19 December 2022
Led by Adam Bandt, a Marxist, Australia’s anti-capitalist Green party2 wants to use the concept of economic rent to target profits. Even though the concept of economic rent is accepted by the great majority of economists as factual it is in reality an absolutely dreadful fallacy whose continued existence is not due to David Ricardo but John Stuart Mill who resurrected it in his Principles of Political Economy3. Though found in every economics textbook it has been largely ignored as an instrument of taxation. Unfortunately, dealing with this fallacious theory is a tedious process which will require some forbearance from readers.
In 2009 Ken Henry, who was the Secretary of the Treasury, decided that a resource tax based on this long-refuted fallacy was an absolutely spiffing idea. According to this genius a tax on what most economists call economic rent would yield $20 billion to $25 billion over the following ten years. Best of all, it would have been absolutely costless. Why? Because according to the concept economic rent is an unnecessary surplus the taxation of would have no effect whatsoever on investment and output.
Henry forgot, if he ever knew, that if something is too good to be true then it probably isn’t. This is especially true of economic rent.
To understand how this absurd economic doctrine survived so long one needs to turn to its origins. Although David Ricardo is usually credited with developing the theory it actually originated with a number of authors — a fact that Ricardo acknowledged — the most prominent of whom at the time were James Anderson, James Mill, Thomas Robert Malthus, Sir Edward West, and the greatly neglected Colonel Robert Torrens.
The essence of the concept is straightforward. Rent is a differential that is determined by the appearance of “no-rent” land, or what we today would call marginal land, land that it just pays to bring into production. According to Ricardo a community farms the most fertile land first. Eventually the pressure of population growth forces the cultivation of “no-rent” land. This development now means that the most fertile land now earns rent. According to Ricardo if land A (the most fertile land) produces 100 units and land B (the second most fertile land) produces 90 units then land A now receives 10 units in rent. When land C is brought into cultivation at 80 units land A now receives 20 units in rent and land B receives 10 units4.
Therefore, rent is defined as a differential. However, Ricardo’s contemporaries were quick to point out the absurdity of this idea. It is also important to note that when Ricardo applied the theory to mines the fallacy on which it rested got him into an awful mess.
The return for capital from the poorest mine paying no rent, would regulate the rent of all the other more productive mines5.
Yet in chapter III Ricardo inadvertently dropped rent as a differential when he admitted that “more productive mines may be discovered” at a later date. If this is the case — and it is — how in heavens name can “the return… from the poorest mine paying no rent… regulate the rent of all the other more productive mines”? This is obviously a direct contradiction of his previously stated opinion that the most productive land is always exploited first.
He further states “that the compensation given for the mine or quarry, is paid for the value of the coal or stone which can be removed”. This is a productivity theory explanation for the of mines that must also apply to agricultural land. It is a direct repudiation of his own theory that rent (economic rent as it is now called) is a differential. Ricardo referred6 to Adam Smith’s observation that payments for mines and quarries come from the value of their products7. This is now standard economic theory that no one disputes. And it also has nothing to do with “the total quantity of labour necessary8” to produce coal, stone, gas or any ores. This was another of Ricardo’s contradictions. It also follows that the productivity theory applies to every factor of production9. There are no exceptions.
It is generally accepted by the economics profession that the Ricardian theory of rent as a surplus was immediately accepted by Ricardo’s contemporaries and quickly became a part of classical economic thinking. In fact, the exact opposite happened. The first attack was a devastating broadside by Thomas Perronet Thompson10 who scathingly observed:
The fallacy lies, in assuming to be the cause what in reality is only a consequence … Therefore a men of six feet exist because there are men of smaller altitudes, and would not existed with them…. All that is stated with respect to the rent being equal between the highest and the lowest returns, is as necessarily and undeniably true as anything that has been stated with respect to proof spirit or men of six feet…. The simple cause of rent, in such countries and everywhere else, is in reality nothing but what Adam Smith pointed out long ago. It is the same that gives rise to the rent of the vineyard that produces Tokay. It is the limited quantity of the land, in comparison with the competitors for its produce.… [Original italics.]
PBut in all this, it is the rise in the price of produce (of which a rise in rent is a necessary concomitant), that enables and causes inferior land to be brought into cultivation; and not the cultivation of inferior land that causes the rise of rent. [Original italics].
What few Ricardians were left standing found themselves unable to muster an effective response. It should have been immediately obvious that if land is of a uniform quality rents would still emerge once population growth had eliminated all free land. Moreover, a little thought should have informed Ricardo that there are circumstances where marginal land could start yielding rents before more productive land can be brought into use. (It’s a question of location). In addition, all marginal land yields rent, no matter how small. If it did not it would not be cultivated. In the same year Robert Torrens — who had completely dropped the rent concept — launched an even more devastating assault of his own that included the above points and which completely destroyed Ricardo’s theory of rent. He stressed the fact11:
Neither the gradations of soil, nor the successive applications of capital to land, with decreasing returns, are in any way essential either to the appearance or to the rise of rents…. Upon a careful examination of the facts, we shall discover, that resorting to inferior soils, and applying additional capital to land with a decreasing return, instead of being the causes which create and elevate rents, are the limiting circumstances which prevent rent from rising so high as it otherwise would rise.
[Ricardo’s] doctrine is erroneous. Rent is not the difference in the quantities of produce obtained by equal capitals from lands of different degrees of fertility…. instead of paying no rent at all, [the marginal land] may pay a higher rent than the first quality which yields 100 quarters[!]
Then in 1831 the Rev. Richard Jones highly detailed historical study of land and rents delivered the coup de grâce to the fatally wounded Ricardian doctrine. He noted that rent is due to the productivity of land and not to any differential. Hence
the difference between the relative fertility of soils were the sole cause of rents, it would not follow, that nothing could raise rents but some cause which altered the relative fertility of the lands cultivated, since any cause would raise rents, which increased the amount of produce of all, while it left their relative fertility untouched12.
I regret to say that part two will be just as tedious as part one. However, economic fallacies need to be pulled out by their roots.
1“Greens often refer to the need for a transition to a sustainable, low-carbon economy, but what does that mean” asks the author of this green fantasy. Downsising an economy means implementing a policy of negative growth which means capital consumption accompanied by a dramatic fall in the standard of living. Like all greenies the author has absolutely no knowledge of capital theory, not that he cares about it. The article is pure economic drivel.
Adam Bandt is himself a fanatical anti-capitalist Marxist. Now one would have to be incredibly naïve to think for a moment that he is not using the green movement to serve the interests of his own ideology. The Greens consist of three groups: there are the activists, useful idiots” and then there is the hardcore. This is a coalition of Marxists and green fanatics. Both are driven, for different reasons, by a hatred of capitalism.
2Greta Thunberg, the darling of the green movement and its favourite stooge, let the socialist cat out of its bag last October when she launched a full-blooded socialist attack on capitalism that was filled with the usual outrageous lies and bile. Nevertheless, she deserves to be congratulated for exposing the green movement as a socialist front intent on destroying capitalism and building a socialist economy on the ruins, the kind of economy that creates nothing but misery and abject poverty.
3John Stuart Mill, Principles of Political Economy, Liberty Fund, 2006, pp. 498-500 Vol. I, 492-496 Vol. II.
4David Ricardo, The Principles of Political Economy and Taxation, Penguin Books, 1971, chapter II.
5Ibid. p. 108.
6Ibid. p. 92
7Adam Smith, Wealth of Nations, LibertyClassics, 1981, p. 364.
8Ricardo, p. 108.
9Samuel Mountifort Longfield, Lectures in Political Economy, Richard Milliken and Son, 1834, pp. 180-199.
He developed a brilliant theory of the marginal productivity of capital to explain how labour benefits from increased capital formation. It was overlooked for many years before being rediscovered.
10Thomas Perronet Thompson, The True Theory of Rent, Westminster Reviews, 1826, p. 6.
11Robert Torrens, An Essay on the External Corn Trade, Longman, Rees, Orme, Brown, and Green, 1826, p. 138.
12Rev. Richard Jones, An Essay on the Distribution of Wealth and on the Sources of Taxation, p. 207.