Summary of Theory of Rent: Its Cause. Includes a Differential Element. a developing country, like the United States, the probability is so strongly in favor of an increase in rents, especially in the case of city lots, that shrewd investors are willing to accept even less than the current rate of interest from their investments in land. In such cases the present value of a lot may be the capitalized value, not of its present, but of its prospective rent. Land has been on the whole an excellent investment in the United States during the last thirty years, in part because the rent it affords has so generally risen, but quite as. much because the rate of interest has fallen and the prices of pieces of land have risen even more than the rents. This last point must always be remembered in connection with the interpretation of statistics showing the growth of wealth. In countries experiencing a declining rate of interest there is an appreciation of land and other permanent sources of income without any corresponding change in the ability of these factors to contribute to general well-being. § 135. In concluding the explanation of rent it may be well to summarize the principal points brought out in this chapter and Chapter VIII.: 1. Rent is an income which arises in consequence of the superior productivity of land above the margin in comparison with that at the margin. 2. Marginal land for some of the uses to which land is put is actually no-rent land. More commonly the marginal land as well as a for any particular use itself affords a rent because, though marginal for the given use, it is above the margin for some other use to which it might be applied. Rent is thus composed usually of a differential and of a marginal element. The differential element is an expense of production only to enterprisers using superior land for the given purpose, while the marginal element must be paid by all enterprisers engaged in the given branch of production and hence figures as an element in the normal expense of production. The Intensive Margin. 3. In addition to the extensive margin there may be, and usually is, an intensive margin, that is, a use of land resulting from an additional investment of labor and capital on it which affords no rent. The intensive margin of cultivation tends always to be a no-rent margin. 4. Rent is measured by the method of differences starting A Surplus from the no-rent land margin and proceeding from grade to Income. grade until the best and most favorably situated lot for the purpose that is economically most important is reached. In the aggregate it is the money equivalent of the surplus product due to the superiority of the land to which it is credited over the poorest land turned to industrial account at the no-rent margin. 5. When best land is superabundant, as is the case in some when newly discovered and sparsely settled regions, rent does not There Is arise. No Rent. 6. If the law of diminishing returns did not apply to land, Law of it would not arise, as then one piece of land would serve all Diminishing purposes for an indefinitely large population. Returns. 7. The income yielded by permanent improvements on land Permanent obeys the same law as income ascribable to the land itself. Improve8. The price of a piece of land, together with permanent ments. improvements embodied in it, is calculated by capitalizing Rent and its net money rent at the current rate of interest. A falling Price of rate of interest tends, therefore, to enhance the land item in Land. the inventory of a community's wealth. Economic § 136. In the foregoing explanation of rent the share of Commercial the return that is economically ascribable to land has been re- Not Always ferred to, rather than the commercial rent that is in practice Same as paid to landlords. This last is determined to some extent Rent. by custom and personal considerations between landlord and tenant and rarely corresponds exactly with the economic rent. In case the commercial rent is less than the economic rent a part of the return is retained by the tenant as a gratuitous addition to his income from the labor and capital he may have invested in his business. On the other hand, if the commercial rent is too high the land owner gets not only what the land is entitled to, but also a part of the return which should go to the land cultivator. In either event the full economic rent is present as a part of the income shared between those who have an interest in the land either as owner or as user. The most familiar mode of determining commercial rent The without much regard to economic principles is the so-called Métayer métayer system. This is the plan by which the cultivator System. Rent of and Ground Rent. Importance of Rent. pays half the produce of the year's husbandry to the land owner, who furnishes sometimes also seeds and tools, and retains only the other half for himself. Cultivating land" on shares" after this fashion has long been the custom in European countries and is common in the Southern States of the United States. It has the disadvantage of not adapting itself readily to changing conditions which involve changes in economic rent, and has therefore been superseded in the more highly developed sections of the country by the system of money rents. In connection with the rent of land improved by the erection of buildings upon it business men are in the habit of lumping together into one sum the rent of the land and the interest on the capital invested in the buildings and calling this rent." When a distinction is made between the two, the first, or rent proper, is called the ground rent, and the second is called the rent of the building. It would be an aid to clearness if this mode of division were to become universal, but even in its absence an expert appraiser can usually say with a good deal of accuracy how much of the gross rent for a built-over lot is due to the building and how much to the lot itself. Economically the two returns are quite distinct. § 137. It would be interesting to know just what part of the income enjoyed by the inhabitants of a country like the United States is properly classified as economic rent, but unfortunately no reliable information on the point is available. Most of the land of the country, most of its sources of water power and most of its mines are operated by owners rather than by lessees. In consequence, calculations in regard to rent are largely matters of private bookkeeping, and are made with the carelessness which business men permit themselves when they come to divide their gross profits into the various items which economic analysis distinguishes. Any statement in regard to rents as a whole must, in the nature of the case, be but a rough guess, except for countries like the United Kingdom, where lands, mines, etc., are commonly operated under lease and the determination of rents is a matter in which two parties are interested. According to the British income tax returns, the total income from lands in the United Kingdom appears to be about one-tenth of the total income of the country. We have no means of knowing whether the total income ascribable to rent in the United States is more or less in proportion than the total for the United Kingdom. Since the country is newer and its lowest margin of cultivation higher, however, it will perhaps be not far from the truth to estimate the rent income of the inhabitants of the United States at about one-twelfth the total income which they enjoy. The payment each year to private property owners of this large share of the country's income for services rendered not by themselves, but by their property, is a practice vigorously condemned by many intelligent students of economics. The most radical modification in the present system that has been proposed is that advocated by Henry George and his followers under the phrase "the Single Tax." The arguments for and against this proposal, and other plans for solving the land problem, are considered in Chapter XXVIII. REFERENCES FOR COLLATERAL READING *Marshall, Book VI., Chaps. IX. and X.; *Seligman, Principles of Economics, Chap. XXIV.; *Carver, Distribution of Wealth, Chap. V.; *Pierson, Principles of Economics, Part I., Chaps. II. and III.; Nicholson, Principles of Political Economy, Book II., Chaps. VIII. and IX.; J. S. Mill, Principles of Political Economy, Book II., Chaps. VI.-IX. and XVI.; *Johnson, Rent in Modern Economic Theory, an Essay in Distribution; *Taussig, Principles of Economics, Chaps. XLII.-XLIV. Definition CHAPTER XV DISTRIBUTION: WAGES § 138. Wages, as the term is used in economics, include all earnings assigned to men for their work, from lowest piece wages to highest annual salaries and" wages-of-management.” The problem of explaining such earnings is more complex than that of explaining rent because it has to do more directly with living men and women. As in the case of rent, it involves an explanation of differences in earning power among different factors in production. In the United States some workers receive as compensation for their work not more than fifty cents a day, while others are paid salaries of $50,000 a year and upwards. Such differences must be accounted for in a theory of wages. In the case of rent an explanation of differences in the shares assigned to different pieces of land is a sufficient explanation of the phenomenon because these differences are measured from marginal land, which affords no rent.* The same is not true in the case of wages. "Marginal workmen earn something, and after all differences in earnings have been explained it still remains to account for marginal or least earnings. Another cause of difference between the two problems is that while the land supply of a country is relatively fixed and unalterable, its labor supply or its working population is constantly changing. The continuance year after year of high rents for certain pieces of land and of low rents for others, excites no surprise, but the continuance of differences in wages seems to need special explanation. Why, as generation follows generation, are not all men molded through an evolutionary process to one common type, so that differences in earning power are eliminated? This is a third distinct question presented by the wages problem. The pres The circumstances which determine the location of the margin of cultivation must also be explained, of course. Cf. Section 156. |