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Ricardian Theory of Rent | Microeconomics

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In this article we will discuss about:- 1. Assumptions of the Ricardian Theory of Rent 2. Causes of the Emergence of Rent 3. Differential and Scarcity Rent 4. Intra-Marginal, Marginal and Sub-Marginal Land 5. Extensive Cultivation and Intensive Cultivation 6. Intensive Cultivation, the Law of Diminishing Returns, and the Ricardian Theory of Rent and Other Details.

Contents:

  1. Assumptions of the Ricardian Theory of Rent
  2. Causes of the Emergence of Rent
  3. Differential and Scarcity Rent
  4. Intra-Marginal, Marginal and Sub-Marginal Land
  5. Extensive Cultivation and Intensive Cultivation
  6. Intensive Cultivation, the Law of Diminishing Returns, and the Ricardian Theory of Rent
  7. Laws of Diminishing and Constant Returns and Intensive Cultivation
  8. Critical Evaluation of the Ricardian Theory of Rent


1. Assumptions of the Ricardian Theory of Rent:

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It was David Ricardo (1772-1823), a classical economist, ‘who first gave us a systematic theory of rent.

The assumptions of his theory are:

(i) Ricardo assumed that only one factor of production, viz., land, can earn rent. He called it the rent of land.

(ii) He thought that the owner of land is entitled to obtain rent for the original and indestructible powers of the soil. Therefore, if the productivity of land is increased artificially by the use of, say, fertilisers (capital), then the owner of land would not get any rent for this enhanced productivity of land; it is the person who invested capital on land should receive some reward for this enhanced productivity.

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(iii) Land is a gift of nature and from the point of view of a particular country, the supply of land is fixed or completely inelastic (e = 0). Since land is a free gift of nature, the country or the society does not have to pay any price for getting its supply.

That is, from the point of view of the whole society land has no cost of production, nor has it any price. That is why, from the point of view of the society, the minimum supply price of land is zero.

(i) Ricardo assumed that land can be used to produce only corn—it has no alternative use. Therefore, the maximum it can earn in an alternative use, or its minimum supply price in the production of corn, is zero.

(ii) There is perfect competition in the land-lease market. That is, there are many people (owners of land) who are willing to rent out a homogeneous type of land, and there are many cultivators who want to hire land for the purpose of cultivation.

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There is perfect competition also in the market for the produce of land. That is, there are many buyers and sellers in this market who buy and sell a homogeneous crop (at a constant price).

(iii) Cultivation of corn on land is subject to the law of diminishing returns. That is, if the increased quantities of the inputs are used on a fixed amount of land, then the total amount produced would increase at a diminishing rate.

(iv) There are different grades of land on the island. The fanners first pick up the plots of first grade land for cultivation, then they cultivate on the second grade plots, and so on.


2. Causes of the Emergence of Rent:

We may now present the exposition given by Ricardo of how rent of land does emerge and how the amount of rent is determined, with the help of the example he used for the purpose.

Let us suppose that some people arrived in an island which had so long been uninhabited, for the purpose of habitation. To earn their livelihood, some of them took to fishing or wood­cutting and, of course, some of them wanted to engage in farming to produce corn.

Ricardo told us that the cultivators of the soil would first cultivate the first grade or the best available plots of land. Since the supply of these lands was plenty in relation to demand and since the lands at present do not earn anything, the rent of land, to begin with, would be zero because of competition among the landlords.

Let us now suppose that if the farmer spends Rs 100 on the inputs (including normal profit), the first grade plot produces 25 quintals of corn. The price of corn in this case would be Rs 4 per quintal, which is just sufficient to ensure the normal profit for the producer.

This is because there is competition among the farmers. If the price happens to be more than Rs 4, the farmers would earn more than the normal profit and some more people would then join cultivation.

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As a result, supply of corn would increase, its price would fall again to Rs 4 (so that each farmer might earn just the normal profit). Therefore, in this stage, the farmers would not have any surplus left to pay the rent of land and, in any case, they need not pay any rent.

Then Ricardo told us that if the population of the island increases and demand for corn also increases consequently, then, at some point, all the first grade plots of land will be brought under cultivation, and now, to meet the increasing demand for food, cultivation would have to extend to the second grade plots of land. Let us suppose that Rs 100 of investment on the second grade plot produces an output of 20 quintals.

Therefore, now the price of corn would have to rise to Rs 5 if the second grade plots are to be cultivated with normal profit. When all the first grade plots would come under cultivation and nobody wants to go to the second grade plot unless price rises to Rs 5 per quintal, the supply of corn would not increase any more, although demand is increasing.

As a result, price would rise eventually to Rs 5 Since the supply of second grade plots are plenty in relation to demand, the farmers, as in the previous case, would not be required to pay any rent. Nor would they have anything left after paying the costs including normal profit, to pay the rent.

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However, the farmers of the first grade plots would also receive now the price of Rs 5 per quintal, so that they now would have Rs (5 x 25 – 100) = Rs 25 left as surplus over the costs. Ricardo says that this surplus, realised by the farmers of the first grade plots, would have to be paid as rent to the landlords of these plots, who are entitled to receive it because of superiority of the original and indestructible powers of the soil of their land.

Therefore, rent now emerges in the first grade plots. Supply of these plots is no longer plenty relative to demand, rather, demand now is greater than supply. This justifies also the emergence of rent in the first grade plots.

We may now carry forward our example to the next stage where all the second grade plots have come under cultivation and where, because of the pressure of demand, price moves to Rs 10 which is just sufficient to meet the costs of Rs 100 with 10 quintals of yield per period on a plot of third grade land. Therefore, the farmer of the third grade plot would have no surplus, i.e., rent does not emerge here.

However, the farmers of the first and second grades of land would now receive the price of Rs 10/quintal for their product. The farmer of the first grade land would now have a surplus of Rs (250 – 100) = Rs 150 and the farmer of the second grade land would have a surplus of Rs (200 – 100) = Rs 100.

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That is, the rent on first grade land would now increase from Rs 25 to Rs 150, and that on the second grade land would increase from zero to Rs 100.

We shall not extend our example further for, by now, we have been able to understand the essentials of the subject which we may put in terms of the following points:

(i) In the Ricardian theory, rent is producers’ surplus which should be transferred to the landlords.

(ii) Rent does not arise so long as supply of land is perfectly elastic in the sense that supply is plenty relative to demand. That is why the first grade land does not get any rent initially, when its supply is more than demand. The owners of these lands earn rent only when the demand for land becomes greater than supply. Similar is the case with the second and third grades of land, and so on.

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(iii) Rent of land emerges, because in the Ricardian case, supply of land is completely fixed, and therefore, the supply of each grade of land is fixed. When the demand for food increases even after all the first grade land is brought under cultivation, the margin of cultivation shifts to the second grade as the price of corn increases.

The first grade land is able now to earn some rental surplus. Similarly, when the margin of cultivation shifts from the second to the third grade land, the second grade land is able to have some rental surplus, and so on.

It may be noted here that if all the land in a country happens to be of the same grade, rent would still emerge, but it would emerge rather late when all available land in the country is brought under cultivation, and the margin of cultivation shifts to another country under the pressure of demand for food, i.e., when the country would have to import food-grains from another country.

(iv) In the Ricardian theory, it is assumed that land can produce only corn, and it has no alternative use, i.e., the minimum supply price of land to corn production is zero. That is why the entire earning of land, or, rather, of the owner of land, would be the rent of land.

For example, when the margin of cultivation shifts from the first grade to the second grade land, and the owners of first grade land get an amount of Rs 25 for each plot, the entire amount is surplus or rent because the minimum supply price of land is zero.


3. Differential and Scarcity Rent:

In our Ricardian type example, we have seen that the different grades of land earn different amounts of rent, because of difference in the productivity of their soil. This is known as “differ­ential rent”. Again, the Ricardian theory gives us that rent emerges because the supply of land in a country is completely fixed or inelastic. That is, rent is obtained because of scarcity of land. This is known as “scarcity rent”.


4. Intra-Marginal, Marginal and Sub-Marginal Land:

In our analysis of the Ricardian theory, at any particular price of corn, some land would earn a positive rent, some would earn zero rent, and some negative rent. They are, respectively, called intra-marginal, marginal, and sub-marginal land.

In our example, at the price of Rs 5 per quintal, the first-grade land would earn a positive rent (Rs 25)—this land is, there­fore, intra-marginal; the second-grade land would earn a zero rent—this land is marginal; and the third-grade land earns a negative rent (- Rs 50)—this land is, therefore, sub-marginal.


5. Extensive Cultivation and Intensive Cultivation:

In our analysis of the Ricardian theory of rent, as demand for corn increases, the margin of cultivation shifts from the first grade to the second grade land and then from the second grade to the third grade, and so on. The farming done here is called extensive cultiva­tion. In this form of farming, all types of land, from the superior to the inferior, are gradually brought under cultivation.

The analysis of the Ricardian theory can also be done in terms of intensive cultivation, when more and more of inputs are used in the cultivation on a particular plot of land in order to increase its produce—the farming done here is known as intensive cultivation.


6. Intensive Cultivation, the Law of Diminishing Returns, and the Ricardian Theory of Rent:

When a particular plot of land is cultivated more and more intensively, it is observed that the farming is subject to the law of diminishing returns (LDR), i.e., the use of additional doses of inputs would result in diminishing increments in output.

For example, if we use the first, the second and the third, etc. doses of inputs on a first grade plot of land, the total product is, say, 25 quintals, 45 quintals, 55 quintals, and so on. Here the output increases, respectively, at the rates of 25, 20, 10, etc., Let us suppose, each dose of inputs costs Rs 100 (including normal profit).

Given the above data, if we apply the first dose of inputs, the price of the product should be Rs 4, and no producer’s surplus or Ricardian rent of land rent does emerge in this case. However, when the pressure of demand raises the price of corn to Rs 5, the second dose of inputs may be applied on the same plot of land, i.e., it would be cultivated now more intensively.

In this case, there would be no surplus or rent on the second dose, only normal profit would be obtained. But, at the price of Rs 5, the first dose would now earn a surplus or rent of Rs (125 – 100) = Rs 25.

Similarly, when price increases further and becomes equal to Rs 10, the third dose of inputs would be applied. There would be no surplus on this dose, only normal profit. But at p = Rs 10, the surplus on the first dose would increase; it would now be Rs (250-100) = Rs 150 and the surplus on the second dose would rise from zero to Rs (200-100) = Rs 100.

In extensive cultivation, we have intra-marginal, marginal, and sub-marginal land. In the intensive cultivation also, we have intra-marginal, marginal, and sub-marginal dose of invest­ment.

For example, at the price of food equal to Rs 5, the first dose of investment is intra-­marginal dose—it results in a positive rent of Rs 25, the second dose of investment is marginal dose—it results in rent being zero, and the third dose is a sub-marginal dose—it results in a negative rent of – Rs 50.


7. Laws of Diminishing and Constant Returns and Intensive Cultivation:

In the case of extensive cultivation, rent arises because the supply of land in a society is fixed. In the case of intensive cultivation, rent emerges because of the operation of the law of diminishing returns (LDR).

Actually, the LDR is tantamount to the inelasticity or fixity in the supply of land. We may see the truth in this, if we see what happens if cultivation on land is not subject to LDR, but it is subject to the law of constant returns (LCR).

Then, in our example, the first dose as also all other doses of investment would result in an increment in output of 25 quintals. Consequently, the price cannot be more than Rs 4 and all the doses result in normal profit only. There would be no rent on any dose whatsoever.

But this situation (under LCR) is tantamount to unlimited supply of land. For here any particular plot of land can increase the supply of food indefinitely at the same rate whenever an additional dose of investment is applied, i.e., any one plot of land can do the work of an infi­nitely large number of plots of land, or, we may say, any one plot would be able to supply food for the whole population.

Therefore, that LCR gives rise to the effect of an unlimited supply of land and no rent can emerge out of this situation. On the other hand, LDR represents limitations to supply of land, giving rise to the emergence of rent.

We may conclude from the above analysis that the factors giving rise to Ricardian rent of land are:

(i) Fixity in the supply of land,

(ii) Operation of the law of diminishing returns.


8. Critical Evaluation of the Ricardian Theory of Rent:

Economists have pointed out some defects of Ricardo’s theory of rent. These are:

(i) Ricardo has told us that the soil of land possesses original and indestructible powers to produce crops. But what we now know is that the power of the soil is neither original nor is it indestructible. For example, by means of investment of capital and technology, the power of the soil has been enhanced to such proportions that it is impossible now to have an idea of the original power of the soil.

Again, in modern days, nuclear and chemical warfare may com­pletely destroy the productive powers of the soil. Therefore, the productive power of the soil can no longer be described as indestructible.

(ii) Ricardo has assumed that land can be used to produce only one type of crop (say, wheat) and land has no alternative use. It is said that this assumption is totally unrealistic—especially when we know that land can be used to produce several crops. Besides, land can be used for the purpose of building houses, factories, shopping complexes, etc.

(iii) Ricardo has said that land is a free gift of nature to a society and, hence, land cannot have any cost of production. Also, the supply of land in a country is completely inelastic. From the point of view of the whole society, these contentions of the Ricardian theory are indeed true.

However, from the point of view of an agricultural producer, the supply of land is not completely fixed and the land has a supply price, because he knows that he can obtain any particular plot of land for growing any crop he likes if he offers a sufficiently large amount of money to the landlord.

Therefore, supply of land is not completely fixed for him. Similarly, land can be obtained for any purpose other than agriculture if the money demanded by the landlord is paid to him.

(iv) Ricardo has told us about rent of land only and does not tell us that rent can also be obtained by the factors of production other than land.

(v) Ricardo assumed that the agricultural producers would classify land on the basis of productivity and would take up land for cultivation in the descending order of their productivity.

We may say, however, that people, while selecting land for cultivation, consider both their productivity and proximity. It seems that Ricardo made this assumption for the sake of simplicity.

In conclusion, we may say that the most of the above defects of Ricardo’s theory of rent stem from the rather unrealistic assumptions of his theory. Ricardo perhaps made these as­sumptions to make the exposition of his theory simple.

However, the modern theory of rent explains economic rent without these assumptions. Besides, Ricardo’s definition of rent as rent of land is a narrower concept. The modern theory of rent has given us a wider concept of rent.

Of course, while pointing out the defects of the Ricardian theory, we must not forget that it was Ricardo who gave us first a systematic theory of rent, and he constructed his theory to deal with the questions relating to land that came to the fore in his times.

We must not forget also that Ricardo could see clearly that the inelasticity of supply of land was the main reason behind the emergence of rent. This very idea forms the basis of the modern theory of rent.


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