Evolution of Economic Thought: Ricardo’s Theory of Land and Rent

These concepts evolved when finding a solution for the issue that was raised by the Corn Law controversy. Ricardo, Malthus, West, and Torrens formulated the principle of diminishing returns.

Diminishing Returns

Diminishing returns states that if one factor of production is continuously increased while others are held constant, the rate at which the total product increases will ultimately diminish. Ricardo assumed that a fixed quantity of land and a variable quantity of capital and labor. In this scenario, he assumed that diminishing returns begin immediately.

Rent Viewed from the product side

Ricardo was primarily interested in explaining the changing amounts of total output received by the landlord and the capitalist in the long run. A farmer pays a landlord a sum for the use of land that in commerce is called a rent, but the payment most likely contains elements of both profits and rents. This rent equalizes the rate of profits on land of differing fertilities. Ricardo explained the reasons for rent as the scarcity of fertile land and the law of diminishing returns.

The intensive margin describes the effect of successive doses of capital and labor on a given plot of land. Let’s assume, there are 3 types of land A, B & C. The below production details are related to Land A.

Doses of Land	Doses of Capital	Total Production	Marginal Production
1	1	100
1	2	190	90
1	3	270	80

According to the above table, when the capital dose increased by 1 while keeping the land constant the marginal production diminishes. Therefore, this reflects the principle of diminishing marginal returns. In this scenario, the farmers can move from land A to land B. This reflects the extensive margin. If there were no diminishing returns in Land B, Land C would never be used. The marginal products of the last dose of labor and capital applied to each grade of land will be equal.

Rent Viewed from the Cost Side

Ricardo considers rent from the point of view of costs of production rather than of product or output. According to the above example, the marginal product of land diminished as successive doses of capital. In this scenario, the marginal cost of the production increases. The rent was paid by the farmer based on the fertility and the revenue of the farmer.

The Taxation of Land

Shape If the supply curve of land is perfectly inelastic, then all the return to land is rent. A tax on land would be paid wholly by the landowner, as it would not be possible to shift the burden of the tax to others in the economy. If a tax is placed on land and the net return to the landowner decreases after the tax has been paid, this has no influence on the quantity of land supplied.

This figure shows the supply and demand for all land in the Georgian scheme. The entire shaded area of rent would become tax revenues to the government.

A More General View of the Concept of Rent

Ricardo considered that the available land was fixed, with a perfectly inelastic supply curve. He considered agriculture as the only sector of the economy which has the principle of diminishing returns. Ricardo’s concept of land rent was a special case of a general analytical theoretical principle. Today most economists would agree with Ricardo that to society as a whole, land rent is not a cost of production and therefore is not price-determining.