Online Library of Liberty: Economics, vol. 1: Economic Principles
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CHAPTER 15
PRINCIPLES OF RENT
§1. Divergence of actual rents from competitive rents. § 2. Gross and net rent to the owner. § 3. Different grades of fertility as affecting rent. § 4. Different costs of cultivation as affecting rent. § 5. Differences in location as affecting rent. § 6. The general doctrine of rent. § 7. Dependence of rent on proportionality. § 8. Rent and intensive utilization. § 9. Divergent subjective valuations of different bidders. § 10. Example of competing bids. § 11. Complexity of the situation lying back of each bid.
§12. Personal efficiency as affecting the valuation of agents. § 13. Variability of rents.
§1. Divergence of actual rents from competitive rents. Every rent paid by one person to another grows out of some agreement, explicit or implied, between two parties, and in a very general sense may be called a contractual payment. But the agreements in force at any moment differ in regard to the time that has elapsed since they were made, in regard to the conditions that existed when they were made, and in regard to the changes that have taken place meantime affecting the value of the uses of the wealth. It must often happen, therefore, that the rent which the borrower is obligated to pay is either more or less than the usance-value as estimated at the present moment. It is necessary to distinguish, therefore, the terms customary rents, lease rents, and competitive rents. A competitive rent is the rent that is (or would be) arrived at under the free operation of the actual competitive market conditions.1 A large part of the rents actually paid, especially for lands and houses, are not at this rate, but at a rate determined at an earlier date and under more or less restricted competition. Some may be customary rents which were fixed in former generations and are not subject to revision. Custom, in the case of a large part of the land holdings of the older countries of Europe, Asia, and Africa, prevents the landlord from charging all that the usance of the land is now worth. Presumably, when the feudal agreements were made in Europe a thousand years or more ago, there was a rough equivalence in the benefits accruing to the landlord and the tenant, respectively. In cases where the customary tenant and his descendants have the right to continue at a rate below a competitive rent, the tenant is to some degree a sharer in the ownership; the value of the usufruct is divided between the two parties. In communities where customary rents are common, a rent of the full annual value of the tenement, or near it, is called a rack rent. It often has resulted from some encroachment by the landlord upon the tenant’s rights, and therefore the term has an evil implication.
In other cases, notably in England, leases of agricultural land are made for periods as long as 30 years, and the tenants have often been the losers because, before the end of the time, the prices of agricultural products had fallen. Even in America city land is sometimes leased at a quit-rent for 99 years, and railroads are leased to other railroads for 999 years. Here the contractual rent actually paid each year varies greatly from what the competitive rate would be if fixed annually. The annual rent agreed upon at
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the signing of a long-time lease is not likely to be the competitive rent of the then current year, but rather an equalization of the varying rents of the whole period, as forecast by the bidders for the agents. Divergent actual rents for the same grade of agents may therefore exist side by side, according to varieties in customs and contracts.
§2. Gross and net rent to the owner. The renting-contract is rarely found in its pure form. Rarely is the borrower, or tenant, required to keep the agent in perfect condition; therefore when the rent is fixed, a certain amount of repairs and some provision for ultimate replacement is allowed for and included. The house-owner usually has to look after the fire insurance, nearly always has to pay the taxes, usually has to reshingle, repaint, and repaper from time to time, has often to employ a janitor, and where there is an elevator, to pay for its operation. Evidently the rent must cover all these items before we can speak of the remainder as a net income to the landlord. A large part of the rent of boats received by some boatmen is used to pay their attendants and the rent of the docks they use; and a considerable part of the rent received for the docks is expended by the owners to replace rotting piles and boards and otherwise to keep up the repairs. The owner nearly always has in mind certain costs of the business which must be deducted from the sum spoken of as rent. This difference between the borrower’s view and the lender’s view must not be overlooked in any specific case. The borrower’s idea of rent is what is generally understood by the term rent in a contract, namely, the amount he pays; the lender’s idea of rent is often the corrected amount, the net-rent which is attributable to the sale of the usance of the particular agent. This sum, since it is the price of the usance, is an absolutely net income. As far as can be foreseen it is an income “in perpetuity,” that is, accruing each year and likely to accrue each year into the indefinite future. But whether a given contract rent is gross or net is immaterial for our present purpose. In either case its amount is determined in the same way that the market price of present direct goods is determined. (See Chapter 7.) It is the resultant of individual valuations which, in a true market, mutually influence each other, and generate a market price. It is the price which brings as near as possible to equilibrium the amount offered and the amount demanded.
§3. Different grades of fertility as affecting rent.2 The theory of rent, as usually presented, deals with very simple conditions, which may be illustrated as follows. Assume that there are several fields, all equally accessible to the market, and all requiring the same amount of labor and of materials for their cultivation. With a small population only the most fertile tract A would be tilled and there would be no rent. As soon as it became necessary to cultivate B, a rent of two bushels an acre would begin on A. Just as it became necessary to seek a part of the food supply on D, the rent on the C tract would be two bushels, on B would be four bushels, and on A would be six bushels an acre.
Fig. 24. Grades of Fertility.
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§ 4. Different costs of cultivation as affecting rent. Or changing our hypothesis we may suppose, in accordance with some cases that actually occur, that all the tracts yield practically the same gross product per acre, say 24 bushels, but require different outlays per acre because of hills, rocks, needs of supplying fertilizer, or any other reason. Under these conditions the rents would be the same as in the other case.
Fig. 25. Different Costs of Cultivation.
A yields24 bushels less18 for costs, rental,6 bushels.
B yields 24 bushels less20 for costs, rental,4 bushels.
C yields 24 bushels less22 for costs, rental,2 bushels.
D yields24 bushels less24 for costs, rental,0 bushels.
§ 5. Differences in location as affecting rent. Still another case is presented when fields are of equal fertility but are at various distances from the market where the product is used and the price is fixed. Let us suppose that the costs of transportation to the market are equal to the costs of cultivation in the preceding examples. This is represented in Figure 26. When it becomes necessary to resort to tract B for products on which the transport-costs would be two bushels per acre, a rent on A would arise equal to the freight charges; and so on as in the preceding examples.3
Fig. 26. Differences in Location and Freights.
§ 6. The general doctrine of rent. The principle in each of these three simple cases is reducible to the one proposition, that the rent (in money) of an agent is equal to the excess of the price of its gross products above (money) costs (other than the rental) needed to obtain them and take them to market. This is equally true when the three conditions are combined in varying proportions, the excess being partly due to a larger product, and partly to lower costs either of cultivation or of transportation.
The comparison of quantities of products might be made in terms of bushels, pounds, tons, yards, etc., provided that all of the products were of the same kind and quality. Likewise the comparison of costs might be made accurately in terms of day’s labor provided labor were the only cost and were all of the one kind and value. But these conditions are rarely, if ever, present. To compare the items, therefore, it is necessary to express them all in common terms of monetary prices. A comparison may thus be made between the most varied products, and between costs of most varied kinds and the most varied kinds of agents.
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The commercial rent paid by the user of a durative agent of any kind is a gross sum which usually is more (or conceivably may be less) than the price of a true usance, according as repairs and depreciation have been attended to by the borrower (see Chapter 14, section 3). A net or true rent, however, is that which leaves the use bearer in condition to yield an unchanging income (see above, section 2).
§7. Dependence of rent on proportionality. It may here be clearly seen that the origin and the existence of rent is dependent on the operation of the law of proportionality. If intensive use of field A met with no resistance there would be no motive ever to cultivate another field. A whole nation could be fed from the single acre of land. But in fact, applying more and more labor and other agents to tract A will not increase the crop of grain proportionally. In applying any fund of complementary agents a point is found where it is better to go over to the cultivation of the tracts B, C, D, successively, each less fertile (case 1), or more difficult to cultivate (case 2), or less accessible and costing more for transportation (case 3), than to go on cultivating tract A with more and more labor or, it may be, at higher and higher money costs. When this is done the return imputable to the additional (marginal) unit of cost on the intensive margin of cultivation in A just equals that of the additional unit on the extensive margin of B, C, D, etc. There comes about a static equilibrium, a best apportionment of agents to the different tracts under the existing circumstances. This best apportionment of complementary agents has, of course, the result of maximizing the net incomes from the various tracts. The better agents are more intensively cultivated than the poorer agents for the reason that in this way labor is most advantageously utilized. This difference in degree of use appears generally in the form of differences in the kinds of products as well as in the amounts, each agent being used for the purpose in which it promises to yield the maximum usance, and, consequently, rental. A may be given to commerce, manufacturing and residences, uses of varying degrees of intensiveness; B, to market-gardening, C, to ordinary farming, D, to grazing, forestry, and other extensive modes of use. And the simple guiding principle in the matter is this: that each thing is put to the use which seems to promise the maximum income. This, of course, is true of labor, buildings, tools and machinery of all kinds, as well as of land.
§8. Rent and intensive utilization. The origin and existence of usance-value and hence of rent is essentially due to the limitation of supply of uses in the better grades and not to the existence of poorer grades forming an extensive margin of utilization. If A were the only grade, rent must arise when it is used intensively. If in accordance with the principle of proportionality the successive units of labor (or of all money costs) are applied so that they become less effective, usance-value must arise. If now, B is there waiting to be used, the rent on A would have to equal about 2 bushels per acre before cultivation could go over to B. The effect of the presence of the poorer grade B, is not to cause the rent on A, but merely to check the rise of usance-value through affording a substitute good. And so, in turn successively lower grades of agents become part of the supply as rent rises, and thus they limit its rise. The problem of usance-value and of rent here touches on the border of the problem of the value of the complementary agent, labor, and may better be explained under wages.4 Rent is not an isolated price problem, but it is interrelated with that of the prices of all agents uniting to obtain a product.
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Online Library of Liberty: Economics, vol. 1: Economic Principles
§ 9. Divergent valuations of different bidders. In explaining the differences in the rents of agents we have thus far mentioned as affecting the result only the limitation and variation in the physical qualities of the agents themselves, whether it be the fertility of the soil, the height of the waterfall, the mechanical efficiency of the machine, the convenience of location, or anything else. These are solely objective differences, whereas there are many subjective (that is, human, personal) differences that influence the result, causing the individual bidders, either borrowers or lenders, to value a particular usance differently.
It has been shown how the valuations of bidders vary in the purchase of commodities, and it is no less true that the valuations of bidders for usances vary. Many circumstances make both the quantity and the value of the products as well as of the costs anything but a fixed, predetermined, unchangeable amount to the various bidders. A durative agent often has to its owner both a value-in-use and a value-in- exchange, a usance and a price, and the two may be approximately equal or very unequal. The owner of a farm may work it himself, or being old, or indolent, or incompetent, or more suitably occupied, he may prefer to let the farm to a tenant. Where the owner can himself manage the farm he has a reserve-valuation below which he will not let it to any tenant; whereas in the other case he is in the position of an urgent seller (of the usance) to the highest bidder (quality of tenant, security, etc., as well as amount of rent being considered). This does not mean that the rent is necessarily lower when the owner can not use the agent himself. The owner’s reservevaluation may often be below the bid of others.
§ 10. Example of competing bids. If there are several tenants that would like to get a certain farm, their maximum usance-valuations might be as follows: A, $500; B, $475; C, $450; D, $425; E, $400. At the basis of each bid must be a forecast of the net usance that the bidder anticipates he could make from it; but he may bid less if he thinks that he can thus get the agent. Each bidder would count his own labor at the figure it would bring if elsewhere applied, and would estimate some return on whatever stock he expected to put into the business. Many factors of psychic income, varying with individual tastes, as liking for the neighborhood, conditions favorable to health, nearness to schools, etc., enter into the actual bid. With due allowance for these differences, A, who counts on a net usufruct of 25 more than B does, ought to be the more skilful farmer, but this is merely his expectation, and he may be mistaken. Even in this case, if A can give security or can convince the landlord that the rent will be paid, he may be able to outbid B and get the farm for a rent of $476. Then, if his forecast was correct, he would clear $24 by renting this particular farm; and in addition he gets the opportunity to apply his own labor and earn returns on his productive agents. This situation is represented in Figure 27.
Fig. 27. Competing Bids of Would-be Tenants.*
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§11. Complexity of the situation lying back of each bid. It should be noted that each bidder’s valuation implies a comparison of the agent with other agents more or less nearly equal to this one in its qualities and usance. The opportunity of a place to work, needed by each, would be lacking if there were but one farm to rent. But several farms are in the neighborhood, and the knowledge of their availability is a part of the circumstances influencing the bids, as is also the chance that each man has of moving elsewhere or of hiring out for wages. If in fact there were but one farm and no other possible place to earn a living, the maximum bids would rise greatly, for each bidder would reduce to the uttermost his estimate of the value of his own services to be deducted from the gross product. The interrelation between the amounts attributable to labor and to the farm is such that rent and wages mutually affect each other. In fact, as bids are made in view of an existing situation, rents reach some degree of equilibrium in a neighborhood. Each tenant has a farm and each farm a tenant, rents and tenant’s income being kept from year to year closely in accord with the level of individual valuations (see Chapter 7, sections 7-9).
§12. Personal efficiency as affecting the valuation of agents. In general it is true that the most skilful cultivator will make a more liberal allowance for his own services in his bid on every grade of farm, for on every farm his skill, tho in varying degrees, will enable him to get a larger net product than his competitors. Despite this higher valuation of his own services, the most skilful cultivator is likely to be the highest bidder for the best agents. The best agents used for a particular purpose tend to get into the hands of the best managers, for the better the agents to which superior skill is applied, the greater are its results as compared with less skill. Thus in many localities this distribution of ability in accordance with fertility is so marked that it is proverbial: “poor lands, poor men.” But when a man’s ability is of a special kind, either by natural talent or by training, he may be able to succeed well in one industry tho failing in another that calls for no more, but merely different, ability. For example a good general farmer may be a poor florist or market gardener, a good lumberman may be a poor furniture maker.
§13. Variability of rents. Rentals of farms, of regular residences and of stores, used from year to year, are comparatively stable. Summer rates for rooms in some college towns where there is a summer school are one-half the regular rates. Rents for unoccupied summer cottages rise quickly if the weather is warm early in the season, for tenants are willing to pay “anything within reason.” Livery charges in many places are higher Sundays than on week days; in college towns are higher both Saturdays and Sundays; and on festal occasions such as “Junior proms” and “Senior weeks,” antique equipages are drawn from hiding to lure incredible sums from the devotees of society. Decoration Day and Fourth of July, if it is pleasant weather, boat hire is likely to be doubled. In these cases the supply at any price can be only slightly increased, for the time, and the demand carries off the whole available stock at abnormally high prices. The rent appears to the regular patrons to be fixed arbitrarily by the seller; but a study of the conditions will show that the rate fixed is approximately the correct marketprice for the conditions, one that just carries off the supply and leaves no efficient demand unsatisfied.
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