The below mentioned article provides an overview on Ricardian Theory of Rent:- 1. Introduction to Ricardian Theory of Rent 2. How Rent Arises in the Ricardian Sense 3. Assumptions 4. Critical Evaluation.
Introduction to Ricardian Theory of Rent:
Ricardo defines rent as “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”.
The essential features of Ricardo’s definition are as follows:
(a) Rent of land is a payment made by the tenant to the landlord, not for any services of the latter but for the services of land.
(b) Land possesses certain original and indestructible powers; these powers are fertility and location.
(c) Rent is the difference between the price of corn and the cost of cultivation, and as suck rent is determined by price.
(d) The amount of rent for any plot of land depends upon the fertility of that plot of land as compared to the fertility of the marginal land.
(e) Marginal land is a no-rent land, since the price of the product and the cost of cultivation of the marginal land will be equal.
How Rent Arises in the Ricardian Sense:
Let us take the case of a new country which is relatively vast and the settlers are few. Land is free and people can have any amount of land. Obviously, people will settle down on the best land, start cultivating it. The cost of cultivation will consist of three items, viz., wage of labour, interest on capital invested and a margin of profit for the trouble of cultivating and producing food for others.
If the cost of cultivation of corn is Rs. 100 per quintal, the price of corn in the market must be equal to the cost of cultivation; otherwise the farmers will produce just the quantity needed for themselves and will not produce anything for the market.
Suppose that, in course of time, more people come to the new country to settle down and that population increases. The demand for corn increases accordingly and cultivation is extended to the second best land (as the best lands are already cultivated). The cost of cultivation of the second best land is higher since the latter is of inferior quality say, Rs.120 per quintal.
The price of corn will have to rise so as to cover the cost of cultivation of the second best land (viz., the marginal land). If the price of corn goes up to Rs. 120, then obviously, the first land where cost of cultivation is only Rs.100 will be getting a surplus income of Rs.20. This extra amount is due to the superior productivity of the first grade land.
Suppose that the demand for corn rises still further because of increased population. The margin of cultivation is extended to the third best lands. Again the cost of cultivation on this land will be higher say Rs. 140 and accordingly, the price of corn will have to rise. If the market price is not equal to the cost of cultivation of the marginal land (in this case, the third best land), then the latter will be brought under cultivation.
If the corn produced by this land is required, the consumers should be prepared to pay the price which is at least equal to the cost of cultivation of this land. If the market price of corn is Rs. 140 per quintal, the best land gets a surplus of Rs.40, the second best land gets a surplus of Rs.20 and the third land gets nothing. In the third case, the price of corn (Rs.140) and the actual cost of cultivation (RS.140) are the same, hence no surplus arises.
In this way, with every increase in production and in demand for corn, increasingly inferior lands are brought under cultivation. The cost of cultivation obviously goes up and consequently the price of corn also rises. The marginal land does not yield any surplus because the price of corn and the cost of production on the marginal land are equal. But the superior lands will yield surpluses.
Assumptions of Ricardian Theory:
Ricardo develops his theory on the basis of certain assumptions.
First, he assumes that nature is niggardly and the volume of land available is limited.
Secondly, Ricardo assumes that land has certain “original and indestructible powers” for the use of which rent is paid.
Thirdly, Ricardo assumes that land having different grades of fertility will be cultivated strictly in the descending order of fertility in such a way that the best lands will be cultivated first and the inferior lands later.
Fourthly, Ricardo assumes the existence of the marginal or no-rent land.
Finally, Ricardo assumes two tendencies the tendency to diminishing returns in agriculture and the tendency towards increase in population.
Given all these assumptions, the growth of population will leap to increased demand for agricultural goods and extension of cultivation to inferior lands; as a result, the superior lands will get surpluses which the landlords can appropriate by way of rent of land from the tenants.
The increase in population may mean suffering to different sections of people, except the landlords, for the greater the population pressure on land, the higher will be the price of agricultural goods and higher will be the rent of land.
Critical Evaluation of the Ricardian Theory (Criticisms):
The Ricardian theory of rent has been the subject of many serious criticisms.
(i) Ricardo’s concept of land is wrong. According to Ricardo, land possesses original and indestructible powers for which rent is paid. Critics, however, argue that land does not possess any original powers nor are its powers indestructible. For one thing, whatever fertility which land possesses now is mainly due to man’s effort-irrigation, manuring, drainage, etc. By using wrong agricultural practices, it is possible to destroy the properties of land.
(ii) Ricardo’s order of cultivation is faulty. Critics have found fault with Ricardo’s order of cultivation. According to Ricardo, the most fertile and most favorably situated land will be cultivated first. However, this may not always be the case. Even in a new country (about which Ricardo talks) the new settlers need not necessarily choose the best lands. They may not know which are the best lands.
(iii) The differential surplus concept of rent is defective. Ricardo assumes differential natural advantages of superior lands over inferior lands and bases his concept of rent on this difference. In the Ricardian analysis, if all lands possessed equal fertility, there would be no rent. Further in the Ricardian theory, the marginal land is a no-rent land.
The supply of land is limited as compared to the demand for it and accordingly rent will exist because of the scarcity of land. All lands including the marginal land will secure rent.
(iv) The relation between rent and price is wrong. An important criticism leveled against Ricardian theory of rent concerns the relation between rent and price. According to Ricardo, price determines rent. The higher the price of corn, the higher will be the rent.
The price of corn is determined by the cost of producing corn on the marginal land which is rent-free. Critics, however, disagree with Ricardo on this question. They argue that rent of land is a cost, and as such enters into the price of the product.
(v) Rent is not peculiar to land. Modern economists argue that rent is not peculiar to land because differential surpluses similar to that of rent of land are widespread both in labour and capital payments. So long as a factor of production is inelastic (in relation to the demand for it) during a given period of time, a surplus income i.e., rent arises.
There is no reason to argue that land alone can be fixed or inelastic in supply. Modern economists, therefore, have extended the concept of rent to refer to an income which any factor of production may secure over and above its minimum transfer cost.