The Ricardian rent theory in early American economics
Turner, John Roscoe, 1882-1925
v^ *r::nL'* c^ <^^ •■ « ,. o V V' s''-', G> < » • * • 0_ '«>,(■''' V^ .^l^rL* <^ ^•^ ^^. \ "^../ »v^^^-. \.a' ^^m^i^, ^^^^ iM THE RICARDIAN RENT THEORY IN EARLY AMERICAN ECONOMICS BY THE SAME AUTHOR INTRODUCTION TO ECONOMICS, 191 9 THE RICARDIAN RENT THEORY IN EARLY AMERICAN ECONOMICS By JOHN ROSCOE TURNER, PH.D. Professor of Economics in New York University * With an Introduction by FRANK ALBERT FETTER,^ Ph.D., LL.D. Professor of Economics in Princeton Uni-versity THE NEW YORK UNIVERSITY PRESS JZ WAVERLY PLACE, NEW YORK CITY I92I Ur^ Copyright 1921, by The New Yoek Univbesitt Peess NH L 4-0 8 c^ THE NEW YORK UNIVERSITY PRESS COMMITTEE OF PtTBIilCATION Abthue Httntington Nason, Ph.D., Chairman Director of the Press Eaele Beownbll Babcock, Ph.D. _ Haeold Dicein-son Senior, M.D., Sc.D., P.K.C.S. KENNEBEC JOUENAL PEB6S, AUGUSTA, MAINE SFP17?3/ A INTRODUCTION BY FRANK ALBERT FETTER OF PRINCETON UNIVERSITY INTRODUCTION THE writings of the early American economists which are surveyed in this study have been strangely neglected by the later generations of American students. The article by Professor C. F. Dunbar, published in The North American Review in 1876, is the only previous American essay purporting to treat the subject. But Dunbar's article consisted almost entirely of a description of American conditions as explaining what he declared to be the utter "sterility" of American economic literature. The brief portion in which he spoke of writers is hardly more than a cata- logue of names and titles compiled from previous re- views. Certainly in some cases, as Doctor Turner shows, and possibly in most, Dunbar was unacquainted with the originals. Even if he had read the books, he, as a representative of the classical school ^ (which he be- lieved had arrived at ultimate truths within the limits of its hypotheses), was not qualified to render a just estimate of the theories in question, however competent he was in the field of money and banking. Forty years have passed, and is it not indeed remark- able that our generation of economic students, so thor- oughly grounded otherwise in the world's literature of economics, should know little or nothing of these, our own, writers, and most of that little through Dunbar's superficial and condemnatory article or through chance and usually disparaging references in the writings of English economists? That the American economists of ^ See his article in The Quarterly Journal of Economics, I, 1, 1886. viii THE RICARDIAN RENT THEORY the period preceding 1880 have been almost ignored in Europe is not remarkable, but that they should have been so forgotten and neglected by their own country- men since economic studies have been so zealously fos- tered in America, is indeed surprising. If we speculate upon an explanation of this neglect, two reasons suggest themselves. The first is the poor estimate of the learning and equipment of the early American economists in comparison with their English contemporaries; the second is the dominance of the Ricardian economics in America, especially after J. S. Mill's work gave it a new appeal and a new vogue among American readers. Perhaps these are but two aspects of the same reason. Doubtless the prevailing opinion is that, in the period from 1815 to 1870 (let us say), the development of eco- nomics in England was in the hands of men of good general and special education — trained economists, to use the modern term — whereas, it is thought, American writers of tliat time were ill-trained amateurs, publicists, and pamphleteers. We forget that there were in Eng- land at that time no "trained economists" whatever, such as we now understand by that term applied to men who prepare by long studies under competent teachers for an academic life-career. British economists were self- educated, having had the practical training, and retaining many of the pecuniary interests as well as prejudices of business men, as did Ricardo, Cobden, and Bright; or, having followed the life of a soldier, as Col. Torrens, or of a lawyer and politician, as Lord Lauderdale; or being occupied as government clerks as were James Mill (a licensed preacher) and J. S. Mill (most peculiarly trained by his father) ; and even when, by accident rather than by design, one of them came to be a "pro- INTRODUCTION ix fessor," he had been educated as Malthus, Jones, and Whately were, for the church, or as Nassau Senior, Longfield, McCulloch, and Cairnes, for the practice of the law. It must shake the preconceptions of many readers to compare with these typical examples of the English economists of that time, the American economists whose education and experience are carefully described in the following pages. These include graduates of nearly all the leading universities or colleges of that time in Eng- land and America — lawyers, business men, mathema- ticians, natural scientists, philosophers, men of wide travel and of varied experience in public and private affairs, a large proportion of them being college teachers. They would seem to have been quite as well — and as ill — fitted as were their English contemporaries, either to give a sound economic interpretation of their environ- ment or to deal with abstract principles. But after J. S. Mill had won for Ricardian economics its predominating place in American thought, that system, with all its unrecognized limitations of time, place, and logic, became the standard of economic science with which any inde- pendent thought upon our peculiar problems was meas- ured and found wanting. The time was not ripe for a re-examination of these opinions until the new era of criticism dating from the Seventies had slowly yielded some fruits in England and America. Partly this criticism was of a historical nature and tended to show the fallible, temporary, and local character of the Ricardian economics. That too, was seen to be of mortal nature like American economic opinion, and not an eternal verity. An article in The Fortnightly Review, October, 1880, by Cliffe Leslie, who recognized something of "perspicuity," novelty, and dis- X THE RICARDIAN RENT THEORY tinctiveness, and some small measure of relative worth in the American writings, was long the only result of this impulse so far as it concerns the present subject. The first American students who returned from Ger- many imbued with historical teachings, made slight beginnings at a re-examination of older doctrines; but, in most cases, their historical training was hardly more than a veneer over the groundwork of their Ricardian opinions earlier acquired at home. With all of its cul- tivation of the historical sense and of the ideas of his- torical relativity and continuity of doctrine, the first generation of mature economists thus trained has mostly been content to see these principles applied in explana- tion of the origin of the rent doctrine in England, with- out apparently permitting its faith in the logical com- pleteness of that doctrine to suffer the least shock. Mean- time, the earlier American material has lain almost un- touched and unworked. It was with this need and oppor- tunity in mind that, several years ago, I suggested the subject of this study to the author. Partly the newer criticism has been of an analytical and logical character, applying new and more rigid tests to old doctrines. It began with Jevons, Menger, and Clark (in The Philosophy of Wealth, 1884), and has been continued by many men in many lands. Probably nowhere in the world has it had so wide and deep an influence as here in America. In all the flowering of opinions and publications in the field of theory, there has been, to be sure, a tremendous waste of blossom; but the best fruitage is a small group of younger econo- mists with better critical methods of study, with clearer economic concepts as instruments of thought, with a more consistent scheme of terminology, and with a spirit of scholarship that is broader, less sectarian, and more INTRODUCTION xi detached from temporary interests when dealing with fundamental principles. "The present study is an outcome of this newer criti- cism as applied to the earlier economic writings. It is far from a full and perfect fruition, as the author recog- nizes, but it contains promise of larger returns in the future. The task undertaken was limited to one theme, the rent doctrine and its necessary implications in the theory of population and in the law of diminishing re- turns. The author has pursued his task with diligence and with affectionate interest through many libraries, until he has made it peculiarly his own. Most of the writers that he has studied had pronounced opinions on the political issues of their day; but the reader will seek in vain for any trace of partisanship in the following pages. The study seems to have been made with an eye single to the interpretation of the abstracter economic doctrines of that period, and the author knows neither Greek nor Trojan as respects the practical interests and influences that helped to shape these economic doctrines. The author employs, however, as instruments of analy- sis, certain concepts and terms found in the recent psy- chological economics ; for, without a new point of view and a new mode of attack, it would have been vain to take up the study of these discarded materials. One must have some thread in hand or be lost in the maze of confused opinions. The usual effect of the industrial environment upon the economic theory of that period in America, appears with striking clearness; even the exceptions, as pre- sented by Doctor Turner, are instructive. Few of the men whose opinions are reviewed had the slightest per- sonal connection with one another; and in few cases were they even acquainted with one another's writings. xii THE RICARDIAN RENT THEORY Yet, with an approach to unanimity, they came to the same conclusion on the population question, often, it is true, by reasoning that is palpably erroneous. They denied, with almost as close approach to unanimity, the "orthodox" contrast between land and capital in the sense of artificial agents (and again the exceptions are suggestive). They conceived of capital in terms of value in relation to investment, and of land as one of the kinds of material agents in which capital was in- vested. One after another, independently, various writ- ers came to this view, usually supposed to have been original with Carey and to have been confined to his school. Many of them held to this idea persistently, despite the influences of the English economic writings which were almost their sole literary guidance. These facts throw light, not less upon the relativity of the English than of the American economic theory of that era. At the period at which this study stops, the English classical system was reasserting its influence in America, and, in the alluring form which J. S. Mill gave it, was taking its dominating place in American collegiate in- struction. There it continued for half a century — and still in some measure continues — to exert its benumbing effects upon American economic thought. Vigorous new life-currents, however, began to stir with Francis A. Walker's dissent from the wage fund, and with his stimulating, though inconclusive, theory of profits. Then in turn came vital impulses of one kind or another from more recent authorities. A recent European critic, in a review of this active intellectual movement — a review most remarkable in its range and grasp of and insight into the literature — plainly told his European readers that America had become the new center of economic theory. ^ INTRODUCTION xiii Now the most notable impression left by Doctor Turner's study, perhaps, is that of a certain likeness between such of those earlier American opinions as were not mere echoes of Ricardianism, and the more recent American concepts and theories. True, it will not do to press the comparison in all directions and without limits (especially since, with changed conditions, the population doctrine has taken on a new form differ- ing from either of the older forms). But the likeness appears clear in the recognition of the conflict between individual and social interests (denial of the economic harmonies), in the attitude toward the theory of value, in the treatment of capital as an investment concept, and in the rejection of the twofold classification of mate- rial factors as land and artificial agents. Perhaps when some Americans recently have fondly supposed that they were discovering novel and original conceptions, they were but beginning to regain a little of that independ- ence of mind which once enabled the American econo- mists in their theorizing to look past conventional ideas and to catch, now and then, glimpses of the world of reality about them. It would, however, be a reproach to this generation if, with a superior equipment, it did not attain to some- thing more nearly ultimate in principles than did our more or less empirical forebears. Progress is not to be made by ignoring former opinions whether English or American, but by more thoroughly appreciating the truth and error in them when studying them with a new critical spirit, by the aid of recent biology and psychol- ogy, and in the light of the rich economic experience of the hundred years between 1815 and 1915. Doctor Turner's study fittingly appears after a century of the ^ J. Schumpeter, in Jahrhuch fur Oesetzgebung, etc., 1910, 913. xiv THE RICARDIAN RENT THEORY Ricardian rent doctrine. As pioneer work in a part of an almost untouched field, it will be helpful to every economic student seriously striving to know "the God of things as they are." F. A. F. Princeton University. AUTHOR'S PREFACE STUDENTS of the history of economic thought have inexcusably neglected the early American economists. This neglect was a subject of fre- quent comment in the seminar of the professor under whom I majored, Dr. Frank A. Fetter. He encouraged me to make a study of their works, calling particular attention to their attitude toward Ricardian rent. Fol- lowing this suggestion, I read the life and works of these economists. I found them worthy, but without fame. I believed then, and now know, that no sys- tematic study has been made of their contributions. It is hoped that this essay, at least in part, may serve to reveal their merit to public attention. Although I was inadequately prepared for the task, this study was begun and completed while I was a graduate student. It is offered for publication precisely as when completed, now eight years ago, with the exception that a tedious sixty- page critique of Ricardo's rent doctrine for the most part is omitted. When the study was begun, I was fresh from a perusal of the writings of the late General Francis A. Walker, in which the reader was taught to believe that he who differs from Ricardo's rent "simply does not know what he is mouthing about." This faith was upset, however, while reading the works of that keen witted philosopher, economist, and statesman, George Tucker of Virginia. The new faith received from Tucker caused me to do battle against Ricardo, but my present judgment causes me to eliminate the greater part of this critique; for, while interesting to the author, it would prove tiresome for the reader. xvi THE RICARDIAN RENT THEORY The purpose of presenting Ricardo's views in the" beginning of the study is that they form a basis for the controversial arguments presented by the economists we shall study. To this end, a critical estimate of the essen- tial features of the theory will reveal its elements of strength and weakness, and will prepare the reader for a more analytical study of its content. The logician would doubtless know the theory first and hear the criti- cism last : the pedagogue would find it both helpful and interesting not to defer the criticism in order to open up the question by setting forth the essential issues involved. J. R. T. New York University, May, 1921. CONTENTS Introduction by Frank Ai^bert Fetter vii-xiv Author's Preface xv-xvi CHAPTER I INTRODUCTION: CRITIQUE OF THE RICARDIAN RENT English economics deduced from experience during war- American economics different from English — Mal-adjustment of productive factors — Ricardo's theory of value — Capital — Capital used in tv^^o senses — Rent not a cost — Proportionality — Capital- ization— The differential concept — Ricardo's statement of the law of diminishing returns — Extension of the law of diminish- ing returns — Ricardo's confused definition of rent — Rent a trans- fer of value — Rent a monopoly return — Rent an addition to national wealth — Relation of rent and tariff 3 CHAPTER II THE EARLY NATIONAL ECONOMISTS: RAYMOND, EVERETT, AND PHILLIPS Raymond — Life — A national economist — Fundamental econom- ic concepts — Theory of population and criticism of Malthus — Rent obeys the law of supply and demand — Land is capital — Teaches historical increasing returns. Everett — Life — A national economist — Opponent of Malthus — The "new idea" — Teaches historical increasing returns. Phillips — Life — A national economist — Fundamental economic concepts — Upholds Gray's theory of population — Criticism of Ricardo's rent — Ricardo's one-cause method and Phillip's prac- tical method contrasted — Rent — Teaches historical increasing returns — Indebted to Dr. Franklin. Other early national economists : Due, Vail, Potter, Opdyke, Mathew Carey, Ware, Rae, and Colton 22 CHAPTER III CLASSICAL ECONOMISTS: McVICKAR, COOPER, NEWMAN, WAYLAND, AND VETHAKE These writers were professors — Environment. McVickar — Life and writing — Upheld McCuIloch. xviii THE RICARDIAN RENT THEORY Cooper — Life and writings — Influence in the South — Answers Everett and defends Malthus — Rent a restatement of Ricardo. Newman — Life and writings — Follows in the lead of Adam Smith. Wayland — Life and writings — Fundamental economic con- cepts— The theory of population — Wage-fund doctrine — Upholds Ricardian rent. Vethake — Life and writings — Wages — "Tendency" and theory of population — Rent and the theory of diminishing returns. Marcius Wilson 50 CHAPTER IV JACOB NEWTON CARDOZO Conflicting biographical references — An editor — Theory of population — Criticism of Ricardian rent — Rent and historical in- creasing returns 75 ' CHAPTER V GEORGE TUCKER Life and writings — An estimate of Ricardo — Fundamental eco- nomic concepts — A statistical study of population — Density of population and the rate of increase vary inversely — Ricardo's theory of wages criticized — Slavery cannot exist in an advanced stage of society — Land is capital — Profits — Tucker and Malthus had similar ideas on rent — Summary of chief arguments — Criti- cism of Ricardian rent — Rent and the theory of limited re- turns 83 CHAPTER VI HENRY CHARLES CAREY Environment, career, and personal characteristics — Arguments against Malthusianism — Relationship of wealth, utility, capital, value, and cost of reproduction — -Two arguments on rent: (a) Land is capital; reijts grow propornonately less ; (b) The natural order of cultivation — Three possible interpretations of Carey on returns — An argument by the writer on interrelationships in the problem of proportionality — Carey and Ricardo on returns — Conclusion no .'IqpA^ER VII FRANCIS BO WEN Life and writings — A national economist — Assumptions — haissez faire — Fundamental economic concepts — Theory of pop- ^ CONTENTS xix ulation and criticism of Malthus — Criticism of the Ricardian theory of rent — Rent and historical increasing returns 143 CHAPTER VIII JOHN BASCOM AND AMASA WALKER Bascom — Life and writings — Theory of population — Rent — The law of diminishing returns in agriculture and increasing returns in manufactures. Wialker — Life — Political career — mercantile career — Objects to Malthusianism — Land is capital — Four elements of rent: (a) Location, (b) Difference in fertility, (c) Importations, (d) Permanent improvements — Differences between Walker and Ricardo on rent 159 CHAPTER IX ARTHUR L. PERRY Life and writings — An estimate of Perry — Fundamental eco- nomic concepts — The theory of population — Land is capital — Rent and the law of historical diminishing returns 179 CHAPTER X R&SUMB Wealth — Value — Capital — Population — Rent — Proportionality 191 BIBLIOGRAPHY 203 THE RICARDIAN RENT THEORY IN EARLY AMERICAN ECONOMICS CHAPTER I INTRODUCTION: CRITIQUE OF RICARDIAN RENT A WELL-ROUNDED study of the attitude of American economists toward the Ricardian the- ory of rent would call for more than a review of the expressions made by these economists; it would call for a consideration of the environment which was powerful in shaping their thought as well as for a deep appreciation of the major problems confronting them. Furthermore, the reader would profit little by studying a criticism of Ricardo's teachings unless he knew what it was that Ricardo taught. And he could not compre- hend Ricardo's thought unless he knew the industrial conditions in England during the first part of the nine- teenth century, for indeed it was from these conditions that his thought grew. Fortunately, however, Edwin Cannan and others have made familiar the circumstances which gave rise to the Ricardian teachings on over-popidation, diminishing re- turnSj and differential land-rent. Then too, the differen- tial theory of rent and the conclusions deduced there- from have been repeated to the point of tiresomeness. The language in which this theory was originally couched is familiar to every economist ; but it is only the language that is familiar, for there has never been agreement upon I the theory itself. "The early nineteenth-century English economists de- duced their doctrines, not from study of the works of 4 THE RICARDIAN RENT THEORY their predecessors, but from the actual experience of England during the war." ^ The history of this experi- ence, as above indicated, has been told so frequently by others that I shall not repeat it here. It was the nature of this experience that gave the temper and tone to the writings of the British economists. But, on this side of the water, it was an entirely different type of experi- ence that gave rise to an entirely different type of eco- nomic thought. American writers regarded the Maltho- -Ricardian theory as an enemy of progress, and held it in contempt as a doctrine that would hail a famine as a deliverer and celebrate a pestilence as an occasion for a thanksgiving. The outlook of American economists was aggressive, versatile, and optimistic. No class was over-rich, nor was any class miserably poor. Novel conditions, both political and physical, were ours. Charged with the mission of subduing a new world, separated from the troubles of the old world by two oceans, and possessed of a new form of government, we had unique problems to face. If our development of economic thought was less rapid than that of the English, there is Httle wonder; for why should Ameri- 5 cans strive to develop a science for the correction of ills that hardly existed ? Industrial ills furnished the motive for economic development in England: the insatiable desire for the increased production of wealth furnished the motive for economic development in the United States. Following these motives, it was but natural that reckonings on distribution should occupy a paramount place in the writings of the English. Likewise we should expect an economy of prosperity to be uppermost in American thought. 1 Cannan, Theories of Production and Distribution, 148. CRITIQUE OF RICARDIAN RENT 5 Furthermore, our institutions of learning neglected the development of this science. In our seminaries and colleges, excessive importance was given to the classics while little or no attention was given to the subject of political economy. The study of constitutional law and the interpretation of written instruments engaged the attention of public men. In the early part of the period we are to review, the currency and the tariff, and in the latter part, the anti-slavery agitation, absorbed pub- lic interest. The currency and the tariff became party issues, and were argued thru upon a political rather than upon an economic basis. The anti-slavery agitation produced its group of moralists, but none of these dis- putes developed economists. The English people were forced to conserve their natural resources. But it was literally true that, for Americans, to be saving of land and resources would be wasteful. We had an unbounded potential productivity in uncultivated lands, an untold supply of minerals and ores, millions of horse power in the form of unharnessed waterfalls, timber so plenteous that our people regarded trees as weeds, and innumerable other resources so abundant as to be termed free goods. At the same time, labor was so scarce and valuable that it could be eco- nomically employed only in those places where the re- turns would be largest. Not the conservation of natural resources, but the most effective utilization of labor, was the dictate of wisdom in this country. There was a mal-adjustment in the productive capac- ity of England in which natural resources was the short factor, whereas over-population made labor the long factor. This naturally led to low wages and high land- rents. In America, there was a mal-adjustment of productive capacity quite different from that found in 6 THE RICARDIAN RENT THEORY England. Here labor was the short, and natural re- sources were the long factor. Naturally enough, land- rents were of little consequence, whereas wages were high and the labor problem was one of major importance. These differences in environment will in part explain the reasons for the different theories of rent held in the two countries. But, in further explanation of the variety of opinions contrary to Ricardo, we must look into his own theory of rent. I shall present this theory in critical form in order that the reader may have the essential points of controversy in mind. To comprehend the reasons for disagreement with Ricardian rent will best prepare the way for a study of the early American economists, for chief among their tasks was to defame the doctrine which made Ricardo famous. Ricardo approached the rent problem through a study of value. His view of the subject is familiarly expressed as "the labor-cost-of-production theory of value." He taught that the value of a good is proportional to the amount of labor employed in its production or to the wages paid for that labor. H your knife costs two days^ labor whereas my pen costs only one, it should follow that your knife would exchange for two such pens as mine. Value : value :: labor cost : labor cost. If the relative values of articles are proportional to labor-costs or wage-outlays, it is a mere truism that no other costs,, as rents or hires, can enter into value. If one accounts for the price of wheat by the labor-cost of producing it, one is forced to prove that other outlays as rents are,, in reality, not costs at all. So much for the theory which teaches that value is proportional to labor-cost or to the wages paid for that labor. - 2 Ricardo's critics have put certain embarrassing questions: (1) 0n& finds a precious stone wortli |500. Is its value determined by its labor- CRITIQUE OF RICARDIAN RENT 7 True or false, this theory of value enabled its author so to classify productive agents as to make rent a sur- plus return above labor-cost. The entrepreneur is hard to convince that wages form his only cost of doing business. He must pay for materials and pay numerous hires, rents, and fees. He asks, If cost determines price, why include only wage-costs and omit others of equal importance ? Questions of this nature were troublesome, and forced Ricardo to make the following classification of productive agents : (a) Land — so defined as to include all natural agents. (b) Capital — so defined as to include all artificial agents produced by labor. (c) Labor — human effort, be it mental or physical. According to the foregoing classification, capital con- sists of productive goods made by human labor. In other words, "capital is canned labor" — past labor having taken the form of present goods. Then, interest or the pay- ment for capital is a remuneration for past labor. Both wages and interest are thus outlays for labor. To this point, capital has been made to consist of productive goods — of tools, instruments, and machines created by labor and used to produce more wealth. Here again the Ricardian is in difficulty. The rent paid to the landlord is called a surplus gained without labor; yet, when he reinvests it in the form of capital, he is forced to define it as the product of labor. cost? No, for it has no such cost. (2) A monopoly artificially raises the price of a good. How is labor-cost responsible for the rise ? The answer is, in no sense. (3) Does the value of money depend upon its labor-cost? Ricardo himself answered in the negative. (4) Wine becomes better and sells for a higher price when allowed to age for a number of years. A sprout worth fifty cents grows through time into a tree worth a hundred dollars. What has labor-cost to do with the increase of prices caused by growth or improvement through time ? Labor-cost advocates regard these as mere exceptions to the "true theory." (5) How account for the value of labor itself? Another exception. (6) And does labor-cost determine the value of land, minerals, and other natural products? Again, no. 8 THE RICARDIAN RENT THEORY Ricardo employed two meanings of capital : capital as tools, and capital as value. It is necessary to his argu- ment to prove that the returns on capital are uniform, in order that no surplus may arise from it. To prove that the per cent of return is uniform for all capital, he is forced to abandon the idea of capital as tools and shift to the idea of capital as value. If capital is conceived as value, competition will operate to maintain uniformity of returns. It is well known, for example, that if ten per cent is returned in the shoe business and only five per cent in the hat business, capital will shift from the less to the more remunerative employment. Because capital tends toward a uniform competitive return, it earns no surplus. No surplus going to capital (canned labor), Ricardo tells us that all the interest on capital is a true labor-cost. The foregoing classification enabled him to treat rent as a surplus that forms no part of the cost of produc- tion. The entrepreneur spends money for labor, for agents created by labor, and for natural agents. But Ricardo tells us that cost determines value, and that the only cost is labor ; therefore, the money paid for the use of natural agents must be eliminated from cost. Call interest the wages of past labor, and wages the payment for present labor ; but the payment for the use of natural agents can not be termed wages since labor did not create such agents. He defined rent as the payment for the use of land (natural agents). He believed rent to be no part of cost; thought that it was a surplus over and above cost. If it is not an element of cost, it can have no bearing on price. How did he proceed to dem- onstrate the proposition that rent is not a cost ? If the different bushels of a supply of wheat are of uniform grade, they will sell for a uniform price in the CRITIQUE OF RICARDIAN RENT 9 market. Like bushels of wheat in a market at a given time will sell at the same price. But the cost of pro- ducing the different bushels is not the same. Some may be produced on superior soil and near the market ; some may be grown on inferior soil and distant from the market; some are secured from the superior uses of land and others at or near the intensive margin. Costs vary, but the price is uniform. Which cost is it that determines the price? The greatest cost — that portion of the supply which is produced at the greatest cost — determines the price of every portion of the supply. But the greatest cost is at the intensive margin or upon the marginal land — the land barely worth cultivating. Such land, or land uses, is so inferior that no rent is paid for the use of it. Then if production at the greatest cost determines prices, and if this greatest cost takes place where no rent is paid, it must follow that rent does not enter into the cost that determines price. This thought was cogently expressed by Ricardo, "Corn is not high because a rent is paid, but a rent is paid because corn is high." Ricardo's theory of value, which required capital to be defined as "stored up labor," has been on the defensive from the moment it was first penned. His theory of rent, his distinction between land and capital, and his theory of distribution based upon this artificial distinc- tion, are the defense works of his labor-cost theory of value. As above indicated, Ricardo reached the conclusion that "rent does not enter into price." This conclusion together with his concept of uniform profits (wages for past labor) made it possible for him to deduce the proposition that the only true cost and determinant of values is that of labor employed at the margin of culti- vation where no rent is paid. 10 THE RICARDIAN RENT THEORY Should it be demonstrated that rent does enter into cost, Ricardo's theory of distribution must fall. This demonstration is made if it can be shown that only- valuable land (or land uses) is cultivated; for valuable land always commands a rent and, therefore, rent would enter into cost. Cultivation extends to, but not beyond the "no-rent margin." Let us examine this statement; for, if it is true, it follows that only valuable land is cultivated. What is this margin? It is, in pure theory, a boundary line separating the land fit (valuable) for cultivation from the unfit (valueless). It is comparable to the line separating time into past and future. Beyond this land-margin, cultivation would occasion greater costs than income. Were the product of uses beyond the margin greater than the cost of harnessing them, they would, in consequence, yield a net return. They would be valuable, and, for this reason, command a rent. But this is contrary to the marginal concept. This thought is substantiated by two laws : proportional- ity and capitalization. The concept of proportionality has been the subject- matter of numerous contributions during the last thirty years; it has now passed out of the theoretical stage, and has become an established economic law. Its fa- miliarity to economists spreads the need of repeating it in full. A single agent is non-productive, and is valueless unless there are other factors to combine with it. An axe cannot cut wood, neither can a man — it takes the two combined, for the mutual interaction of agents lib- erates each the productive power in the other. Arid land produces nothing, and is valueless unless water is in prospect. Turn a river into the barren area, and CRITIQUE OF RICARDIAN RENT n the combination, land and water, becomes productive and valuable. Since neither factor alone could produce and because it requires mutual contact for each factor to liberate the productive capacity in the other, it fol- lows that the productive agent is a composite in nature and valued as a single unit. Does land make the water valuable? or does water make the land valuable? Each liberates the productive capacity in the other, and the two in one are valued. Consider a rich agricultural state like Minnesota with its many lakes and rivers. Is not water there, although utilized in production, a free good ? I answer that water in the lakes or rivers is free because it exists in such abundance as to render the short factor, land, incapable of liberating its productive capacity. Suppose now it were possible for the owner of a bonanza farm separ- ately to sell and remove the moisture from his farm. The water would not be free, but it would require the total value of the farm to buy it. If one thinks of the air as a separate thing, it is free ; but, were it integrated with the chemical qualities of the soil, the farmer would not have it permanently removed for a price less than the value of the farm. To harness a free agent and make it an integrated part of a composite productive agent is to make it valuable. A farm is more than land ; it is the combined productive qualities that grow a crop. Thus we see that proportionality is a physical law having to do with so adjusting things that they, in obedi- ence to natural laws, will give off the means of gratify- ing desires. Man makes the adjustments, however; and the motive by which he is directed is that of securing a valuable return. No effort is wasted by man to harness an agent that is without promise of a valuable return. The conclusion follows that, except for miscalculation 12 THE RICARDIAN RENT THEORY and poor judgment, all cultivated land yields a net re- turn, is valuable, and, therefore, commands a rent. The writer has in mind an investment of $ioo,ooa made in the fruitless attempt to convert a seemingly- bottomless svi^amp into productive soil. The venture failed and the money w^as lost because there was no productivity in the situation to exploit. A composite agent is valueless w^hen one of the essential factors is unproductive. Suppose that this swamp had responded to good treatment, that the composite agent (the land, the capital expended and embodied in its improvement, together with the other essential factors) had produced an annual net yield of $10,000. This capitalized at five per cent would give a capital value of $200,000. This yield could not be subdivided and the different portions of it attributed to the different factors in the composite agent. Specific productivity is not a generally accepted theory. One can no more attribute the value of the product to one factor in the composite agent than he could attribute music to the piano exclusive of the pian- ist, or sound to the clapper exclusive of the bell, or walking to the right foot exclusive of the left. But why will a man farm except for a yield? And if yield there be, its value is reflected, without exclusion, to the factors which compose the farm, the integrated agent of production. The process of capitalization is such as to make all land under cultivation valuable, and, therefore, rent-bearing. But if only rent-bearing land is cultivated, rent must enter into cost, Avith the conse- quence that the labor-cost theory of value falls. We shall see, later on, that almost all of the Ameri- can economists had the view that rent enters into cost. With this thought in mind, naturally enough they could not see why a tax on rent could not be shifted. To CRITIQUE OF RICARDIAN RENT 13 recognize rent as an element in the cost of production is to take the premise from under Ricardo's deduction of a non-shifting land-tax. Throughout the following pages, we shall find other difficulties which our writers encountered in their criti- cism of Ricardo. Among these, it should be kept in mind that Ricardo's theory of rent was static, whereas American economists took a dynamic point of view. What is more, Ricardo approached the determination of price from the margin, whereas almost all American economists thought that the no-rent margin was deter- mined by the price of the product. They reasoned that the margin is price-determined rather than price-deter- mining. Again Ricardo's well known formula makes differ- ences in land a cause of rent ; but the principle of cap- italization enables us to argue that difference in fertil- ity is not a cause, but only a measure of rent. Rent in the competitive market, as above shown, is paid for all land under cultivation. Moreover, rents come to equality in the sense of equal price for equal service. Paying rent is but buying the productive services of agents. A rent of $100 for the superior acre which yields 100 units of service, is equal per unit of service to the rent of $5 paid for the inferior acre which yields only 5 units of service. These rents are equal in the same sense that the price of 5c for one loaf is not higher than the price of $1 for twenty loaves. Competition renders equal land-uses equal in price. And the price paid for the uses of land is as much a cost to the entre- preneur as is the price paid for the services of labor. From the best to the poorest land, rent enters uniformly into cost. Regarding capital as uniform, Ricardo limited the dif- 14 THE RICARDIAN RENT THEORY ferential concept to land. We shall find that not a few of the writers we shall study made a severe attack against him at this point. At a latQj: date than we shall review, Francis A. Walker, though a defender of Ricar- dian rent, recognized differences among men, and made these the basis for his theory of differential profits. Recent authors — notably Hobson, Clark, Cannan, Fetter, and Davenport — see that the differential idea applies with equal force to the artificial agencies of production as it does to labor and land. ^ Akin to his differential was Ricardo's treatment of the law of diminishing returns, which, despite its im- perfections, was a real contribution. Turgot had nar- rowly conceived this law. * Cannan believes that Malthus did not make use of this law in the first and second editions of his essay on population. But, I ask, is not the very essence of the orthodox concept of diminish- ing returns contained in Malthus' arithmetical and geo- metrical ratios? The doctrine of the pressure of popu- lation on the means of subsistence, has no basis if it is not the disadvantage which attends the attempt to extort a greater and still greater crop from the soil. Ricardo himself does not give the law a better statement than is found in Sir Edward West's Essay on the Application of Capital to Land (1815).^ But to connect this law with the problems of rent, profits, and wages, and to weave it into a general system of distribution was left for Ricardo. The recent extension of this law to other * Walker, Political Econ., Part IV, chap. IV. Also Hobson, The Law of the Three Bents, Quar. Joum. Econ., V, 263-288, Apr., 1891; Clark, Distribution as Determined by a Law of Rent, Quar. Jovt/m. Econ., V, 289-318, Apr., 1891; Cannan, The Origin of the Law of Diminishing Returns, Econ. Jour., 11, 53-69, 1892; Fetter, The Passing of the Old Rent Concept, Quar. Joum-. Econ., XV, 416-455, May, 1901 ; and Fetter, The Relation Between Rent and Interest, Amer. Econ. Ass'n., 1904, third series. 176-198. * Cannan, Theory of Production and Dtifrihution, 147-148. ^West, Essay on the Application of Capital to Land, 9-27. CRITIQUE OF RICARDIAN RENT 15 productive factors, though the method of reasoning and the definition of the law be modified, has furthered the work which Ricardo began. This law, to Ricardo, was a principle of resistance ; and, to him, cost was the over- coming of resistance. This principle is related to value since, because of resistance, supply is limited. Ricardo's thought was that land obeys the law of diminishing returns whereas other agents do not. This statement, it should be said, has been denied for the most part by later economists. Almost all economists now observe that, should any productive agent cease to obey the law of diminishing returns, it would lose the element of scarcity and become a free good. It is true that, in the beginning of his work, Ricardo doubly emphasized the point that the law of diminish- ing returns is associated only with the original and inde- structible qualities of the soil. ^ He reckoned as capital all the investments on the land such as hedges, fences, manure, and other improvements. But Ricardo himself was led to give up a classification so artificial as this. He abandoned the classification in these words : "As a part of this capital, when once expended in the improve- ment of a farm, is inseparably amalgamated with the land, and tends to increase its productive powers, the remuneration paid to the landlord for its use is strictly of the nature of rent, and is subject to all the laws of rent." ^ Thus we see that Ricardo himself came to give a more extensive application to the law of rent than later writers have given him credit for. 