David Ricardo, a renowned economist, propounded a theory of rent in his book ‘Principles of Political Economy and Taxation.’
According to him, “Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.”
He advocated that rent is a reward received for availing the services of land, which is fixed in supply.
In addition, he also stated that rent is generated due to its original features in terms of natural soil, fertility, and mineral deposits. These features or qualities are indestructible. According to Ricardo, rent can be determined under two conditions, which are extensive cultivation and intensive cultivation.
Rent in Extensive Cultivation:
Ricardo advocated “All the units of kind are not of the same grade. They differ in fertility and location. The application of the same amount of labor, capital and other cooperating resources give rise to difference in productivity. This difference in productivity or the surplus which arises on the superior units of land over the inferior units is an economic rent”. Let us discuss rent in extensive cultivation with the help of an example. Suppose there are four grades of land A, B, C, and D in a country.
Table-1 shows the yield of these four lands as well as returns generated from these four lands:
From Table-1, it can be seen that A is more fertile than B, B is superior to C, and C is more productive than D. Therefore, the superiority of the four lands is A>B>C>D. Land A is producing 100 quintals of wheat per acre, which is sufficient for meeting the needs of people. Now, suppose the population of the country has increased.
In such a case, land A is not able to satisfy the increased needs of people. Therefore, land B would also be used for cultivation so that the needs of people can be met. Here, it has been assumed that the same amount of labor and capital is employed on both the land, A and B. Land B yields 85 quintals per acre.
A surplus of 15 quintals of wheat (100 – 85 = 15) that is generated with the identical outlay on land A is considered as economic rent. Land B is a marginal land; therefore, gives no rent. The country is facing continuous pressure of increase in population.
Therefore, land C is also used for cultivation. In such a case, economic rent of land A would be raised to 30 quintals of wheat per acre (100- 70=30) and for land B, the economic rent is 15 quintals of wheat per acre. Similarly, land C being a marginal land would generate no rent.
If the cost of production on land A, which is yielding 100 quintals of wheat, is Rs. 10000 and the market price of total yield on land A is also Rs. 10000, then only land A would be used for cultivation. Here, land A is the marginal land. Suppose the price per quintal of wheat increases to Rs. 110 and the cost of production of wheat on land B is equal to the market price of wheat, which is Rs. 9350, then land B would also be used for cultivation.
In such a case, land B would become marginal land. Similarly, land D would become the marginal land when the cost of production and the market price of wheat would be Rs. 8450. There would be no surplus on land D. Therefore, it can be said that marginal land is not fixed and varies with the change in the price of yield generated.
Rent in Intensive Cultivation:
In the above, we have discussed rent in extensive cultivation.However, the surplus or economic rent is also generated from the land, which is cultivated intensively. This is because the law of diminishing returns is also applied in this case.
When a land is cultivated intensively, the additional application of labor and capital produces low yield with repeated cultivation. The amount of labor and capital whose cost is equal to the value of marginal return is considered as marginal or no rent land.
Let us understand rent in intensive cultivation with the help of an example. The application of first unit of labor and capital for cultivation yields 50 quintals of wheat, the second unit yields 40 quintals of wheat and with the application of third unit, the land would yield 30 quintals.
Only three doses of labor and capital are applied as the total cost of production on the third application is equal to its return. Therefore, the third application would be regarded as marginal. The rent when measured from the third application is 20 quintals (50 – 30 = 20) on first application and 10 quintals on the second application (40-30= 10). Therefore, the third unit is a no rent land.
Criticism to Ricardian Theory of Rent:
The theory of rent given by Ricardian is criticized by many economists.
The major points of criticism are as follows:
i. Assumes that the fertility of a land does not remain the same. In case, a good land is cultivated for a large number of times, then it would lose its fertility. However, good lands can get their fertility back more rapidly as compare to poor lands, when both of them are fertilized simultaneously.
ii. Considers the concept of no-rent land, which provides return equal to the cost of production. This does not exist in reality.
iii. Assumes that rent is generated only in case of perfect competition. However, rent can also be generated in imperfect competition.
iv. Assumes that only those lands are cultivated, which are best in terms of fertility. However, this is not the case in reality. The lands that are easily available are first used for cultivation.