Marginal Revolution: Ricardian rent theory

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Ricardian rent theory

Lex, a loyal MR reader, asks:

My understanding of Ricardo's theory of rents is that they are based on the least productive land used. Shouldn't rent be based on the most productive land not used? Is that merely a semantic difference?

Ricardian rent theory is strange. Let's say you have three pieces of land, yielding 3, 5, and 10. Rent will be 7, or 10-3, with apologies to Samuel Hollander. The marginal piece of land, the one yielding three, is allocated to wages and profit from capital. (You can treat profits as an afterthought in this model.) The rest goes to landowners.

Why might that distribution result? In the Ricardian model you can (and do) augment labor through Malthusian breeding. So labor doesn't have much bargaining power in the long run. Any move in favor of wage labor creates more people and lowers the wage of labor to the return on the marginal unit of land. If you have some extra land, even if it isn't incredibly productive, you can always breed more people to cultivate that marginal unit. So the value of the least valuable piece of land in essence sets the wage.

Land is inelastic in supply, and thus the landowners reap the rest of what is produced. We can also see that the last plot of land used (and not the marginal piece of land not used) determines rent and wages, because it is the actually used piece of land which regulates population and the return to labor.

That is my quick and dirty take on Ricardo, noting that "what Ricardo really meant" became a cottage industry about one hundred and ninety years ago...

Posted by Tyler Cowen on June 21, 2007 at 05:54 AM in Economics | Permalink

Comments

Are you accurately representing the theory? The wiki is light on detail. My knowledge of it comes from
reading (summary of) Henry George. First of all, rent of *what* is seven? I think you mean to say that the
rent of the highest value land (the 10) is seven. The rent of the 5 is 2.

The reasoning, IIRC, doesn't depend directly on Malthusian breeding, but on the insight that to "persuade"
a worker not to use the free land, you have to bad at least the yield he'd get on that land. So, if the
3-land is free, labor earns 3 because you have to bid 3 to get him to work for you on the 10.

I'm trying to remember the objection I had to this line of reasoning, because i discussed it with a Georgist.
I think my complaint was, "well what determines the yield on the marginal plot?" At the very least, you
would have to express that in money-neutral, and in fact, physical neutral terms to avoid regression. So you
can't say "the marginal plot yields $3" because, why is the output worth $3? But then, you also can't say
"the marginal plot yields 3 carrots" because if there's more than one good, you have to ask what determines
the exchange ratio of that land's output to the other lands' different output.

The upshot is, you would have to express the value of the marginal plot as something of the form, "enough
to provide sustenance for ones self" or "enough to provide sustenance for three people" or something like that

Okay, now it sounds like I'm rambling. Take it FWIW.

Posted by: Person at Jun 21, 2007 12:00:49 PM

Ricardo believed in the labor theory of value, and it was from him that Marx got it.
So, the question is the labor theory value theory of the value of labor power, which
turns out to be the labor cost of its reproduction, which in Ricardo means the cost of
feeding the labor enough to keep it alive and reproducing itself. Wages and profit
rates are assumed constant throughout the economy, including across all plots of land
being used to produce food, because of competition and an assumed long-run equilibrium.

So, what varies is the cost of production across plots of land, given that they vary
in their inherent productivity. As population rises, more land must be brought into
production, which indeed takes more labor to produce a given yield per acre. That land
will earn zero rent, with all the revenues going to the labor as wages and the capitalists
as profits (on machinery used). Any land more productive than this land will thus earn
some residual revenue, which is land rent, and how much it earns depends on the difference
between its productivity and that of the marginal land. As more land is brought in that is
less and less productive, this gap will grow for any given land already in use, and a larger
share of the national income will go to the landords as rent, being taken away from the
labor and capital recipients.

At a more surface level this will manifest itself through rising food prices as the cost
of production of food rises, which in turn force up wages, although there is no increase
in real wages, as labor just gets paid subsistence that just barely allows them to survive
and reproduce. Thus, the ultimate victims of this process are the capitalists, whose
profits get squeezed by the rising wages, with their share of the national income falling
and being gobbled up by the lazy landed aristocracy. As only the virtuous capitalists
carry out growth-inducing capital investment, and do so only out of their profits, this
decline of profits will lead to lower capital investment and a lower rate of growth.
This was Ricardo's Iron Law of Wages, which depended ultimately on a Malthusian mechanism.

An aside here is that for many recent decades it was widely bandied about that this theory
was what inspired Thomas Carlyle to describe economics as the "dismal science." It is a
great service that David Levy of GMU and various coauthors have done to demonstrate that
this was a canard, and that in fact Carlyle used the term to describe economists such as
John Stuart Mill who opposed slavery.

Posted by: Barkley Rosser at Jun 21, 2007 2:29:04 PM

based on the least productive land used. Shouldn't rent be based on the most productive land not used?

Surely one simply imagines that land is a continuum, where these are identical. If the farms were large enough that these two were different, then the price should be somewhere in between, set by some other factor. No?

Posted by: ignorant physicist at Jun 21, 2007 4:33:16 PM

i.p.,

Assuming a continuum, then on each side of the line, the "least productive
land used" and the "most productive land not used" will differ in their
productivity by epsilon, or if you are a fan of non-standard analysis, by
an infinitesimal real number. Of course, once one complicates the story by
positing lumpily sized farms like we see in the real world, then, well, the
story gets a bit more complicated. The least productive used land might earn
some minimal level of clearly positive rent.

There is a theory in some later Ricardian lit that posits and discusses what
is called "ground rent," rent earned on the marginal land and not because of
lumpy farms. But that is not Ricardo; it is a variety of post-Ricardians,
including Marx, all part of that cottage industry that Tyler referred to,
which spread to a lot of cottages, not all of them earning any rent...

Posted by: Barkley Rosser at Jun 21, 2007 10:30:25 PM

If there were no improvements in fertilizer, Ricardo would still be bs.

Posted by: CK at Jun 23, 2007 4:15:45 PM