The Principles of Economics, with Applications to Practical Problems

by Frank A. Fetter

THE RENTING CONTRACT

§ I. NATURE AND DEFINITION OF RENT

Temporary use and permanent possession of agents

1. The temporary use of materials and power and their sources is necessary to bring most enjoyable goods into being. Indirect goods have value solely because they help to get direct goods. The apple-tree is valued because it bears fruit, and the orchard because the trees give promise of yielding a succession of crops for years to come. There are thus two problems of value in connection with durable goods: that of the value of a temporary use for a brief period, as for a year; and that of the value of a thing itself, the use-bearer, for a long series of years or in perpetuity. To explain what fixes the value of the temporary use is the problem of rent; to explain what determines the value of long-continued use or of permanent control and ownership of a use-bearer is the problem of capitalization.

Origin of the term rent

2. The term rent is used in a number of senses, which must be carefully distinguished. The original meaning of rent was any regular income or revenue arising from wealth. The word comes from the low Latin renta from renda, in turn from redditus, that which is given, yielded or given back, or rendita, that which is given or returned. The French rendre (English render), to give or return that which belongs to one, is used very early. Chaucer used "rente" as an income. "Cattle had he enough and rente," cattle probably meaning property (chattels), and rente income. Rental is a collective term for a number of rents. The total yield of an estate was called its rental or rent-roll, and a list of the various sources of income, including all payments from tenants in money, produce or services, constituted its rental.

Popular and special meaning of rent

3. The popular meaning of rent is the amount paid for the use of material things which must be returned to the owners after the time of use agreed upon. We speak of the rent of a house, boat, etc., using the word as a synonym for hire. In the European languages the word is used more frequently in that sense. In the French la rente means the income from any kind of property; but corporate securities and national bonds came particularly to be called les rentes, because they are a form of investment yielding a permanent income. The one who has a perpetual income from bonds or rents is called a rentier. In German the term Rente is used more broadly than in English, as an income of any sort, Grundrente meaning the rent of land, and Capitalrente the income usually in England called interest.

A restricted meaning has long been applied by economists to the word: the income yielded by lands, etc. This was put in contrast with interest for money and capital, and with wages of labor. This meaning is now being abandoned by economic students.

A wider meaning recently given to the word by many economists turns on the supposed relation of some portions of price to cost of production. Thus, frequent use is made of the expressions: consumer's rent, producer's rent, buyer's rent, seller's rent, etc. In the well-founded opinion of some recent critics this usage rests on a mistaken reasoning. However, in the midst of this wide variety of usage the student must be forewarned and alert. Doubtless agreement will at length be arrived at. Meantime, no economist can dictate what meaning is to be attached to the term, but one may suggest the definition that seems to him most expedient. Throughout this work we shall endeavor to use the term rent uniformly and consistently as it is now to be defined.

The essence of rent

4. The essential thought in rent, as we shall use it, is that it is the value of the usufruct as distinguished from the value of the use-bearer or thing itself. The meaning of usufruct is the use of the fruits, or in legal phrase: "the right of using and enjoying the income of an estate or other thing belonging to another, without impairing the substance." The obvious fact is that fruits can be eaten without destroying the tree, the harvest gathered without destroying the field. By a metaphor the word in legal discussion is applied to the use of any product, and we shall employ it, as in common speech, in reference to one's own goods as well as to the goods of another.

Rented agents are looked upon as durable

The qualities whose use gives value are not usually indestructible, but they are treated as undestroyed. There is a famous phrase used by Ricardo, "rent is paid for the original and indestructible qualities of the soil." He said "indestructible," but the word is not apt. There are many qualities in the fertile field that must be destroyed when it is used. Every economist since Ricardo's time has recognized this, and many excuses for the inaccuracy have been given. After every harvest, the field is less serviceable than before, and if it is to be of the same grade of efficiency, the fertile elements must be restored. We cannot assert that Ricardo meant undestroyed, for he was not quite clear on the question. But it is evident that one can count as true income only that part of the value of product that remains after full repairs have been made. It is only by a fiction that most indirect agents can be regarded as indestructible. Things yielding rent are not indestructible, but generally they are preserved undestroyed.

True rent a net income

5. A distinction must be made between gross and net, or true and false rent. Before the usufruct is estimated, allowance must be made for repairs, depreciation, and for various expenses which absorb a good portion of the gross product. When this allowance has been made, the income may be considered as a net sum not due to the sale, or to the using up of any part of the thing rented. This is the essential thought in typical rent—that it is the value of the surplus, or net product, of an economic agent leaving the agent itself unimpaired in efficiency. The total product is sometimes called the "gross rent," but economic rent is "net rent." This thought is made clearer by the following discussion.

§ II. THE HISTORY OF CONTRACT RENT AND CHANGES IN IT

Economic and contract rent distinguished

1. Economic rent (likewise called natural, competitive, and sometimes rack rent) is to be distinguished from contract rent. Economic rent is the market value of the usufruct, and contract rent is the amount a man pays for the use of wealth by virtue of an existing agreement. The one is impersonal or economic; the other is personal or legal, being fixed by agreements between persons. The rents usually spoken of are contract rents.

The two diverge more or less. If the contract has been lately made the two will be nearly the same. Contracts of long standing often bind the tenant or borrower to pay either more or less than the present competitive price. If, after a time, the value of the use is greater than the contract rent, the tenant is fortunate in having his lease. But he is the loser if he is bound by lease or agreement to pay rent in a locality where land has become less valuable.

Economic and contract rent usually diverge also because of the agreement that the owner, or lender, keep up the repairs and pay the taxes. Here it is simply the difference between gross and net rent.

Custom may prevent the owner from charging all the usufruct of the agent is worth. If the contract rent is less than the economic rent, evidently the borrower enjoys a part of the usufruct, without charge, and to that degree is in the position of an owner. The usufruct in this case is divided between the two parties. Such instances were numerous in the Middle Ages in the renting of land, and still are found in many countries.

Contract rent is based on economic rent and tends to conform to it whenever there is competition. The existence of economic rent is the basis of the agreement to pay contract rent. Prospective hirers of agents forecast what the use will be worth to them and make their bids accordingly.

The renting contract for the use of wealth

2. The renting contract is the agreement of a borrower to pay for the use of a thing and, at the end of the time, to restore it in good condition or pay for its complete repair. In practical business it is necessary to have definite agreements to prevent disputes. Some provide that one party, some that the other party, shall keep up repairs. The form of the renting contract is observed by men in estimating the uses of their own wealth where no contract exists. If they count the gross product of an agent as rent, it is bad bookkeeping. In many cases it is necessary, therefore, to follow the form of the renting contract in order to determine the net yield of indirect goods.

The renting contract in the middle Ages

3. In early stages of industry the use of nearly all wealth is estimated under the renting contract. In the lower stages of culture, in hunting, fishing, or nomadic pastoral tribes, land is not recognized as wealth to be exchanged or owned. But at a later stage, as in the Middle Ages in Europe, land and the things pertaining to it, as ditches, houses, mills, cattle, stock, and the few simple implements, constituted the larger portion of the wealth. Land was granted to the tenant or serf in return for services. The contract was pretty strictly drawn and all items were specified. It was not hard to hold the tenant to his contract to keep the land in about the same condition. There was a certain rotation of crops; the tenant was obliged to keep his stock up to standard; and, moreover, he had a certain interest in the land because his contract rent (as explained above) was less than the economic rent. The landlord, therefore, could count pretty surely on the undiminished power of his land and stock from one year to another.

At that time, truck and barter were the common modes of exchange, and rents were paid in products and services, not in money. The fruits of the soil were consumed on the spot instead of being sold as now. Land was rarely, if ever, sold outright, so that there was no occasion to estimate its total selling value. It was thought of as a place on which to live and as a source of livelihood. Its yearly use was all that was subject to contract, sale, and exchange. Not the land itself but a rent charge on the land was sold, the term rent charge meaning an annual sum payable out of the yield of an estate. Many medieval estates were so tied up by legal conditions that they could not be sold outright; all that the owner could do was to sell or mortgage the annual rental. Thus, in the Middle Ages, it was all but universal to look upon most indirect agents as exchangeable only under the renting contract, as subject to renting but not to complete transfer and sale.

The renting contract not convenient in commerce

4. As industry developed, the renting contract remained almost wholly confined to cases of renting lands and houses. The materials and appliances needed for manufacture and commerce are so manifold and varying in quality that the rent-form of contract is very cumbersome and difficult for exchangers to enforce. If a merchant about to embark on a trading journey wished to rent a ship and a stock of goods, the renting contract became most difficult to interpret. He must agree to repay the loan in goods of the same kind and quality as those received, a contract most difficult to execute, and giving occasion to costly tests and countless disagreements. It was much easier for the merchant to get his loan under the interest contract, i.e., a money loan, with which to buy the goods. With the growth of industry and commerce, wealth increased in towns, taking many forms, as those of ships, wagons, tools, and stocks of goods, that could not conveniently be rented.

The thought of it remains associated with a rural economy

In England, the country which developed its industrial system earliest, the idea of rent, therefore, gradually became disassociated almost entirely from the use or hire of any wealth but land and real property. Because in the Middle Ages rent was associated almost entirely with natural resources, they being the only important forms of wealth which men rented from others, there was fostered the idea that the essential mark of rent is the connection with natural resources. It is a simple example of the association of ideas. In the transfer or loan of movable goods, the rent contract was quite overshadowed by the other form of contract, that of a money loan. According to this explanation the essential and primary difference between renting wealth and borrowing money at interest is not in the kind of wealth whose use is thus temporarily transferred, but in the nature of the contract. But as forms of wealth differ in their fitness for transfer under the two forms of contract, there goes on a competition between them, as a result of which each becomes associated with certain groups of goods. In the Middle Ages the renting contract was the dominant form, but it has been progressively displaced by loans in the money form, and its importance is still declining.

Renting contracts most used with land

5. The main forms of wealth whose usufruct is still sold under long renting contracts are land and its more durable improvements. In England farms are let under long leases, a very common form being the thirty-year lease. Under the old, almost fixed, conditions in agriculture such a lease was equitable, but when prices are rapidly changing and when new methods are being introduced, it gives rise to great hardships. About twenty-five years ago, the great fall in the price of agricultural products brought ruin to many of the tenant farmers. The land troubles in Ireland have been largely about tenants' improvements. When the lease expired, the landlord could appropriate all the improvements that the tenant had made. In America farms are let usually on shares, and from year to year, but the plan of a money rent is increasingly followed. The difficulty of getting an equitable arrangement between landlord and tenant is recognized by all. The landlord must make the proper repairs or see that they are made; he must specify in the contract whether the products can be taken away or are to be fed on the place so that the soil may not be impoverished, and he must provide for the purchase of other fertilizers. On the other hand, the tenant under the renting contract has little motive for improvement, and many occasions for discontent. So in America, far more than in the older countries, land changes hands by sale, the purchaser going into debt for it, giving his note and paying interest on the loan rather than rent for the farm.

But many other goods are rented

Many less durable goods are rented for brief periods. Carriages are rented for the day, bicycles by the week or month. Sewing-machines, boats, guns, tents, and even diamond engagement rings, yield their joys under the renting contract. People frequently hesitate between the renting and the purchase of a piano, and in some cases renting is the more convenient and desirable way of securing its use. The purchase of a dress-coat or of a masquerade-suit to be worn but once, involves for some an excessive and needless sacrifice. For a moderate sum its temporary use may be had, and it is then returned, little the worse for wear, to the accommodating clothier.

Economic rent much wider than the renting contract

A final word of caution may be given. Economic rent is not confined to the cases of contract rent. It exists in every case where a more or less durable agent yields a use that is scarce and desirable. The owner who uses a thing himself gets the advantage in the product as clearly as if he collected rent from a borrower. Houses lived in by the owners, house furnishings, clothing, books, all scarce and durable agents, are yielding rents in this logical sense. To the economist, therefore, the problem of economic rent, as one of the grand divisions of the problem of value, remains of undiminished importance, for in these unceasing streams of uses emanating from our environment, is found the basis for the value of all durable wealth.

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