A History of Economic Doctrines from the time of the physiocrats to the present day. Charles Gide
Malthus emphasised another important feature of rent, and it was this characteristic that especially attracted Ricardo. Seeing that different parts of the earth are of unequal fertility, the capitals employed in cultivation must of necessity yield unequal profits. The difference between the normal rate of profit on mediocre lands and the superior rate yielded by the more fertile land constitutes a special kind of profit which is immediately seized by the owner of the more fertile land. This extra profit afterwards became known as differential rent.
To Malthus, as well as to the Physiocrats, this kind of rent seemed perfectly legitimate and conformed to the best interests of the public. It was only the just recompense for the “strength and talent” exercised by the original proprietors. The same argument applies to those who have since bought the land, for it must have been bought with the “fruits of industry and talent.” Its benefits are permanent and independent of the proprietor’s labour, and in this way the possession of land becomes a much-coveted prize, the otium cum dignitate which is the just reward of meritorious effort.
Ricardo enters upon an entirely new track. He breaks the connection with Smith and the Physiocrats—a connection that Malthus had been most anxious to maintain. All suggestion of co-operation on the part of nature is brushed aside with contempt. Business-man and owner of property as he was, he had no superstitious views concerning nature, whose work he contemplated without much feeling of reverence. As against the celebrated phrase of Adam Smith he quotes that of Buchanan: “The notion of agriculture yielding a produce and a rent in consequence because nature concurs with human industry in the process of cultivation is a mere fancy.”[318] He proceeds to defend the converse of Smith’s view and to show how rent implies the avarice rather than the liberality of nature.
The proof that the earth’s fertility, taken by itself, can never be the cause of rent is easily seen in the case of a new country. In a newly founded colony, for example, land yields no rent, however fertile, if the quantity of land is in excess of the people’s demand. “For no one would pay for the use of land when there was an abundant quantity not yet appropriated, and therefore at the disposal of whosoever might choose to cultivate it.”[319] Rent only appears “when the progress of population calls into cultivation land of an inferior quality or less advantageously situated.” Here we have the very kernel of Ricardo’s theory. Instead of being an indication of nature’s generosity, rent is the result of the grievous necessity of having recourse to relatively poor land under the pressure of population and want.[320] “Rent is a creation of value, not of wealth,” says Ricardo—a profound saying, and one that has illuminated many a mystery attaching to the theory of rent. In that sentence he draws a distinction between wealth born of abundance and satisfaction and value begotten of difficulty and effort, and he declares that rent is of the second category and not of the first.
Still, this cannot be accepted as the final explanation. It is difficult to understand how a purely negative condition such as the absence of fertile land could ever create a revenue. It were better to say that the want of suitable land supplies the occasion for the appearance of rent, although it is not its cause. The cause is the high price of agricultural products—say corn—due to the increased difficulty of cultivating the less fertile lands.[321] In short, the cause and the measure of the rent of corn-land are determined by the quantity of labour necessary to produce corn under the most unfavourable circumstances, “meaning by the most unfavourable circumstances the most unfavourable under which the quantity of produce required renders it necessary to carry on production.”[322]
Let us assume, as Ricardo did, that first-class land yields a bushel of corn as the result of ten hours’ work, the corn selling for ten shillings a bushel.[323] In order to supply a population that is increasing in accordance with the Malthusian formula, land of the second class has to be cultivated, when the production of a bushel requires fifteen hours’ work. The value of corn will rise proportionately to fifteen shillings, and landed proprietors of the first class will draw a surplus value or a bonus of five shillings per bushel. So rent emerges. Presently the time for cultivating lands of the third class will approach, when twenty hours’ labour will be necessary for the production of a bushel. The price of corn goes up to twenty shillings, and proprietors of the first class see their gift increased or their rent raised from five to ten shillings per bushel, while the owners of the second-class land obtain a bonus of five shillings per bushel. This marks the advent of a new class of rent-receivers, who modestly take their place a little below the first class. The third class of landowner will receive a rent whenever the cultivation of fourth-class land becomes a necessity.[324]
It has been said in criticism of the theory that the hierarchy of lands has simply been invented for the purpose of illustrating the theory. But what Ricardo has really done is to put in scientific language what every peasant knows—what has been handed down to him from father to son in unbroken succession, namely, that all land is not equally fertile.
Ricardo, so often represented as a purely abstract thinker, was in reality a very practical man and a close observer of those facts that were then occupying the attention of both public and Parliament. High rents, following upon high prices, constituted the most important phenomenon in the economic history of England towards the end of the eighteenth and the beginning of the nineteenth centuries. Right through the eighteenth century—that is, up to 1794—the highest price paid for corn was only a few pence above 60s. per quarter. But in 1796 the price rose to 92s., and in 1801 it reached 177s.—nearly three times the old price. The exceptionally high price, due to extraordinary causes, chief among them being the Napoleonic wars and the Continental blockade, could not last long, although the average during the years 1810–13 remained as high as 106s.[325]
This high price of corn was not entirely due to accidental causes. Something must be attributed to the fact that the available land was insufficient for the upkeep of the population, and that new land had to be cultivated irrespective of situation or degree of fertility. The pastures which had formerly covered England were daily disappearing before the plough. It was the period of the iniquitous Enclosure Acts, when landlords set their hearts upon enclosing the common lands. Professor Cannan has drawn up an interesting chart to show the close correspondence between the progress of the enclosure movement and the high price of corn.[326]
In 1813 a Commission appointed by the House of Commons to inquire into the price of corn—for the proprietors dreaded the day when the return of peace would allow of importation—came to the conclusion that new lands could not produce corn at a less cost than 80s. a quarter. What an argument for Ricardo’s theory![327]
But is there no possible means of avoiding the cultivation of lands of the second and third order? Intensive cultivation might doubtless do something to swell the returns on the older lands, but only up to a certain point. It would be absurd to imagine that on a limited area of land an unlimited quantity of subsistence can be produced. There must be a limit somewhere—an elastic limit perhaps, and one which the progress of science will push farther and farther away, even beyond our wildest hopes. But the cultivator stops long before this ideal limit is reached, for practice has taught him that the game is not worth the candle, because the outlay of capital and labour exceeds the profits on the return. This practical limit is determined for him by the law of diminishing returns.[328]
That law is indispensable to an understanding of the Ricardian theory, and is implied in Malthus’s theory of population. Its discovery is still earlier, and we have an admirable statement of it in Turgot’s writings: “It can never be imagined that a doubling of expenditure would result in doubling the product.” Malthus, unconsciously no doubt, repeated Turgot’s dictum.[329] It is evident, says he, that as cultivation extends, the annual addition made to the average product must continually diminish.[330] Ricardo witnessed the operation of the law under his very eyes, and he frequently hinted at the decreasing returns yielded by capital successively applied to the same land. Even in cases of that kind, where recourse to new lands was impossible, rents were bound to increase.
Taking again land No. 1, which yields corn at 10s. a bushel, let us imagine that there is an increased demand for wheat. Instead of breaking up land No. 2 an attempt might be made to increase the yield