The Corn — The Rent, Plate i

Rent looks like the most transparent of prices — the sum a tenant hands a landlord for the use of land. It was, nonetheless, the first price the new science of economics took apart, and what it found inside has unsettled the common understanding of the subject from that day to this. For rent, Ricardo argued, is not what it appears: not a charge the landlord levies that makes the produce of the land dear, but a surplus that the dearness of the produce leaves behind — and the direction of that causation, once seen, turns the whole intuitive picture on its head.

The question pressed itself on Ricardo and his contemporaries by way of a furious public quarrel over the Corn Laws, the tariffs that shielded English grain. Landlords grew rich as grain prices climbed, and it was natural to suppose that their swelling rents were a cause of dear bread — a charge passed along the chain to the consumer's loaf. Against this, and nearly at the same moment as Sir Edward West, Malthus, and the earlier James Anderson, Ricardo set out a mechanism that reversed the arrow of cause.¹

1. David Ricardo, On the Principles of Political Economy and Taxation (1817), chapter ii, "On Rent." The differential theory was stated almost simultaneously by Sir Edward West and by Malthus (1815), and anticipated by James Anderson in the 1770s; the Corn Law controversy was its immediate occasion.

Begin with the plainest fact about land: it differs in quality. Some fields are fertile, well-watered, close to the market; others are poor, dry, remote. As a growing population demands more grain, cultivation spreads from the best land outward to the worse, because the best is limited and cannot feed everyone. Consider, then, the very worst land actually in use — the margin of cultivation. On that land no rent can be charged: it is barely worth farming as it stands, and a tenant asked to pay rent for it would simply decline, and the land would fall idle. So the marginal land pays nothing, and the price of grain must stand high enough to make the farming of that marginal, no-rent land just worthwhile — high enough to cover its costs, including the ordinary profit that draws any capital into farming at all.²

2. The no-rent margin: the least productive land in cultivation pays no rent, since competition among tenants would otherwise drive it out of use. The price of corn is therefore governed by the cost of production on this marginal land — the land that just repays its cultivation and no more.

But that same grain price — fixed at the margin — is paid for grain grown anywhere, the good land included, where the same crop is raised at lower cost. On the fertile field the costs are low and the market price is the same high one set at the margin; the difference between them is a surplus. And here competition does its decisive work: tenants, seeing that the good land throws off this surplus, bid against one another for the right to lease it, and their bidding transfers the surplus, pound for pound, from the farmer to the landlord. That transferred surplus is rent. Rent is thus the differential — the gap between the produce of a given piece of land and the produce of the marginal land that pays nothing — and it exists only because the good land is scarce.³

3. Rent as the differential between intra-marginal land and the margin: competition among tenants transfers the surplus of the better land to its owner. The magnitude of the rent is set by the difference in productivity — hence "differential rent" — and would vanish if good land were not scarce relative to demand.

⁂

From this the famous inversion follows, and it is worth stating exactly, because it is so easily lost. The high price of grain is not caused by the rent; the rent is caused by the high price of grain. Rent does not enter into the cost of production and push the price up from below; it is squeezed out of the price from above — a residual claimed after the market price, governed by the no-rent margin, meets the lower costs of the better land. Rent is price-determined, not price-determining. Abolish every rent tomorrow and the price of grain would not fall by a farthing, for it is set at the margin where no rent is paid; only the destination of the surplus would change, passing from landlord to farmer or to consumer. The landlord's charge is an effect, masquerading in the public mind as a cause.⁴

4. "Rent does not enter into the cost of production" — the Ricardian doctrine. Because the price is set at the no-rent margin, abolishing rent would not lower it, but only redistribute the surplus. The confusion of this effect for a cause — blaming high rents for high prices — was, Ricardo thought, the most persistent error in the popular understanding of the subject.

Notice what this makes of rent, morally as well as economically. The landlord, considered simply as a landlord, contributes nothing to the growing of the corn; the fertility of the soil is, in Ricardo's memorable description, an original and indestructible power of nature, a free gift and not the owner's creation. The rent is a payment for access to that gift, made valuable not by anything the owner does but by the scarcity of good land set against the demand for its produce. Rent is therefore the prototype of a category that will shadow the rest of the volume: an income that flows to ownership rather than to action — a surplus from scarcity rather than a reward for contribution.⁵

5. The soil's fertility as a "free gift of nature": rent is not a return to anything the owner produces but a payment for access to a scarce natural power. This makes rent the first clear instance of an income earned by ownership alone — the prototype of every later category of "unearned" income.

The residual character of rent — what is left after the margin sets the price and the costs are met — and its origin in scarcity made it the first and clearest case of a surplus to ownership, and it became the seed of much that followed. Marx took up Ricardo's apparatus and extended it, distinguishing the differential rent of better land from an absolute rent arising from the private ownership of land as such; and the physiocrats before Ricardo had already located in land the net product of a nation. But the essential move was Ricardo's: to show that a payment universally regarded as a cost was in truth a surplus, and that the surplus fell to whoever owned the scarce thing, for no reason but that he owned it.⁶

6. Marx distinguished differential rent (from differences in fertility or location) from absolute rent (arising from landed property as such); the physiocrats had earlier treated land as the source of a nation's produit net. The durable significance is Ricardo's demonstration that a supposed cost was a surplus to ownership.

Ricardo's corn opened a door he did not himself walk through. If rent is a surplus that scarcity hands to ownership, captured for no contribution by whoever holds the scarce thing, then nothing in the argument confines it to fields. Any scarce thing — a location, a license, a patent, a name, a place in a network — can throw off the same surplus to whoever owns it. The next plate takes the concept off the land, and finds that, once one knows what rent is, it appears almost everywhere.