Modern Theory and Ricardian Theory of Rent!
Ricardian theory of rent paved the way for modern economists to express their ideas on the similar issue.
Modern economists like Mrs. Joan Robinson, Marshall tried to make it more practicable and to answer the questions which Ricardo failed to give.
Therefore, it is observed the modern theory is a modification and improvement over the Ricardian theory. The following points support the idea.
Ricardo opined that the supply of land can neither be increased nor decreased. Therefore, its transfer earning is zero and whole of its earnings is called the rent. Ricardo believed that only land earns rent. But on the other hand, modern economists amplified the theory and stated that all the factors of production enjoy rent. Of course, all the factors of production are specialized in nature to some extent. It means part of income earned by the factors of production is rent. In the words of Mrs. Robinson, “Particular units of factors of production which belong to those broad categories of labour, entrepreneurship and capital also earn rent.”
Modern economists have made several modifications in the Ricardian Theory of rent as:
Measurement of Rent:
According to Ricardo rent can be measured by the difference between intra marginal and marginal land. He believed that the surplus earned by the intra marginal land over the marginal land is called the rent. The modern economists rejected this dubious assumption of marginal land and maintained that rent is the surplus of actual earnings over the transfer earnings.
Emergence of Rent:
Ricardo observed that rent arises due to the difference in the fertility of land. But the modern economists provided a scientific explanation to rent. Accordingly, rent arises due to the specificity of factors.
Rent and Price:
According to Ricardo, rent does not enter into price. But the modern economists opposed this idea and opined that rent determines price and affects it. Thus, from the above analysis, we can sum up that Ricardian theory was no doubt a basic and remarkable attempt to explain the origin of rent. It suffers from various shortcomings which have been removed by modern economists. Therefore, modern theory can surely be regarded as an improvement over the Ricardian Theory.
Relationship between Rent and Price:
There is widespread controversy among the economists regarding the relationship between rent and price. But, there are two viewpoints is this regard viz; Ricardo’s views and modern views.
Ricardo expresses his view that rent does not enter into price because rent is not priced determining but it is price determined. Therefore, first of all price of marginal land is determined and after that rent on intra marginal land is found. Thus, rent does not affect the price.
According to Ricardo, “Corn is not high because rent is high, but rent is high because corn is high,” This statement of Ricardo shows that rent does not affect price but it is being affected by price.
Modern economists like Lipsey, Pareto, and Mrs. Joan Robinson etc. observed that as per Rieardo’s view, that rent does not enter the price from the entire economy’s point of view; but from a firm or individual producer’s point of view, rent is included in price. It is only due to this reason that the producer has to pay for the services of land he uses. Therefore, it is included in the cost of production, thereby affects the price. The views of modern economists regarding the relation between rent and price can also be studied from the following three angles:
From the Point of View of Society:
The supply of land for the society as a whole is fixed in quantity or inelastic in supply. Its supply price or transfer cost is zero as it is provided free to society by nature. Moreover, land has no transfer price. Thus, rent is not included in the cost of production of goods for the society as a whole. But, when the demand for land rises, its supply being fixed, rent on land increases. Thus, rent is price-determined. Rent is not included in the cost of production of goods for the society since the supply cost is zero. According to modern economists, it is the supply price which is included into the cost of production.
From the Point of View of an Industry:
In an industry transfer cost of land or the supply price of land is a part of the cost of production. Therefore, it enters into price. To an industry, the supply of land is less than perfectly elastic. To attract land from other uses, the industry will have to pay the owners of land at least what it would have earned in the next most profitable use. If the industry is not prepared to pay this much price of land, land will not be released.
Suppose with the rise in demand for sugar, the sugar industry needs more land for sugarcane cultivation. Therefore, to get land from rice cultivation, it must offer at least what a piece of land can get under rice cultivation.
Naturally, land requires a minimum transfer price to sugarcane growing. This transfer cost will enter into the cost of production of sugarcane. Thus, transfer cost or the supply price or supply cost of land is included in the cost of production of goods.
From the Point of View of the Individual Producer or the Firm:
The supply of factor is perfectly elastic to firm or for the individual producer. The entire earnings of the factor are equal to the transfer cost of the factor. From the point of view of individual firm the whole payment made for a factor is part of the cost of production. Since the whole payment made to the factor or the entire earnings of the factor are equal to the transfer cost or the supply price of the factor and there is no excess over transfer earnings.
From the point of view of industry, only transfer earnings of a factor are part of the cost of production. For the economy as a whole, the transfer cost or the supply price or opportunity cost of the factor is zero, and no part of payment to the factor may be considered as cost.