Ricardian Theory of Rent: Meaning, Assumptions, Statement and Features

Ricardian Theory of Rent: Meaning, Assumptions, Statement and Features!

Meaning:

Just as the Malthusian Theory of population is the basis for all further studies in population, in the same fashion Ricardian theory of rent has been considered the ground for all discussions on the problem of rent.

Generally, this theory is named after David Ricardo, an eminent economist of the 19th century. Prior to Ricardo, Physiocrates and Adam Smith regarded rent as the result of the bounty of nature. According to them, the amount of labour employed for the cultivation of land is rewarded by nature by yielding produce which is many times more than the labour involved.

This excess production is named as net production or rent. Moreover, classical economists like James Anderson opined that rent arises due to difference in the fertility of land. According to them to increase agriculture production when extensive cultivation is done then inferior land is also brought under cultivation. Therefore, extra produce obtained from relatively superior land is called rent. But, to Ricardo, “rent is that portion of the produce of earth which is paid to the landlord for the use of the original and indestructible powers of the soil.”

Thus, rent according to Ricardian definition is a payment for the use of land only and it is different from contractual rent which includes the returns on capital investment made by the landlord in the form of hedges, drains, wells and the like. In simple words, if we deduct the return on the capital investment made by the landowner from the contractual rent, we will be left only with the pure land rent which according to Ricardian terminology is the price for the use of land only.

Assumptions:

Ricardian Theory of rent is based on certain assumptions which are as follows:

1. No Alternative Use:

It has been assumed that land has no alternative use as it is used only for farming.

2. Difference in Fertility:

The theory also assumes that fertility differs from land to land. It means some pieces of land are more fertile as compared to other pieces of land.

3. Law of Diminishing Returns:

The theory assumes that law of diminishing returns holds in agriculture. It states that output will not be increasing at the same rate at which labour and capital increases.

4. Increase in Population:

The population of the country increases continuously which results in an increase in agricultural production to feed the larger population.

5. Long Run:

The Ricardian theory of rent is based upon the assumption of long period. This assumption is basic to the classical economics.

6. No-Rent Land:

The Ricardian theory assumes the existence of no-rent land which does not enjoy any rent.

7. Scarcity of Land:

The Ricardian theory assumes that the supply of superior grade of land is limited.

8. Original and Indestructible Powers of the Soil:

The Ricardian theory rests upon the fundamental assumption that land possesses some original and indestructible powers.

9. Perfect Competition:

The theory assumes the existence of perfect competition in the market. Since under perfect competition, the product price is given, economic rent is that surplus which accrues over and above the cost of production.

10. Descending Order of Cultivation:

Theory assumes that different tracts of land are brought under cultivation in a descending order of fertility. In the words of Ricardo, “The most fertile and most favourably situated land will be first cultivated”.

Statement of the Theory:

According to Ricardo, in the beginning of the civilization, when population is not much, the food requirements of the people may be met by the cultivation of only the best tracks of land. But when population increases or new people come to the country, people will be forced to take up the cultivation of second best or less fertile pieces of land. To the application of same amount of labour and capital as was applied on the best grade land, the less fertile land will yield less produce. The price of produce must be equal to the cost of cultivation on the less fertile land.

The cost of cultivation of the superior grade of land will be less than the cost of cultivation of the less fertile grade of land. With the result, the owners of superior grade of land will come to enjoy a sort of surplus which by definition constitutes rent. Thus, rent appears as a surplus on superior grade of land because of the difference in the fertility of different pieces of land. If all pieces of land are homogeneous, rent arises due to scarcity of land. The difference in fertility is the measure of the size of the rent.

Features of Ricardian Theory:

The major features of Ricardian theory of rent are as under:

1. Rent is the Factor Income of Land:

It is payment made to the landlord on account of the original and indestructible powers of the soil.

2. Rent Increases with the Increase in Population:

As the population goes on increasing and the law of diminishing returns becomes applicable to agriculture, due to the niggardliness of the nature, rent goes on increasing. In other words, as the population increases, the demand for food also increases and therefore, inferior quality of land is cultivated. Thus, the rent arises on the superior quality of land. Thus, Ricardo, unwittingly though, proved that the unearned income of the capitalist goes on increasing with the increase in population. This provided to socialists a very important point of criticism of the capitalist system.

3. Rent Does not Enter into Price:

The market price of an agricultural commodity is equal to the cost of producing it on the marginal land. Rent in the Ricardian sense, is a surplus above cost. Therefore, rent does not determine price. It is the price which determines the rent.

4. Rent is Unearned Income:

Rent is not due to any labour or effort on the part of the landowner. Therefore, it is an unearned income’. The abolition of such income by taxation or otherwise will not reduce the supply of land.

5. Rent Arises Both in Intensive and Extensive Form:

It arises in the intensive form when more units of labour and capital are put to work on the same plot of land or, in the extensive form, when more and more plots are put to cultivation. In both the cases total output increases but at a diminishing rate.

6. Rent is a Differential Return:

The rent of a plot of land tends to equal the difference between its yield and the yield of marginal plots.

7. Rent is Due to the Original and Indestructible Power of the Soil:

According to Ricardo, every plot of land is endowed by nature with certain powers which are original and indestructible. The original qualities of land can neither be created nor destroyed. The yield obtained from any plot is determined by the extent of those powers.

8. Rent is Due to Niggardliness of Nature:

The differential surplus, which is called rent, arises whenever inferior lands have to be cultivated. If the supply of good quality land was adequate it would not have been necessary to do so. Rent arises because good quality land is scare. Hence, according to Ricardo, rent is not due to the bounty of nature but to her ‘niggardliness’.