rival producers, which stimulates to improvement and checks misdirected energy; and often also they are not entirely dependent for their income on the sale of their farm produce. They, or their wives and their children, may be partly engaged in some other employment. They may even regard the cultivation of their land in some cases as secondary in importance to the main occupation of their lives, and they may then again be content to produce at a loss.
The importance of a second occupation has been lately illustrated by the Highland crofters, who have sometimes added the business of fishing to that of farming. In such cases it is theoretically possible that rents fixed by competitive bargaining may yet vary from a true measure of differential advantage. Higher rents may conceivably be offered than would arise from a single regard to the productive powers of the land and the income accruing from the sale of its produce. The second occupation may be of primary importance; and, even if it is subsidiary, as in the case of the crofters, a sudden failure or unexpected disaster in their fishing ventures may render them not merely unwilling, but unable, to pay a rent, which was fixed with the prospect of securing some part of their income from this subsidiary source. Such cases of by-industries are undoubtedly very complex and difficult when viewed from a theoretical standpoint.
There is another aspect from which the assumption of competition may be considered in the case of small cultivators. We have already seen that this assumption implies that tenants can carry their wares and services to the best market, and that the Agricultural Holdings Acts may be treated as a recognition of their inability to remove their unexhausted improvements. We have now to add the consideration that in some cases they may not be able to remove their own persons. The conditions, indeed, of mobility of capital and labour, which are necessary to justify the assumption of a correspondence between the effort and expenditure of different employments and their rewards, require to be carefully interpreted; and it is not necessary that every individual labourer and employer, and every particular portion of capital, should exhibit the capacity to move from the less to the more advantageous occupation. It is only necessary that a sufficient number of labourers, which may be found in the rising generations successively entering on industrial and business life, and an adequate amount of capital, which may be discovered in fresh accumulations or floating funds, should move or be expected to move; and these quantities may vary at different times and in different employments. But it is not difficult to find cases where the influences of such an amount of mobility as this are inoperative, because the necessary conditions do not exist; and here the assumption of competition implied in the theory of rent does not seem to be realised in a way that the theory contemplates.
It has, for example, been contended that in Ireland there has, broadly speaking, been no alternative occupation to agriculture for a large part of the population. There have been only such other industries as were to be found in a few exceptional districts, and therefore the cultivator of land could not compare his earnings with those to be gained in other employments. So far as this was the case, the assumption of competition implied in the theory of rent did not appear to have been fulfilled. There might be competition; but its only limit would be the necessities of subsistence, and it would not be restrained, as the theory is generally understood to assume, by the alternative of leaving farming and passing into some other occupation. In the case, indeed, of such small cultivators, the comparison would seem generally to lie between the wages to be obtained in other occupations and the earnings of farming, rather than between those earnings and profits; and this consideration may be of more than theoretical importance. But even this lower limit of wages may be conceived as ineffectual, if other occupations are insignificant in extent, or are practically non-existent. Rent is sometimes described as the 'leavings' of profits and wages, but in such cases it may rather be what is left when the necessities of a bare subsistence have been met. The cultivator, having no alternative occupation, may conceivably be forced by competition to offer such a rent as will only permit him to live, and he may offer it with a full knowledge of the conditions of his present position and of the future consequences of his act.
But again, even where the possibility of passing from one place or trade to another may not be beyond the limits of conceivable attainment, it may, from the ignorance or incapacity of the cultivators themselves, be outside the bounds of practical realisation. The alternative employments may exist, and yet want of ability or intelligence may debar the cultivators from availing themselves of the opportunities thus presented. This, also, has been asserted to be the case with regard to large districts in Ireland; and the position of some classes of small urban tenants has been represented as similar. Mr. Sidney Webb, in his evidence before the Town Holdings Committee, recently described 'certain localities' of London as 'economically equivalent to Connaughts,' because the tenants were compelled by an 'inability to move,' and the 'absolute necessity of being near their occupation,' 'to pay much more than anything which could reasonably be called the economic rent.' So far as these tenants are forced to live in certain districts in order to prosecute their special industry, they may be said to resemble those Irish tenants, who are represented as having no alternative employment to agriculture; and, so far as they are compelled by their want of industrial capacity to follow certain trades, they resemble the Irish tenants, to whom the alternative employments, which exist, are said to be practically closed. In any event they appear to share with them this common characteristic, that they are not independent, intelligent agents, able to make the best bargain in the best market.
The failure of competitive influences to be present in their fulness has of late been prominently urged both in connection with the taxation of ground-rents in urban districts and the payment of tithe on agricultural land; and the recent public discussion of these questions has also brought into notice some nice theoretical points. It has been argued, on the one hand, that the real incidence of local rates, like that of tithe, falls on the landlord, although it may nominally be borne by the tenant, because they are considerations which enter into the calculation of the tenant when he makes his bargain with the landlord for the occupancy of his farm or house. They are part of the expenses connected with the occupancy, and rent is the surplus remaining when these expenses, including the profits of the tenant, have been defrayed. But, on the other hand, it is obvious that, so far as competition fails to be operative, this theory of incidence is not fulfilled either in the case of tithe or that of urban rates. It may, however, be laid down as a more general rule that the farmer is sufficiently alive to competitive considerations to have regard to the amount of the tithe when he concludes his bargain for rent; and there are certainly instructive differences between his case and that of the urban ratepayer.
In the first place, the real incidence of the burden is determined in the long run only. The tenant of agricultural land may indeed enter into a lease like the tenant of urban land; and, like him, he may be unable to modify the terms of his lease so as to throw on the landlord the weight of any fresh burden, which may, contrary to his reasonable expectations, be levied. But leases of agricultural land are generally drawn for shorter terms. They are indeed, in England as a usual rule, of no longer duration than a year; and, in any case, nineteen or twenty-one years are an outside limit. The opportunities for readjustment are thus of frequent recurrence; and it is easy to anticipate the nature and amount of taxation which will be imposed on the land during the continuance of the contract. In the case of tithe, indeed, the commuted apportionment has now for some time been fixed; but the question of urban rates seems to be widely different. The leases run for longer periods, in some cases for seventy or ninety-nine years, in others in perpetuity, as in the 'chief rents' of Manchester. The burden of local rates has, it is contended, been mainly imposed, or largely increased, since the conclusion of many of the contracts. It could not have been anticipated by the tenants when they entered upon their leases; and, while some of the expenditure for which the taxation is levied is devoted to objects of present, and temporary, or general convenience, some of it is incurred for works of permanent improvement, the cost of which will be defrayed before the leases expire, while the benefit will remain to enhance the reversionary value of the interests of the ground landlords. Many, if not all, of these points are controverted; but, taken together, they constitute a wide difference between the position of urban and agricultural land, and, taken singly, they indicate a greater difficulty in determining the real incidence of the rates. There are also, in many cases of urban tenancies, several intermediaries between the actual occupier and the ground landlord; and the effort needed to shift the incidence of the rates may be successfully attempted in some of these successive stages, and may fail, or not be attempted at all, in others.
But not only has the discussion raised by the question of taxing ground-rents served in this way to induce the careful scrutiny of the assumption of competition which is implied in the theory of rent, but it has also brought into notice some nice points of another kind. Mr. Sidney Webb maintains in his evidence before the Town Holdings Committee, that the economic theory of the incidence on the occupier or consumer of that part of local taxation, which is proportioned to the value of the house as distinct from the ground on which it is built, 'assumes that there is no other shoulder on whom the builder can shift it, that he must get his normal interest, that he is between the fixed point of the ground landlord, and the shifting price of the consumer, and that one of them must give way.' But, he argues, 'the ground landlord is not a fixed point, and, in the passage of agricultural land into building land, 'there is' always a large jump in value. 'The freeholder getting, in any case, a much larger than the agricultural value' has 'no fixed point of resistance,' and 'the better economic opinion would now be that, in the same sense that the rate on land falls upon the owner, the rate upon buildings falls equally so.' Professor Munro urges before the same committee that the 'circumstances are so different that you cannot apply' the 'theory of agricultural rent to the rent of building land' 'without great qualifications.' 'The landowner of agricultural land requires to let his land in order to obtain a return,' and has to be 'content with the surplus that remains over' the 'remuneration,' which the 'farmer has received for himself' and his 'outgoings.' But 'in the case of agricultural land that may be turned into building land there is no necessity for the owner to let it for building purposes. As agricultural land he is obtaining a fair ordinary return for it, and anything that he obtains over and above the agricultural rent is a pure and absolute gain in itself.' 'He can control the market' 'to a very much greater degree than a landowner can control the market for agricultural land.' And again, at the time when 'the builder purchases the land from the landowner, the only rates that the land is liable to are rates for agricultural purposes, and the future increased rates that may fall upon that land in case it is built upon, and in case a house is erected and occupied,' do not at all enter into consideration.
In these different ways both Mr. Webb and Professor Munro lay stress on the distinction between agricultural and urban land. We are not now so much concerned with the practical conclusions which they deduce respecting the real incidence of taxation, as with the fact that the distinction involves a point of fundamental importance in the theory of rent. Rent, broadly defined as a payment for differential advantages, is measured upwards from a minimum level where, it is assumed, no rent is paid. The producers on the 'margin' of production clear their expenses, but have no surplus in hand to transfer to the landlords. This assumption of a 'no-rent' minimum has been often criticised, and many of the objections have been successfully answered. But one criticism seems to be of fundamental importance, and it is of the nature of a commentary on the theory rather than an objection to it. This criticism states that the differential advantages, of which rent is the measure, are of various kinds, and do not always vary in the same direction or degree. It is a consideration of this character, which seems to be implied in the arguments of Mr. Webb and Professor Munro before the Town Holdings Committee, and from it the consequence follows that what is a 'no-rent' or inferior land, regarded from the standpoint of one particular kind of advantage, may not be so with respect to another.
Ricardo, as his habit was, simplified the problem. He considered, as Professor Marshall has recently shown, the different crops which might be raised from the land as convertible into terms of corn; and, although he recognised the element of situation, he introduced it by a qualifying clause, and traced the rise of rent by differences of natural fertility. It was only at the end of his exposition that he became more comprehensive, and said that the 'exchangeable value' of the 'produce' of the 'most fertile and favourably situated land' would 'be adjusted by the total quantity of labour necessary in various forms, from first to last, to produce it and bring it to market.' And again, in spite of passages in which he qualifies his statements, he seems on the whole to have regarded wages and profits as more rigidly determined than we should hold them to be; and, in his exposition of the theory of rent, he appears to have postulated them as practically fixed. Nor lastly, had he more than a single market in view for the sale of the farm produce. These assumptions were legitimate for the purpose in hand, and they were not at variance with the broad characteristics of the times. But it is necessary to bear them continually in mind in any practical application of the theory to the circumstances of the present day.
Ricardo, then, in expounding the theory, may be considered to have regarded rent as a payment for differential advantages arising from the different fertility of different soils for the production of corn for a single market by producers, who paid wages, which were assumed to be fixed, and expected profits, which were assumed to be fixed also. Thus regarded the problem was comparatively simple; and such simplicity is a useful, if not a necessary, preliminary to the successful handling of the complexity of actual fact. But perhaps the most fruitful and important result of economic study since Ricardo's time has consisted in the emphasis laid on the great number and the variable character of the elements involved in the determination of an economic problem, and on the way in which they may mutually determine, and be determined by, one another.
The differential advantages for which rent is a payment may be measured upwards from land, which is least fertile, or most unfavourably situated. It is by no means certain that the differences measured according to these two standards will coincide. They may conceivably vary in opposite directions in the case of the same soils, and they may also vary in the degree of variation in the same direction. This supposition has, in fact, been recently used by Professor Sidgwick to support the assumption of 'continuous variations' in the total advantages of different soils.
Again, a soil, which is suitable for one crop, may be more or less suited for another, and the differential advantages of different soils, as respects their fertility, may conceivably vary in opposite directions or different degrees in the case of different crops, while their advantages as respects their situation, and the cost of conveying their produce to the market, may be subject to variations of a similar character, if one crop is more bulky or perishable than another, and more likely to be injured by delay or rough handling in transit. Once more, the cost of conveyance to the market may differ according to the market in view, and lands favourably situated for one market may be disadvantageously placed for another, and vice versâ. And lastly, as rent is the surplus above the expenses of production, or, as it is sometimes termed, the 'leavings' of wages and profits, the differential advantages of different lands as instruments of production may vary as the rates of wages and profits themselves vary. All these considerations tend to the general conclusion that what is a 'no-rent' or inferior land, regarded from one point of view, may conceivably be a superior land from another, and they illustrate the theoretical importance of the distinction established between urban and agricultural land by Professor Munro and Mr. Webb.
Perhaps, however, they are of especial importance in their bearing on the most conspicuous of the recent applications of the theory of rent to practical affairs. The popular conception of an 'unearned increment' is avowedly based on Ricardo's theory. Rent is considered to be a payment, which is constantly increasing, made to a class which has not earned it. That Ricardo entertained the idea of a continuous growth of rent as a characteristic feature of progressive civilisation cannot be questioned, and he generalised from the conspicuous circumstances of his times. The law of diminishing returns seemed to be rigorously applying to English agriculture, and the margin of cultivation to be extending to poorer and yet poorer soils. Population was rapidly increasing, and the importation of food from abroad on any large scale appeared to be as far removed from the sphere of practical possibilities as the introduction of any notable improvements in agricultural science or practice. There seemed to be no doubt that the natural tendency of rent was to rise at the expense of wages and profits, as the pressure of population on the resources of land became more urgent.
Later experience has, however, shown that what Ricardo himself regarded as improbable, although he recognised its possibility, has actually occurred. The law of diminishing returns may be postponed or counteracted in various ways. A denser population may conceivably permit of greater organisation and division of labour, and its effective application to the cultivation of land, so as to result in an increasing rather than a diminishing return. Some special application of capital on an extensive scale may so alter the character of land, or the circrunstances and conditions of production from it, as to cause for some time more and not less abundant returns. Intensive cultivation may be substituted for extensive methods, or improved machinery or fresh manures be employed. Or lastly, an alteration in the means of conveying the produce to the market may diminish the cost of transportation: and in these various ways the practical consequences of the law of diminishing returns may be postponed or counteracted.
Again, changes in transportation may open the resources of more lands than before to certain markets, or bring within the range of certain lands more markets than before. They may alter the relative situation of different soils with reference to the market, and, while producing perhaps a fresh increment of rent in some cases, they may occasion a decrement in others. The serious fall in English agricultural rents of recent years has, for example, been largely due to the immense improvement in the means, and decrease in the cost, of transporting grain from the rich virgin soils of America and from India. These changes also tend to equalise the advantages of different lands in situation with respect to the market; and therefore their broad result is to postpone the consequences of the operation of the law of diminishing returns on the one hand, and on the other to reduce the amount of the differential advantages of situation of different soils. In both these ways they tend to arrest the rise of rent.
They may exercise a further influence. As a consequence of changes in the markets to which the produce of the land is sent, and of fresh demands in those new markets, they may lead to the raising of different crops from those produced before. These crops may of course be less suited to the character and conditions of the land in question; but the balance of probability seems to incline to the conclusion that, with the extension of the number of available markets, and of the area from which the supplies for one particular market are drawn, crops will tend more and more to be raised from the soils which are best fitted to produce them, and to take their place in the most suitable and productive order of rotation. In this way, again, the practical consequences of the law of diminishing returns are postponed, and the differential advantages of different soils confined within a smaller range. The increase of rent is arrested, and what was in one place an increment becomes a decrement, and in another a decrement is converted into an increment.
All these changes allow of the advance of wages and profits; and in these several ways the problem, so simple in Ricardo's hands, becomes very complex. It might be cogently argued that the broad result is to point to a fall rather than to a rise of rent, so far, at any rate, as the agricultural rent of the old countries of the world is concerned; and it is at least certain that the measurement of differential advantages from different standpoints renders the existence in particular instances, or continuance, of an increment, or decrement, as the case may be, very doubtful and difficult to determine. Nor is this latter conclusion untrue of the circumstances of urban land; for changes in fashion, or the methods of business or transport, assuredly affect the relative values of different sites, lowering some while raising others. It is even conceivable that improvements in the means of conveyance may, taking a general view, diminish as well as increase the advantages of central sites; and that some industrial or inventive change in the future may arrest the tendency to concentration in towns, and reawaken the industries of country villages.
But, even if an increment be regarded as probable, the difficulty remains of determining how much of it is unearned, and how much is earned. Ricardo himself defined rent as 'that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil;' and he drew a distinction between this 'strict sense' of the term and the 'popular sense,' which confounded the 'interest and profit of capital' with it, by applying the name to 'whatever is annually paid by a farmer to his landlord.' The unearned character of a payment for the 'original and indestructible powers of the soil' can hardly be denied; but the whole difficulty turns on the identification of rent in this 'strict sense,' and the distinction established by Ricardo appears to be rather one of those niceties, which are allowable and useful in theory, and may be expected in the characteristic theory of so abstract a writer, but are nevertheless by no means easy to discover or determine in practice. Ricardo himself traced the rise of rent chiefly by differences in 'natural' fertility, but the difficulty of distinguishing the earned from the unearned increment is not diminished by introducing the element of situation; and in a later chapter he admitted that 'part' of the capital applied to the 'improvement' of land, 'when once expended,' 'is inseparably amalgamated with the land, and tends to increase its productive powers,' and that 'the remuneration paid to the landlord for its use is strictly of the nature of rent, and is subject to all the laws of rent.' This may indeed be the case, regarded from the standpoint of the existing differential advantages of land; but, viewed from a historical standpoint, such a payment is earned. Some writers have gone so far as to urge that in modern times in old countries 'economic rent,' or rent in the 'strict sense,' has, broadly speaking, disappeared; and, at any rate, a succession of economists has recognised the incorporation of the results of expenditure with the 'original and indestructible powers of the soil.' It is for this reason that it has been recently contended that the order in which land may be withdrawn from cultivation may differ from that in which it was first brought into it, because the 'non-recurrent expenditure' sunk in improvements will be considered in the first instance, and disregarded in the second.
The conception of rent as a payment for differential advantages has also been extended by a succession of writers to other forms of wealth; and Professor Marshall, while strongly insisting that the 'rent of land' has important 'peculiarities of its own,' argues that, from the point of view of Ricardo's doctrine that 'rent does not enter into the cost of production,' it is a 'leading species of a large genus.' The 'inherent properties of land,' which 'include,' and often chiefly consist of, 'the space relations of the plot in question, and the annuity that nature has given it of sunlight and air and rain,' are a 'typical instance' of the class; for, like 'other gifts from the bounty of nature,' they 'are incapable of increase by man's efforts in any period of time however long.' But the permanent improvements usually made by an English landlord, although incurred in the first instance with the expectation of an adequate return, when once incorporated with the soil, must also 'be taken for granted' over shorter periods of time, and the 'income derived' from them 'may be regarded as a Quasi-Rent.' And thus by a 'continuous series' we may pass to 'less permanent improvements, to farm and factory buildings, to steam engines, &c., and finally to the less durable and less slowly-made implements. And parallel to the series of the material agents of production there is a similar series of human abilities, those that are the free gifts of nature and those that are the result of a more or less long and specialized process of training.'
The continuity of this series does not, it is true, determine the question of the origin of the differential advantages to which it relates; and Professor Marshall is very careful to indicate the dangers of pushing the analogy of rent too far, and to emphasise its intimate reference to the periods of time which we have in view. But it does seem to be legitimate to argue from these and similar considerations to the improbability of an abrupt distinction as we pass from rent in the 'strict sense' to rent popularly so called, and to infer from the more apparent difficulty of distinguishing between what is earned and what is unearned in the case of these other differential advantages to a likelihood, at least, of difficulty in the case of land. A farmer, in making his present contract for rent, does not concern himself with the past history of the causes of the fertility or situation of the land, but with its present advantages, and he makes no attempt to draw the distinction between the earned and the unearned. And, in the future, he and his landlord may allow the nominal rent to remain unaltered in spite of increased prosperity or intensified depression in agriculture, in consideration simply of lessened expenditure or added liberality in the matter of improvements. Ricardo, again, himself declares that 'there is not a manufacture in which nature does not give assistance to man;' and opportunity and chance and society, with its changing demands and altering organisation, play no inconsiderable part in the determination of professional incomes and the earnings of employers and workmen. The very conception of value, as Sir Louis Mallet points out, and as Karl Marx was compelled to recognise, implies the action and influence of society.
The distinction between what is earned and what is unearned would, indeed, seem on theoretical grounds to be more easily established in the case of land than of other forms of wealth, and in the case of urban rather than agricultural land. But even here the evidence given by surveyors before the Town Holdings Committee on the possibility of distinguishing between the value of a house and of the land on which it is built was conflicting, and even here landlords may have developed and improved building sites by expenditure and efforts of their own. Even here fashion may shift the abode of the rich and alter the demand for land; and one quarter of a town may grow at the expense of another, or an entire town decay owing to the removal of an industry to another. As a whole, no doubt, urban rent tends to increase in civilised countries, and sometimes by rapid strides; and municipal owners of building property benefit by this growth. But the increment may in particular cases become a decrement, and the difficulty of determining how much of this increase is earned by the municipality as an improving landlord, and how much is due to it as a social factor, still remains. Where, indeed, a public authority executes a definite improvement, which seems certain to result in definite benefit to definite property, the argument for charging a proportion of the cost on the owners of such property is very strong, and the reason lies in the possibility of defining, with tolerable precision, the 'unearned' increment which will accrue. There may be practical difficulties in determining the exact extent of the property which will be benefited and the precise degree of benefit. But there are important theoretical respects in which these proposals for applying the principle of 'betterment' differ from the case of the unearned increment generally. There is ex hypothesi no question as to an increment and not a decrement resulting. The improvement is an improvement which must add to the value of property. It may injure other property by diverting traffic or in some other way, and it might seem as if compensation were thus due for an unearned decrement. But, if the alternative lies between charging a proportion of the cost on the 'bettered' property, and meeting it entirely from the general rates, the former course is manifestly for the interest of the 'worsened' property, and to this extent it receives compensation. The definiteness of the improvement is so far ascertainable that the cost which it will involve is known, and it is a totally new and distinct factor introduced into the situation. If, then, the proportion of the cost to be borne by the bettered property is duly limited, and the area of the property selected is adequately extended, the theoretical case seems to be very strong. The nicety of the distinction between what is earned and what is unearned is here a less troublesome factor; and it is the nice refinements of Ricardo's theory which render its application to practical affairs so full of difficulty and so open to abuse.
L. L. Price
- ↑ Book ii. chap. i.
- ↑ Political Economy, p. 118.
- ↑ Principles of Political Economy, book ii. chap. vii. sect. i.
- ↑ Report 1890, Q. 59.
- ↑ Reports of Town Holdings Committee (especially 1890).
- ↑ Report 1890, Q. 42.
- ↑ Ibid. Q. 1804—1812.
- ↑ Principles of Economics, p. 486.
- ↑ Principles of Political Economy, p. 284, note 1.
- ↑ Principles of Economics, preface and book iv, chap. iii., book vi. book vii. chaps. vi.—xi.
- ↑ Free Exchange, part ii. On the Unearned Increment.