Ricardo’s theory of rent Essay

     Ã‚  Ã‚  The term â€Å"rent† comes from the Latin word â€Å"rendita’, which means â€Å"returned†. Rent as an income of one of the factors of land attracted attention since old times. Further, in the economic theory the concept of economic rent as a part of income of any factor appeared and developed. One of the theorists that formed and developed the concept of rent was David Ricardo, who is considered to be one of the fathers of the theory of rent. However, despite the old origins, the theory has been criticized a lot by both theorists and practitioners.   Ã‚   David Ricardo first mentioned rent in his book â€Å"The foundations of political economy and taxes† (1817). In this book, Ricardo defines rent as a part of the land product, which is paid to the landowner for the use of the soil. The logic of Ricardo is quite simple. Given the law of supply and demand, nobody pays for the use of air and water (as well as any other nature’s gift, which is widely available). Thus, any brewer or producer of any good constantly uses air and water to produce their goods. But because the air and water are limitless, they are not paid for. Following this logic, Ricardo comes to a conclusion that rent is paid for the use of soil just because the amount of land is not limitless and the quality of land is not the same. With the rise of the population, the worst land or the lands that are situated inconveniently are also get cultivated. When the cultivation touches the lands of so-called second category, i.e. the worse, the lands of the first category simultaneously form the rent, which depends on the quality of those two types of land.   Ã‚   The peculiarity of Ricardo’s theory lies in the fact that he approached the rent as a concept from only one perspective. Ricardo thought of rent as a solely agricultural one. Moreover, Ricardian rent is a rent for a raw product of agriculture in general, but not the rent for the land given for the one peculiar type of a product. It is considered that the land used as a field cannot be used a pasture; labor and capital change from one piece of land to another, but the use of soil itself remains unchangeable. Because the amount of land is limited, as it was already mentioned, and it is used in a single way, rent is determined by price and not vice-versa. According to Ricardo, the rent is paid because the bread is expensive and not vice-versa. (Henderson, 1922)   Ã‚   Practitioners notice that Ricardo’s theory of rent has also another shortcoming. Ricardian rent is solely the payment for the soil itself. Thus, it excludes any payment for the interest on capital invested by landowner in the form of buildings, drain constructions etc. Moreover, Ricardo’s concept of rent also excludes the income from the wood development or the extraction of any mineral resources on the rented land. There remains the â€Å"pure† rent for soil, which is regarded as the land designed for cultivation and not touched raw material richness, which is though limited in amount and completely specialized on the production of one type of product not considering certain distinctions in placement and fertility.   Ã‚   However, later on Ricardo developed another branch of his theory. According to Ricardo, rent has two sources. If the land is homogenous, its limit provokes the rent of â€Å"rareness†. In this case, rent is a difference between the product of all applied capital and labor and the product of the final input in the form of intensive use of soil. When the land differs in quality, the limited amount of certain quality is the source of so-called differentiated rent. Ricardo thought that Europe of that time had quite substantial amount of land, which didn’t give rent. However, from the perspective of his theory, nothing could have changed, if this had been true. Rent wouldn’t be simply differentiated, but would have remained the rent of â€Å"rareness†.   Ã‚   The important input of Ricardo’s theory is the fact that he proved that the source of rent was the work of labor that cultivated the land. Thus, rent becomes a social phenomenon in Ricardo’s theory. The emergence of rent is connected with the emergence of private ownership for land. The emergence of differentiated rent Ricardo explained from the point of view of the law of value. Differentiated rent in Ricardo’s theory doesn’t arise as the special form of added value, i.e. the exploitation of hired labor, though Ricardo characterizes rent as added product.   Ã‚   Yet, because of the insufficient development of labor theory of value and inappropriate and insufficient understanding of the correlation between value and the price of a product, Ricardo didn’t research the absolute land rent and denied its existence based on the fact that it didn’t conform to the law of value. Ricardo though that because the cost of agricultural products produced under the worst conditions regulate the cost and the price of all the rest of the same products, those lands cannot give any rent, because rent is a difference between the cost of production on the worst pieces of land. Otherwise, rent would be simple margin for the price of a product. Aspiring to retain this basis, Ricardo denied the existence of absolute land rent. Another reason why Ricardo denied the existence of absolute rent was the fact that he didn’t understand the division of capital on constant and variable parts. Thus, Ricardo failed to detect the difference in organic structure of capital in industry and agriculture, and consequently the excess of added value in agriculture, which is actually construct the absolute rent.   Ã‚   In such a way, though Ricardo contributed much to the overall understanding of economic theory and the theory of rent in particular, the latter has many inherent flaws derived from the misunderstanding and fault mixture between the concept of value and the concept of price. The main advantage of the theory is the definition of so-called differentiated rent, i.e. the attempt of the explanation of the economic essence of rent. The foremost fault of Ricardo’s theory of rent on the earliest stages is that he regarded rent as the payment solely for the use of soil, excluding reinvested capital and interest. The second foremost flaw of the theory is the denial of the existence of the absolute rent, thinking that rent can be derived only from those land that are more fertile. However, Ricardo didn’t count the fact that landowners of worse land wouldn’t give this land in temporary usage for free. References Debrah Y. (2002) â€Å"Globalization, Employment and the Workplace† Routledge, London Henderson H. (1922) â€Å"Supply and demand† McGraw Hills, New York March, James G., and Simon, Herbert A., (1958). Organizations. New York: McGraw Hill Moorhead G. and Griffin Ricky W. (1995), Organizational Behavior, 4th ed., Houghton Muffin Company, Boston, MA Shove G. F. Varying costs and marginal net products // Econ. J. 1928. Vol. 38. Jun. P. 258-266 Winters A. (1992) â€Å"International Economics† Routledge, London   

Cheat Sheet Finance Essay

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