9 January 2023
Part 1 gave examples of Ricardo’s contemporaries refuting his rent theory. I finished with the Rev. Jones total destruction of Ricardo’s theory of how economic rent emerges. Nevertheless, some economists tried to dismiss the Reverend’s argument on the spurious grounds that Ricardo — at least in the instance of rent — was using a purely historical argument to make a point. This is the line that Wesley C. Mitchell seemed to support when he presented his view that
that Ricardo was not taking into account actual historical circumstances; that his was a schematic, theoretical view of the subject; that… none the less the Ricardian theory of rent remained true…1
This is unbelievable. Ricardo emphatically stated that the best land is always farmed first and that the pressure of population growth would bring marginal lands into cultivation thus creating the differential he called rent. There were no buts or equivocations. He understood that the theory rested entirely on this statement. Once it could be shown that the sequence of events were not as he described them then the theory would collapse. But it should not be forgotten that for his critics the key point was not the existence or non-existence of marginal land but the fact that what really mattered was the land’s productivity. This is why Ludwig von Mises said:
As far as Ricardo’s theory refers to the graduation in the valuation and appraisement of pieces of land, it is completely comprehended in the modern theory of the prices of factors of production2.
Colonel Torrens delivered the theory’s obituary in an address to the Political Economy Club in 1831 when he declared Ricardianism to be dead, including the concept of rent. So what happened? John Stuart Mill happened. He used his enormous prestige to turn the tide against Ricardo’s critics. Mill’s father had remained largely faithful to Ricardo and Mill was clearly determined to uphold that tradition. In his Principles of Political Economy he staked out his position in uncompromising language:
The rent of land consists of the excess of its return above the return to the worst land in cultivation. (Original italics)3.
After this it just got worse.
It is one of the cardinal doctrines of political economy; and until it was understood, no consistent explanation could be given of many of the more complicated industrial phenomena. The evidence of its truth will be manifested with a great increase of clearness, when we come to trace the laws of the phenomena of Value and Price4.
Unfortunately Mill’s book remained the major economics text until Alfred Marshall published his Principles of Economics in 1890. However, Marshall was not much better in this respect. Whether out of a misguided sense of national pride or some peculiar attachment to Ricardo he strove to rehabilitate the Ricardian paradigm. So instead of abandoning the untenable rent theory he gave it new life, arguing that
Ricardo was technically right (or at all events not definitely wrong) when he said that rent does not enter into the marginal cost of production of mineral produce5.
And this was said despite the fact that in 1871 Jevons had written:
When at length a true system of Economics comes to be established, it will be seen that that able but wrong-headed man, David Ricardo, shunted the car of Economic science on to a wrong line — a line, however, on which it was further urged towards confusion by his equally able and wrong-headed admirer, John Stuart Mill. There were Economists, such as Malthus and Senior, who had a far better comprehension of the true doctrines (though not free from the Ricardian errors), but they were driven out of the field by the unity and influence of the Ricardo-Mill school6.
The attacks on the fallacy of economic rent did not cease with the publication of Marshall’s Principles. In fact, Marshall muddied the situation further when he argued that durable capital goods temporarily earn “quasi-rents” while permanent land earns full rents. In his crushing 1901 review Frank A. Fetter concluded:
The use of the term “rent” for any surplus above “real” cost is out of harmony with the conception of rents as a regularly accruing income, and with the practical needs of a money economy in which the concept must be employed. The doctrine of quasi-rents, involving the idea that no income, of share, enters into market prices in short periods, cannot stand7.
Moreover, Fetter pointed out that Ricardian rent was “a garbled marginality theory8.” Marshall’s response was extremely weak. He simply accused Fetter of having “missed the point of the central doctrine as to rents”9*.
Fetter explained that rent is the hire price of any unit or service, including wages. In the case of the purchase of a house the rent is capitalized. A careful comparison of Marshall’s defence with Fetter’s analysis should leave no doubt in the reader’s mind that Fetter’s view is the correct one10. Fetter’s was not a lone voice. The venerable John Bates Clark correctly observed that the application of marginal productivity theory
removes the danger that comes from supposing that the extension of the margin of utilization is the cause of an increase of rent. The truth is, that it is the increase of rent which extends the margin11.
Nevertheless, the Ricardo-Mill-Marshall doctrine triumphed. If Fetter and Clark had been fully aware of the devastating criticisms of Ricardo’s contemporaries things might very well have been different. Instead, we have to put up with the likes of Ken Henry12 using a long-discredited theory to argue for an additional burden to be levied on the mining industry so that the government can use the extra revenue to buy votes. Anyone who genuinely believes in the fallacious rent concept should not be allowed within a mile of any kind of tax proposal.
The Marxist Adam Bandt and his merry band of green socialist wreckers want to impose heavy taxes on resource companies because they want to drive them out of Australia.
Bandt has freely admitted that he wants eliminate coal and gas13. Once one takes this fact into account his true motive for a ‘rent’ resource tax becomes abundantly clear. It should not be forgotten that the energy crisis we are facing was the creation of not Putin but the greens’ anti-growth energy policies.
In principle there is no difference between a mining company and a shipping company, for example. If a huge demand for shipping suddenly emerges then prices will surge and shipping companies will enjoy a steep rise in revenues which will encourage them to expand their services to earn even more money. If the ships are rented out then when the contracts expire they will be renegotiated on the basis of expected revenues. The same goes for any kind of production, regardless of its nature. If the government steps in and taxes away the shipping company’s so-called economic ‘rent’ on the basis that it is an unearned surplus then any expansion will be aborted. Mining companies are no different.
What is bothersome is the failure of mining companies have utterly failed to grasp the fact that they are being clubbed with an economic fallacy for the sole purpose of driving them out of the country.
A note on the nature of profit:
The remarkable thing about this debate on the so-called rent resource tax is the complete absence of any attempt define profit. Participants refer to a normal rate of profit but never a normal rate of loss. We are battered with references to windfall profits and excess profits without ever being given a real definition of what these are. It should be clear that profits emerge from the difference in the prices of factors of production and the expected prices of their products. But prices are continuously changing because maladjustments between supply and demand are also continuously emerging. This is because we do not live in that mythical world economists call general equilibrium.
Therefore, profits are never normal. The corner shopkeeper does not make a profit: he merely makes a living and rarely has to deal with maladjustments. When they do appear he tries to adjust his behaviour but he can do nothing to increase supply. What we have is not a so-called normal profit versus a super profit but profits and losses. Now profit-making entrepreneurs play the major role of combatting maladjustments by making every attempt to increase supply. They do this by increasing investment and where possible rearranging factors of production to expand output.
Bandt is a ruthless liar. He claimed that the fossil fuel industry gets a $10 billion a year federal subsidy. This is a brazen lie14 along with his lie that gas is more expensive then solar and wind lie and lie that gas is dirtier than coal. His ideological rants make it clear to the public and his “useful idiots” that the resource companies are not going to use their profits to invest in Australia while neglecting point out that it was Marx claimed that businessmen had an irrational compulsion to investment. It was he who wrote:
Accumulate, accumulate! that is Moses and the prophets! Industry furnishes the material which saving accumulates.’ Therefore save, save, i.e. reconvert the greatest possible portion of [profits] into capital!15
Perhaps that is what Bandt fears. If investment does not increase the blame will clearly lie with the Labor Government and its Green comrades.
1Wesley C. Mitchell, Types of Economic Theory: From Mercantilism to Institutionalism, Vol. II, Augustus M. Kelley, 1969, p. 226.
2Ludwig von Mises, Human Action, Henry Regenery Company, 1963, p. 631.
3John Stuart Mill, Principles of Political Economy, Liberty Fund, Vol, I, 2006, p. 419. (First published in 1848.)
Mill contradicted himself on rent in the following statement where he inadvertently admits that productivity determines ‘rent’ and that it has nothing to do with the fictitious existence of “zero-rent” land. Hence a
P …large rent which is paid for shops in certain situations, near a great thoroughfare for example, which have no advantage except that the occupier may expect a larger body of customers, and be enabled to turn over his capital more quickly. (John Stuart Mill, Principles of Political Economy, Vol. II, Liberty Fund, 2006, p. 836.
In other words, supply and demand determine the rent. Therefore differences in rents have absolutely nothing to do with it. This is a direct contradiction of the Ricardian concept.
4Mill, Principles of Political Economy, Vol. I, 419.
5Alfred Marshall, Principles of Economics, Eighth Edition, Macmillan and Co., LTD, 1920, p 439. He further stated: “In a sense all rents… are differential rents.” p. 422.
6W. Stanley Jevons, Theory of Political Economy, Augustus M. Kelley, 1965, p. li.)
7Frank A. Fetter, Capital, Interest, and Rent, Sheed Andrews and McMeel, Inc., 1977, p. 352.
9Marshall Principle, p. 422.
10See Fetter’s The Principles of Economics, New York Century Co., 1910, chapter 8.
11John Bates Clark, The Distribution of Wealth, Macmillan Company, 1908, p. 350.
12Ken Henry is a Keynesian economist who served as Australia’s Secretary of the Department of the Treasury from 2001 to 2011.
13Bandt naturally forgets to explain where the lost revenue from closing down these industries will come from. And just as naturally, no one on our right has asked him.
14Bandt got his figures from an utterly dishonest report fabricated by the left-wing Australia Institute
About $8.07 billion of these fictitious subsidies consisted of the Fuel Tax Credits Scheme, the diesel fuel rebate for off-road vehicle use that also applies to agriculture. The exemptions are granted because fuel used in production is a cost. This is why other countries also have excise-tax exemptions. The rest of this so-called report is equally dishonest. Yet our lousy media take these fanatical greens seriously
15Karl Marx, Capital Vol. I, Penguin Books LTD, 1982, p. 742. I adjusted the quote by removing “surplus-value or surplus product” because it is based on the absured concept that labour is the source of all value and that profit is a surplus that has been misappropriated from the workers. But labour, like capital, is never a source of value. Labour produces only goods and services that already have value or are expected to have value. Archbishop Whately summed it up neatly when he pointed out the obvious fact that
[i]t is not because pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price.
Richard Whately, Introductory Lectures on Political Economy, 1832, Augustus M. Kelley, 1966, p. 253.