Law of rent

The law of rent was formulated by David Ricardo around 1809, and presented in its most developed form in his magnum opus, On the Principles of Political Economy and Taxation. This is the origin of the term Ricardian rent. Ricardo's formulation of the law was the first clear exposition of the source and magnitude of rent, and is among the most important and firmly established principles of economics.

John Stuart Mill called it the "pons asinorum" of economics.[1]

Description

The law of rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the same purpose, given the same inputs of labor and capital.

Ricardo formulated this law based on the principles put forth by Adam Smith in Wealth of Nations.

"The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give." — Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter XI "Of the Rent of Land"

Ricardian rent should not be confused with contract rent, which is the "actual payments tenants make for use of the properties of others." (Barlow 1986). Rather, the law of rent refers to the economic return that land should accrue for its use in production.

Being a political economist, Ricardo was not simply referring to land in terms of soil. He was primarily interested in the economic rent and locational value associated with private appropriation of any natural factor of production. The law of rent applies equally well to urban land and rural land, as it is a fundamental principle of economics.

Ricardo noticed that the bargaining power of laborers can never dip below the produce obtainable on the best available rent-free land, because whenever rent leaves them with less than they could get on that free land, they can simply move to the new location. The produce obtainable on the best available rent-free land is known as the margin of production. Since landlords have a monopoly over a given location, the only limiting factor for rent is the margin of production. Thus, rent is a differential between the productive capacity of the land and the margin of production.

Note that Ricardo's original formulation assumes that the best quality land would be the first to be used in production, and that goods are sold in a competitive, single price market.

See also

Notes

  1. ^ H.D. Macleod The Elements of Economics (1886 D. Appleton) Vol. 2 p. 96

Further reading

  • David Ricardo, An Essay on the influence of a low price of corn on the profits of stock
Air rights

Air rights are the property interest in the "space" above the earth's surface. Generally speaking, owning, or renting, land or a building includes the right to use and develop the space above the land without interference by others.

This legal concept is encoded in the Latin phrase Cuius est solum, eius est usque ad coelum et ad inferos ("Whoever owns the soil, it is theirs up to Heaven and down to Hell."), which appears in medieval Roman law and is credited to 13th-century glossator Accursius; it was notably popularized in common law in Commentaries on the Laws of England (1766) by William Blackstone; see origins of phrase for details.

Customary land

Customary land is land which is owned by indigenous communities and administered in accordance with their customs, as opposed to statutory tenure usually introduced during the colonial periods. Common ownership is one form of customary land ownership.

Since the late 20th century, statutory recognition and protection of indigenous and community land rights continues to be a major challenge. The gap between formally recognized and customarily held and managed land is a significant source of underdevelopment, conflict, and environmental degradation.In the Malawi Land Act of 1965, "Customary Land" is defined as "all land which is held, occupied or used under customary law, but does not include any public land". In most countries of the Pacific islands, customary land remains the dominant land tenure form. Distinct customary systems of tenure have evolved on different islands and areas within the Pacific region. In any country there may be many different types of customary tenure.The amount of customary land ownership out of the total land area of Pacific island nations is the following: 97% in Papua New Guinea, 90% in Vanuatu, 88% in Fiji, 87% in the Solomon Islands, and 81% in Samoa.

Differential and absolute ground rent

Differential ground rent and absolute ground rent are concepts used by Karl Marx in the third volume of Das Kapital to explain how the capitalist mode of production would operate in agricultural production, under the condition where most agricultural land was owned by a social class of land-owners who obtained rent income from those who farmed the land. The farm work could be done by the landowner himself, the tenant of the landowner, or by hired farm workers. Rent as an economic category is regarded by Marx as one form of surplus value just like net interest income, net production taxes and industrial profits.

Economic rent

In economics, economic rent is any payment to an owner or factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In the moral economy of neoclassical economics, economic rent includes income gained by labor or state beneficiaries of other "contrived" (assuming the market is natural, and does not come about by state and social contrivance) exclusivity, such as labor guilds and unofficial corruption.

In the moral economy of the economics tradition broadly, economic rent is opposed to producer surplus, or normal profit, both of which are theorized to involve productive human action. Economic rent is also independent of opportunity cost, unlike economic profit, where opportunity cost is an essential component. Economic rent is viewed as unearned revenue while economic profit is a narrower term describing surplus income earned by choosing between risk-adjusted alternatives. Unlike economic profit, economic rent cannot be theoretically eliminated by competition because any actions the recipient of the income may take such as improving the object to be rented will then change the total income to contract rent. Still, the total income is made up of economic profit (earned) plus economic rent (unearned).

For a produced commodity, economic rent may be due to the legal ownership of a patent (a politically enforced right to the use of a process or ingredient). For education and occupational licensing, it is the knowledge, performance, and ethical standards, as well as the cost of permits and licenses that are collectively controlled as to their number, regardless of the competence and willingness of those who wish to compete on price alone in the area being licensed. In regard to labor, economic rent can be created by the existence of mass education, labor laws, state social reproduction supports, democracy, guilds, and labor unions (e.g., higher pay for some workers, where collective action creates a scarcity of such workers, as opposed to an ideal condition where labor competes with other factors of production on price alone). For most other production, including agriculture and extraction, economic rent is due to a scarcity (uneven distribution) of natural resources (e.g., land, oil, or minerals).

When economic rent is privatized, the recipient of economic rent is referred to as a rentier.

By contrast, in production theory, if there is no exclusivity and there is perfect competition, there are no economic rents, as competition drives prices down to their floor.Economic rent is different from other unearned and passive income, including contract rent. This distinction has important implications for public revenue and tax policy. As long as there is sufficient accounting profit, governments can collect a portion of economic rent for the purpose of public finance. For example, economic rent can be collected by a government as royalties or extraction fees in the case of resources such as minerals and oil and gas.

Historically, theories of rent have typically applied to rent received by different factor owners within a single economy. Hossein Mahdavy was the first to introduce the concept of "external rent", whereby one economy received rent from other economies.

Free-rider problem

In the social sciences, the free-rider problem occurs when those who benefit from resources, public goods, or services do not pay for them, which results in an underprovision of those goods or services. For example, a free-rider may frequently ask for available parking lots (public goods) from those who have already paid for them, in order to benefit from free parking. That is, the free-rider may use the parking even more than the others without paying a penny. The free-rider problem is the question of how to limit free riding and its negative effects in these situations. The free-rider problem may occur when property rights are not clearly defined and imposed.The free-rider problem is common with goods which are non-excludable, including public goods and situations of the Tragedy of the Commons.

Although the term "free rider" was first used in economic theory of public goods, similar concepts have been applied to other contexts, including collective bargaining, antitrust law, psychology and political science. For example, some individuals in a team or community may reduce their contributions or performance if they believe that one or more other members of the group may free ride.

Intangible property

Intangible property, also known as incorporeal property, describes something which a person or corporation can have ownership of and can transfer ownership to another person or corporation, but has no physical substance, for example brand identity or knowledge/intellectual property. It generally refers to statutory creations such as copyright, trademarks, or patents. It excludes tangible property like real property (land, buildings, and fixtures) and personal property (ships, automobiles, tools, etc.). In some jurisdictions intangible property are referred to as choses in action. Intangible property is used in distinction to tangible property. It is useful to note that there are two forms of intangible property: legal intangible property (which is discussed here) and competitive intangible property (which is the source from which legal intangible property is created but cannot be owned, extinguished, or transferred). Competitive intangible property disobeys the intellectual property test of voluntary extinguishment and therefore results in the sources that create intellectual property (knowledge in its source form, collaboration, process-engagement, etc.) escaping quantification.

Generally, ownership of intangible property gives the owner a set of legally enforceable rights over reproduction of personal property containing certain content. For example, a copyright owner can control the reproduction of the work forming the copyright. However, the intangible property forms a set of rights separate from the tangible property that carries the rights. For example, the owner of a copyright can control the printing of books containing the content, but the book itself is personal property which can be bought and sold without concern over the rights of the copyright holder.

In English law and other Commonwealth legal systems, intangible property is traditionally divided in pure intangibles (such as debts, intellectual property rights and goodwill) and documentary intangibles, which obtain their character through the medium of a document (such as a bill of lading, promissory note or bill of exchange). The recent rise of electronic documents has blurred the distinction between pure intangibles and documentary intangibles.

Iron law of wages

The iron law of wages is a proposed law of economics that asserts that real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker. The theory was first named by Ferdinand Lassalle in the mid-nineteenth century. Karl Marx and Friedrich Engels attribute the doctrine to Lassalle (notably in Marx's 1875 Critique of the Gotha Program), the idea to Thomas Malthus's An Essay on the Principle of Population, and the terminology to Goethe's "great, eternal iron laws" in Das Göttliche.It was coined in reference to the views of classical economists such as David Ricardo's Law of rent, and the competing population theory of Thomas Malthus. It held that the market price of labour would always, or almost always, tend toward the minimum required for the subsistence of the labourers, reducing as the working population increased and vice versa. Ricardo believed that happened only under particular conditions.

John Bates Clark

John Bates Clark (January 26, 1847 – March 21, 1938) was an American neoclassical economist. He was one of the pioneers of the marginalist revolution and opponent to the Institutionalist school of economics, and spent most of his career as professor at Columbia University.

Legal plunder

Legal plunder, is the act of appropriating, under the laws, the property of others. This was coined by Frédéric Bastiat, most famously in his 1850 book The Law. It has since become a concept in libertarian thought, and has been used similarly by others, including Daniel Lord Smail.Today it is the appropriation of the assets of another person by power groups through rules of public law that violate the principle of equality and the Constitution.

Throughout history there are many examples of legal plunder as the political and economic regimes that have followed: partial legal plunder are the result of tyranny and protectionism or universal legal plunder the result of socialism or communism.

List of types of formally designated forests

This is a list of types of formally designated forests, as used in various places around the world. It is organized in three sublists: by forest ownership, protection status, and designated use.

Malthusianism

Malthusianism is the idea that population growth is potentially exponential while the growth of the food supply is linear. It derives from the political and economic thought of the Reverend Thomas Robert Malthus, as laid out in his 1798 writings, An Essay on the Principle of Population. Malthus believed there were two types of "checks" that in all times and places kept population growth in line with the growth of the food supply: "preventive checks", such as moral restraints (abstinence, delayed marriage until finances become balanced), and restricting marriage against persons suffering poverty or perceived as defective, and "positive checks", which lead to premature death such as disease, starvation and war, resulting in what is called a Malthusian catastrophe. The catastrophe would return population to a lower, more "sustainable", level. Malthusianism has been linked to a variety of political and social movements, but almost always refers to advocates of population control.Neo-Malthusianism is the advocacy of population control programs to ensure resources for current and future populations. In Britain the term 'Malthusian' can also refer more specifically to arguments made in favour of preventive birth control, hence organizations such as the Malthusian League. Neo-Malthusians differ from Malthus's theories mainly in their enthusiasm for contraception. Malthus, a devout Christian, believed that "self-control" (abstinence) was preferable to artificial birth control. In some editions of his essay, Malthus did allow that abstinence was unlikely to be effective on a wide scale, thus advocating the use of artificial means of birth control as a solution to population "pressure". Modern "neo-Malthusians" are generally more concerned than Malthus was with environmental degradation and catastrophic famine than with poverty.

Malthusianism has attracted criticism from a diverse range of differing schools of thought, including Marxists and socialists, libertarians and free market enthusiasts, social conservatives, feminists and human rights advocates, characterising it as excessively pessimistic, misanthropic or inhuman. Many critics believe Malthusianism has been discredited since the publication of Principle of Population, often citing advances in agricultural techniques and modern reductions in human fertility. Many modern proponents believe that the basic concept of population growth eventually outstripping resources is still fundamentally valid, and "positive checks" are still likely in humanity's future if there is no action to curb population growth.

Max Hirsch (economist)

Maximilian "Max" Hirsch (21 September 1852? – 4 March 1909) was a German-born businessman and economist who settled in Melbourne, Australia, where he became the recognized intellectual leader of the Australian Georgist movement and, briefly, a member of the Victorian Parliament.

Political economy

Political economy is the study of production and trade and their relations with law, custom and government; and with the distribution of national income and wealth. As a discipline, political economy originated in moral philosophy, in the 18th century, to explore the administration of states' wealth, with "political" signifying the Greek word polity and "economy" signifying the Greek word "okonomie" (household management). The earliest works of political economy are usually attributed to the British scholars Adam Smith, Thomas Malthus, and David Ricardo, although they were preceded by the work of the French physiocrats, such as François Quesnay (1694–1774) and Anne-Robert-Jacques Turgot (1727–1781).In the late 19th century, the term "economics" gradually began to replace the term "political economy" with the rise of mathematical modelling coinciding with the publication of an influential textbook by Alfred Marshall in 1890. Earlier, William Stanley Jevons, a proponent of mathematical methods applied to the subject, advocated economics for brevity and with the hope of the term becoming "the recognised name of a science". Citation measurement metrics from Google Ngram Viewer indicate that use of the term "economics" began to overshadow "political economy" around roughly 1910, becoming the preferred term for the discipline by 1920. Today, the term "economics" usually refers to the narrow study of the economy absent other political and social considerations while the term "political economy" represents a distinct and competing approach.

Political economy, where it is not used as a synonym for economics, may refer to very different things. From an academic standpoint, the term may reference Marxian economics, applied public choice approaches emanating from the Chicago school and the Virginia school. In common parlance, "political economy" may simply refer to the advice given by economists to the government or public on general economic policy or on specific economic proposals developed by political scientists. A rapidly growing mainstream literature from the 1970s has expanded beyond the model of economic policy in which planners maximize utility of a representative individual toward examining how political forces affect the choice of economic policies, especially as to distributional conflicts and political institutions. It is available as a stand-alone area of study in certain colleges and universities.

Property rights (economics)

Property rights are theoretical socially-enforced constructs in economics for determining how a resource or economic good is used and owned. Resources can be owned by (and hence be the property of) individuals, associations or governments. Property rights can be viewed as an attribute of an economic good. This attribute has four broad components and is often referred to as a bundle of rights:

the right to use the good

the right to earn income from the good

the right to transfer the good to others

the right to enforce property rightsIn economics, property is usually considered to be ownership (rights to the proceeds generated by the property) and control over a resource or good. Many economists effectively argue that property rights need to be fixed and need to portray the relationships among other parties in order to be more effective.

Quarterly Journal of Economics

The Quarterly Journal of Economics is a peer-reviewed academic journal published by the Oxford University Press. Its current editors-in-chief are Pol Antràs, Robert J. Barro, Lawrence F. Katz, and Andrei Shleifer (Harvard University). It is the oldest professional journal of economics in the English language,

and covers all aspects of the field—from the journal's traditional emphasis on microtheory, to both empirical and theoretical macroeconomics. According to the Journal Citation Reports, the journal has a 2015 impact factor of 6.662, ranking it first out of 347 journals in the category "Economics".Some of the most influential and well-read papers in economics have been published in the Quarterly Journal of Economics, including:

"Distribution as Determined by a Law of Rent" (1891), by John B. Clark

"The Positive Theory of Capital and Its Critics" (1895), by Eugen von Böhm-Bawerk

"Petty's Place in the History of Economic Theory" (1900), by Charles Henry Hull

"Fallacies in the Interpretation of Social Cost" (1924), by Frank H. Knight

"The General Theory of Employment" (1937), by John Maynard Keynes (an expansion on Keynes' General Theory)

"The Interpretation of Voting in the Allocation of Economic Resources" (1943), by Howard Rothmann Bowen

"A Contribution to the Theory of Economic Growth" (1956), by Robert Solow

"The Market for "Lemons": Quality Uncertainty and the Market Mechanism" (1970), by George Akerlof

"Job Market Signaling" (1973), by Michael Spence

"Equilibrium in Competitive Insurance Markets: The economics of markets with imperfect information" (1976), by Michael Rothschild and Joseph Stiglitz

"A Reformulation of the Economic Theory of Fertility" (1988), by Robert Barro and Gary Becker

"A Theory of Competition among Pressure Groups for Political Influence" (1983), by Gary Becker

"A Contribution to the Empirics of Economic Growth" (1992), by N. Gregory Mankiw, David Romer, and David N. Weil

"Golden Eggs and Hyperbolic Discounting" (1997), by David Laibson

"Does Social Capital Have An Economic Payoff? A Cross-Country Investigation" (1997) by Stephen Knack and Philip Keefer

"A Theory of Fairness, Competition, and Cooperation" (1999), by Ernst Fehr and Klaus M. Schmidt

"Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory" (2000), by Richard Clarida, Jordi Galí, and Mark Gertler

"Information Technology, Workplace Organization, and the Demand for Skilled Labor: Firm-Level Evidence" (2002) by Timothy F. Bresnahan, Erik Brynjolfsson and Lorin M. Hitt

Race to the bottom

The race to the bottom is a socio-economic phrase which is used to describe government deregulation of the business environment, or reduction in tax rates, in order to attract or retain economic activity in their jurisdictions. An outcome of globalization and free trade, the phenomenon may occur when competition increases between geographic areas over a particular sector of trade and production. The principal effect and intent of these actions is to make labor rates "more competitive" (i.e. lower), the principal cost of business, together with other factors (pensions, environmental protection and other externalities), and thus the metaphor where the bottom is the lowest wage that can be paid for that labor.

Rack-rent

Rack-rent denotes two different concepts:

an excessive or extortionate rent, or

the full rent of a property, including both land and improvements if it were subject to an immediate open-market rental review.The second definition is equivalent to the economic rent of the land plus interest on capital improvements plus depreciation and maintenance—the normal market rent of a property—and is not inherently excessive or extortionate. Also, this may be different from the rent actually being received.

Historically, however, rack-rent has often been a term of protest used to denote an unjustly excessive rent (the word "rack" evoking the medieval torture device), usually one paid by a tenant farmer. The two conceptions of rack-rent both apply when excessive, extortionate rent is obtained by threat of eviction resulting in uncompensated dispossession of improvements the tenant himself has made. I.e., by charging rack-rent, the landowner unjustly uses his power over the land to effectively confiscate wages, in addition to merely charging the tenant interest and depreciation on the capital improvements which the landlord himself has made to the land.When there is no accessible rent-free land, any improvements in the condition of society, be they in the form of civilizational progress or local improvement, are recaptured in the form of higher land values, and the leftover wages after rent is paid will tend towards subsistence, as described by David Ricardo's Law of Rent. Such rents can be described as rack-rent, and this sense of the term is economically meaningful, and distinct from other forms of rent.

In Ulster in the 1700s, "... landlords were able to 'auction off' leases to the highest bidders. That practice, known as 'rack renting', forced renters to bid more than they could afford to pay."

Rent-seeking

In public choice theory and in economics, rent-seeking involves seeking to increase one's share of existing wealth without creating new wealth. Rent-seeking results in reduced economic efficiency through poor allocation of resources, reduced actual wealth-creation, lost government revenue, increased income inequality, and (potentially) national decline.

Attempts at capture of regulatory agencies to gain a coercive monopoly can result in advantages for the rent seeker in a market while imposing disadvantages on (incorrupt) competitors. This constitutes one of many possible forms of rent-seeking behavior.

Tangible property

Tangible property in law is, literally, anything which can be touched, and includes both real property and personal property (or moveable property), and stands in distinction to intangible property.In English law and some Commonwealth legal systems, items of tangible property are referred to as choses in possession (or a chose in possession in the singular). However, some property, despite being physical in nature, is classified in many legal systems as intangible property rather than tangible property because the rights associated with the physical item are of far greater significance than the physical properties. Principally, these are documentary intangibles. For example, a promissory note is a piece of paper that can be touched, but the real significance is not the physical paper, but the legal rights which the paper confers, and hence the promissory note is defined by the legal debt rather than the physical attributes.A unique category of property is money, which in some legal systems is treated as tangible property and in others as intangible property. Whilst most countries legal tender is expressed in the form of intangible property ("The Treasury of Country X hereby promises to pay to the bearer on demand...."), in practice banknotes are now rarely ever redeemed in any country, which has led to banknotes and coins being classified as tangible property in most modern legal systems.

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