David Ricardo

Rent becomes critically important in Georgist economics, because rent is the increment of market gain that accrues to choice land parcels. This insight arose originally in the context of agricultural societies, where differential qualities of land were recognized by varied payment in rent. An individual’s return on investment was represented by his labor — that was his and his alone to keep. So also were whatever capital goods he acquired through the efforts of his past labor. On the other hand, whenever land offered a higher yield separate from whatever the individual’s labor investment might represent, this constituted a windfall gain above and beyond what might be minimally expected. This is land rent, and it exists even if it isn’t collected. Today, as earlier noted, the greatest land rents derive from their location, grown out of nearby social investment.

The concept of rent needs further explication precisely because it is so foreign to 20th century students, even those who have been schooled in economics at it is currently taught. Land rent has no relationship to the word rent as it is used in contemporary vernacular, that is, when one rents a car or an apartment. Rather, rent is a surplus, defined as the return on investment above and beyond what is minimally required to bring a service into production. To take just an elementary example, consider that there are three parcels of land available for farming and three farmers of equal ability and enterprise. But suppose the parcels differ in their productive capacity, due perhaps to their fertility, access to water, and so on. If planted with similar quality seed, the three parcels will yield different quantities of harvest, the one with the highest quality land having the best return. The one with the lowest quality land would in like fashion have the lowest return. Economic rent is defined as the amount of surplus harvest qualitatively measured by the difference between the parcel with the highest return and that with the lowest return.

Even though its originator, David Ricardo, had in mind the differential return from agricultural lands, the concept of rent applies to other natural services as well. Consider what happens in the case of urban communities, using the simplest comparison with a tic-tac-toe board. When the lattice is completely undeveloped and consists only of vacant land squares, the locational sites have inconsequential value. But let us suppose that each square is then settled — the first by a hotel, the second by a department store, the third by a restaurant and so on — and supposing that the owner of the center square is reticent to build at all. Reserving his prerogative as titleholder he may intend ultimately to sell. Given the rules of economics as they apply today he may be wise to do so, keeping his money for other uses, as his square will have increased in market value more than all the others despite his having done nothing to improve it. It was this that prompted John Stuart Mill to observe that “Landlords grow richer in their sleep without working, risking or economizing. The increase in the value of land, aris[es] from the efforts of an entire community.. . .” 27 As will be discussed later below, the single greatest factor in determining the economic rental value of land today results not from nutrients or access to water but rather due to site value determined by location. And that can be priced and collected easily.

Lastly, one must appreciate that the market value of “land” of every sort is entirely rent, as there is no human factor of labor that accounts for its origination. Services of nature have no prior cost to bring them into production existence — the electromagnetic spectrum, for example, exists regardless of human presence on earth and so presumably does time. Ocean fish, fossil fuels, and heavy metals are all found in nature, not the result of human creation. They are, in 19th century classical economics, the fruits not of man’s labor but of God’s. And it is to God, or at least to God’s representative on earth — the lords and kings — that rent was owed, just as much as it was their role to provide reciprocal services to the tenants of the land. That bargain, so well refined in feudal economic arrangements, was an equilibrium balance, disrupted, one might say, by the annulment of rent collection and the exploitation of land without recognition of its price. The practice effectively ended with what in Britain is known as the “enclosure movement” of the early Tudor reign, driving the peasants off the land into cities to provide cheap labor for the early English industrialists.28 But the theory continued long afterwards. Georgists today argue that land rent should be collected from titleholders so that it is not left to render economic distortions. This in turn affects the price of labor and the price of money. Government’s role, whatever else it does, is at the very least responsible for defending the commons, to ascertain titles and to collect rent. Although there are many differences about the proper role, scope and domain of government among Georgist adherents, the collection of rent and the supervision of open markets is central to its tenets.

Despite assiduous efforts to make clear the extent and the limits of the economic rent as a concept — known as well as land rent, Ricardian rent, and ground rent, even the best of contemporary neoclassical economists disagree. Some texts argue that certain athletes or other star performers with great natural ability reap returns for their efforts far above what is in fact necessary to “bring them into productive use.” The difference between what it would minimally take to entice them to perform and the price they are actually paid is all economic rent. Babe Ruth, Michael Jordan, Britney Spears, and the Beatles have all been compensated with impressive amounts of economic rent.29 Georgists and classical economists are of mixed minds, arguing sometimes that such payments are either wages or else are simply transfers that in no way reflect productivity.30 ...read the whole article

As recently as a century ago classical economic thought still regarded land for the most part as the common heritage of mankind. From Adam Smith, through Thomas Malthus, David Ricardo, and finally with John Stuart Mill economic productivity was regarded as a function of three interacting factors: land, labor, and capital. John Locke also accepted these premises. To achieve optimal economic productivity, one had to exact the appropriate price from each of those factors. The price of labor was in wages; the price of capital was interest; and the price of land, particularly following the thinking of David Ricardo, was rent. Rent in its classical sense means payment for the use of something in fixed supply, or, more generally, payments above the costs incurred for its creation. Disequilibriums and inefficiencies in economic development resulted if the appropriate prices were not paid for each factor. But, as we shall see, there were powerful interests in this country, bent on not seeing any rent extracted from land use, that persuaded the nascent economics profession at the end of the 19th century no longer to regard land as a separate factor and to redefine the terms of production instead in two-factor theory. This was concurrent with the inclusion of land as property, since called "real property."

As land came to be transferred to other nobility and usurped under title in fee simple rather than in usufruct, it came to be regarded as a private financial asset. Earlier it was regarded as part of nature, much like air, water, wind and weather. Accounting practices now listed land as an asset "owned" in fee simple, and as a liability on the other side of balance sheets in money "owed" to banks. This tendency has been extended today so that we have privatized much of our air, water, wind, and even sunlight. Land came to be simply one special kind of capital, nothing special, nothing requiring further treatment. Ricardo's Law of Rent became an artifact of intellectual history. The conflation of land into capital to create two-factor economics is one of the greatest paradigm shifts in the evolution of social philosophy. How the premises and terms of economic discourse have been changed has been documented for the first time in a new book by a California professor of economics, Mason Gaffney. The account is put forth in fascinating detail entitled, The Corruption of Economics. It was indeed a corruption of a discipline, a deliberate putsch by powerful economic forces with an interest in seeing such definitions changed, and we have all been paying the price since that time. This revealing thesis is what I really want to relate to you, and to explain the dire consequences it has had for us in our contemporary world. I have come to believe it; it makes sense to me, both historically and in contemporary analysis, from several perspectives. ... read the whole article

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