Mr. Henry George:

An Examination of Mr George's position as a
Systematic Economist and a Review of the
Competitive and Socialistic Schools of Economy

Robert Scott Moffat

[Book V / Chapter III / 1885]

CHAPTER III / THE THEORY OF RENT

That Ricardo's theory of rent is in a high degree plausible is obvious from the fact that it has been almost universally received by economists. No more insinuating doctrine, in fact, was ever presented to human reason. This is the natural result of the process of elimination, of which it is the masterpiece. All reasoning to some extent includes elimination. But it is one thing in a particular process of reasoning to eliminate facts irrelevant to the immediate object of inquiry, and another and very different thing to introduce the wholesale elimination of facts as a method of scientific investigation, that gives a greater appearance of plausibility to this process in the hands of Ricardo is the air of realism he gives to the fictitious illustrations by means of which he conducts it, by putting them in the form of actual transactions, although he is well aware that no such transactions as he represents them take place. I have formerly said ( The Economy of Consumption, Part I., Book IV., Chap. V.):

"While his premises are always abstract, he almost invariably puts them in a concrete form, arraying them in the fictitious garb of facts and figures. Thus he contrives to move the industrial machine by means of sets of economical marionettes. But however amusing may be the motions of his figures, there is always some difference between the motions inspired by a brain of sawdust and one of the ordinary human texture."

Rent is evidently to a large extent differential; it is paid for the use of land; and those who pay it do so in the hope of making a profit by the cultivation of the land rented. Moreover what causes rent to assume a differential character is that land varies to a great extent, and usually very gradually, in fertility; so that there is usually in a country at every stage of its industrial progress some land which it would not pay to cultivate, as well as some the cultivation of which would only leave a bare profit, without allowing anything for rent. According to the distribution of population, land is subject to similar variation in advantage of situation. These with some others implied, and to be afterward noticed, are the facts to be represented in the theory of rent. What could be more plausible than to represent them thus? Rent is "that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructive powers of the soil." It is a surplus over the cost of labour and capital required to cultivate the soil. When the produce does not exceed the cost of labour and capital, that is to say, when there is more than sufficient to yield ordinary wages and profit, the land yields no rent. Land which yields rent may, and commonly will be cultivated, if it yields the return just specified to labour and capital; but not otherwise. Accordingly the margin of cultivation is that degree of fertility which will yield the ordinary profit to capital, and the customary maintenance to labourers, without any surplus. The cost of production on land of this description determines the line above which all the produce of the more fertile land goes to rent. It represents, therefore, the cost of production, inclusive of rent, to all agricultural producers more favorably situated. Hence it is the standard cost of production, and regulates the market value of the produce.

This is the theory of rent, as propounded by Ricardo, and from beginning to end it is a pure fiction. So far, however, it is a consistent fiction. Ricardo adds to it certain corollaries in relation to the growth of population which contain new Principles totally contradictory of the preceding, and which land the whole subject in a confusion only more skillfully disguised than that which we have found in the parody of Mr. George. It is with these corollaries in their relation to the distribution of wealth that we have at present to do. To discuss Ricardo's theory in its whole extent would carry us beyond the bounds of our present inquiry, but I shall briefly indicate, without controversy, the corrections that require to be made on the preceding propositions.

I may premise that in the preceding statement of Ricardo's theory I have omitted the part of the theory that is most distinctively Ricardo's, because it is for the present purpose unessential, and it is inconsistent with the assumed general facts which constitute the theory, or on which it rests, although it is quite in accordance with the method of Ricardo to substitute a fictitious abstraction for a generalization from facts. Because Ricardo held that the cost of production to the farmer was alike on whatever soil he worked, and that the standard of that cost and remuneration were the cost and remuneration on the land last entered upon, he held that rent did not enter into cost of production. Now assuming the former generalization to be true, the latter is not a true inference from it. If the cost of production on all lands is equal, then rent enters into cost of production in all cases except on the land last entered upon, otherwise the cost of production in all other cases must be fictitiously made up; for the capital and wages expended on better land are not actually equal to those on worse. It is rent that reduces them to the same level of productiveness; consequently, without rent the cost of production on the better land cannot be made up. What Ricardo does is to substitute for it a fictitious statement consisting of an equal cost made up under different conditions. The true inference from the standard assumed by Ricardo is that rent enters into cost of production as a variable, or differential element, the alternative element on Ricardo's principle being; wages, seeing he assumes the remuneration of capital to be always equal.

Rent is not a price paid for the use of the indestructible powers of the soil. No concrete liability of this kind is ever incurred, and no such payment ever made. Bent is paid for the temporary use of certain of the customary or legal privileges of ownership, which the owner continues to guard while the tenant makes use of them. The tenant's use gives him the control not of the indestructible, but of the actual powers of the soil, with all improvements already made, a use which is not unaccompanied with risk of loss, even if the tenant undertakes to return the land unimpaired, as he may fail to fulfill his engagement. It also gives him the use of all improvements made by the landlord during his tenancy, and as long as land is owned; the chief interest in its improvement will remain with the landlord. Thus the landlord is not, as the Ricardian theory represents, a passive instrument of the industrial organization, but an active agent in it. Among other functions which he exercises in it, one of the highest importance is the selection of tenants, so that even the tenants' improvements proceed primarily from him, and rent is not an idle revenue, as the theory assumes, but the capital on which the landlord's improving power depends. It is because of the landlord's interest in improvement that land is cultivated without rent.

But it is not true that the margin of cultivation is the cessation of rent, together with the maintenance of profit and wages. As the landlord has active functions to discharge, the margin of self-supporting production includes a rent adequate to the performance of his duties; as he has an interest in promoting production the margin of actual production is the limit of the desire of the landlord to improve, and includes not only the cessation of all profit, but a negative rent, or an outlay instead of a revenue to the landlord. Rent is not a mere surplus over cost of production. It is determined by the relative speculativeness of landlords and tenants upon variable markets and a variable cost of production. The standard or self-sustaining cost of production includes a rent adequate to the maintenance of the capital necessary to the due performance of the functions of the landlord; a profit adequate to the performance of those of the farmers, and wages sufficient for the maintenance of the labourers and their dependents. There is no fixed margin of actual cultivation. It varies with the intensity of speculation. The market price, which determines rent, is not determined by a fictitious standard of cost of production, but by the quantity of produce actually brought to the market taken in relation to the actual demand for it. The ratio of supply to demand fluctuates, as already said, with the degree of speculation. Profit and wages have each a differential element as well as rent, and, as already said the limit of self-sustaining production includes a positive rent as well as positive profit and wages.

The following are Ricardo's corollaries. He lays down the principle that the "natural" wages of labour are the means of maintenance including: reproduction of the species. He assumes, apparently because these are the "natural" wages of labour, that somehow they must be got. He lays it down again and again that a rise in the cost of necessaries, if not preceded, must be followed, he seems to think immediately and by direct consequence, by a rise in the ratio of wages. He assumes that the tendency of competition is to equalize profits, consequently he treats profits as equal. He holds that the profit of cultivation at the margin of production determines not only agricultural profits, but all the profits of production, and all other profits earned by the employment of capital. When the numbers of labourers increase, the assumed necessity of finding subsistence forces production on to inferior soils, with a gradual increase of rent and universal decline of profit. Wages being already at the level of subsistence remain constant.

The theory of the tendency of wages to a minimum requires a more exact definition, which has been already given, [Book II, Chapter II] than that it is the "natural" wages of labour. The principle itself is no doubt founded on actual observation, but it is defined with that readiness for a priori generalization which characterizes all the speculations of Ricardo, and the whole superstructure which Ricardo has built on it is an absolute fiction. It is not a fiction dependent upon the fictitious character of the previous theory, but a new and independent one, for the reader will observe that the tendencies of the same force, namely that of rent, assumed in the original theory are not only divergent from, but opposite to those assumed in the derived theory. In the former theory rent is a mere surplus profit, or margin on the cost of production necessary to remunerate all the active producing agents, among whom the landlord is not, in Ricardo's theory, included. The remuneration of the landlord is thus determined by, and not determining of the remuneration of these agents; in the latter theory we find rent an aggressive force gradually crushing out profit, which has already reduced wages to a minimum, and, through the extinction of profit, arresting the growth of population. The [unreadable] by which this change in the character of rent, and the singular inconsistency between its original and its ultimate relations to profit is wrought, is the theory of wages.

Why must labourers obtain the means of subsistence? Ricardo does not tell us. There is one way in which it is certain they must. Their number will be reduced to those who can obtain subsistence. This is no doubt what Ricardo, with his rapid habit of generalization, had in view when he originated his theory of wages; but this is not the view he has embodied in it. It is essential to Ricardo's method that all details should be struck out, and all processes eliminated. I have shown that it is impossible to reach the results of a complex process in this way. Accordingly Ricardo has in every case substituted something that has a superficial resemblance to, but is in principle fundamentally opposed to it. What he has actually embodied in his theory is a gratuitous assumption that labourers get the means of subsistence because they require them.

Mr. George supplies the omission of Ricardo, and gives a specific and definite answer to the question. What is the natural source of the labourer's wages? His answer, as we have seen, is given in his capacity as a strict follower of Ricardo. [It will be remembered that he gives elsewhere a very different definition of the remuneration of labour, one which is entirely his own invention,] He says, the wage's of labour are determined by what the labourer could earn for himself on the land on which he can enter free of rent. This answer, as has been shown, is most dutifully Ricardian, for it is a pure fiction. In a country with an organized industry all land, whether cultivated or not, is appropriated. It is open to owners or capitalists; but not to labourers having no means to cultivate it. There is, therefore, no such land, and nothing at all can be earned on it.

Taking Ricardo's generalization as he himself has applied it, it is manifestly contrary to fact. There is no reason compatible with a competitive organization of industry why a capitalist should employ a labourer for the purpose of supplying his wants, unless a sufficient remuneration for his capital can be earned on the employment of him. There is consequently no reason why the wants of labourers, or the growth of their numbers, should diminish the profits of capital.

It seems to me evident that Ricardo did not derive originally his theory of the synchronous quality of profits, and of their gradual decline, from the doctrine of the standard cost of production. The former is avowedly derived from the nature of competition, and others besides Ricardo have derived the latter from the same source. Adam Smith has observed a tendency in the rate of profits to decline with the advance of industrial organization. What Ricardo did was to combine these independent observations into a complete generalization along with his laws of rent and wages. In order to appreciate this result it will be necessary to investigate independently the real nature of the distribution of the proceeds of industry in a community with an organized competitive industry, between the three main contributories - land, capital and labour. I shall take them in the order given, premising that the remuneration of labour has already been pretty fully discussed, and, being in this order the complementary factor of the three, will require only a very general notice.

Rent, I speak firstly of agricultural rent, can never be more than a portion of the gross profit of agricultural production, after deduction of the actual outlay on wages and material. There may be no rent, or there may be a rent paid at the cost of the cultivator, but a rent can only be actually earned when the costs of cultivation have been paid, and something is left to the cultivator to divide with his landlord.

Now, as we have seen, with advancing organization, the cost of raw material bears generally a diminishing ratio, normally, it may be said, a continuously diminishing ratio, to the aggregate wealth of the community, so the notion of all the proceeds of production becoming absorbed in rent is entirely unwarranted by anything in the nature of rent itself. The landlord we have found to be an active agent in the industrial organization. His agency is conducted through the medium of rent as a capital; but it embraces responsibilities peculiar to the holder of the original resources of production. We have seen that the efforts of the landlord to increase the revenue of his own land tend to reduce rent in the aggregate. This is especially the case with that class of exertions which commonly earn for the landlord the highest unpopularity. When he exacts the full competitive rent of the land, he exacts from his tenant the full measure of competitive diligence, and when he evicts idle, incompetent or impoverished tenants, he is providing for the use of adequate means to promote efficient cultivation. All these things tend to increase aggregate production, and whatever tends to increase aggregate production tends directly to diminish rent.

As land has a value for other purposes besides agriculture the landlord has other interests than his industrial interests; but the effects of these upon his industrial interest have been greatly exaggerated. Before the landlord can use land for his amusement, he must live by it, and the more expensively he lives, the more he must get out of it. The extent, therefore, of the alien interests of landlords is strictly controlled by their industrial interests. With a free exchange of land it would never lead to greater appropriation of land to purposes of pleasure than is desirable in the general interest of the community.

Rent, as we have seen, enters as a distinctive element into value. It may either enter as a positive or a negative element. That is to say the relative quantity of produce brought to market may be diminished by the necessity of contributing something to the support of landlords, or it may be increased by the speculation of landlords to increase rents. Ricardo's standard is a delusion. It is not even the standard round which competition fluctuates. That, as I have shown, is the standard of self-sustaining production, including a positive rent.

Mines, and all other sources of raw material, follow the same law as agricultural land; but there is another kind of property that requires farther notice. Mr. George, apparently apprehensive that agricultural rent, notwithstanding his unrestricted demonstration to that effect, would not be able to devour the whole proceeds of industry, and somewhat suspicious, perhaps, that the fact did not correspond with his theory as well as it might from the satisfactory nature of his logic be expected to do, has brought a similar charge in an aggravated form against the rent of tenements in towns.

Although Mr. George gives in his grandiloquent way a sketch of the growth of population from the first settler to the rise of a great city, he is utterly incognizant of the economic conditions by which that growth is controlled and co-ordinated. His position that the rent of towns ever has absorbed, or can absorb, the bulk of manufacturing or mercantile profits, is dictated by the most superficial and inaccurate observation. It might seem obvious at first sight that the capitalist will not work for a landlord, any more than for a labourer, unless he receives adequate remuneration. Mr. George's strictures are, of course, properly applicable to the differential rent due to situation; which, it is to be noted, may be very different from actual ground rent. But even gross rental including "interest" on buildings, and even on machinery, will not sustain his hypothesis. What is the rent of the most expensive counting- house in the City to the profits of one of its largest merchants? What is the rent of the office of an insurance company or a bank to the amount of business it transacts? With regard to large manufactories practical proximity to a town can be obtained by them without incurring the differential rent of a choice town site, by selecting a suburban one. Differential value in shop rents is also a matter exclusively of position. It rests upon the general profits of a locality, not upon the capabilities of particular traders. If a man could double his gross profit in a year by causes peculiar to himself, and not common to the locality, it would not raise his rent one halfpenny. Nor does the town any more than the country landlord get the whole advantage of differential value. To cultivate a superior situation he requires a superior tradesman, and has to allow him a superior profit. With regard to private residence, people of any class can be accommodated in a large town at a moderate rental, if they do not insist on living in districts consecrated by fashion as eligible, or specially appropriated to other more remunerative uses.

Differential rent is the co-ordinating force that not only regulates the growth and distribution of population in each particular town, but also the relative growth of different towns, not only in the same, but, in as far as commerce is free, even in different communities.

It determines for example, the limits of the enormous growth of London, not only by setting a higher cost of living against its attractions as a resort of fashion; but also by raising the cost of all industrial enterprises, not only positively, but relatively to their cost in other centres of industry. It also distributes all sites in towns relatively to the importance measured by a mercantile standard, of the uses for which they are demanded. The notion that these functions could be performed by any external force, whether governmental or municipal, or otherwise than by competition among those concerned, is not compatible with a rudimentary knowledge of economic law, whether as founded on physical facts, or on human motives or dispositions.