In a former chapter we were led to investigate the utterly futile attempts made both by Carey and Bastiat to undermine the Ricardian theory of rent. Open to criticism the theory certainly is, but in their anxiety to do away with it altogether these critics were led to deny that the land had any value at all.
But this denial has been refuted in no equivocal fashion by the emergence of what is perhaps the most striking phenomenon in nineteenth-century history, namely, the fabulous prices paid for land in the neighbourhood of large cities. The last century was pre-eminently the century of big towns. No other epoch in history can point to such growth of urban centres. England, America, Germany, and to a lesser degree France, have all had a share in this development. One result of this rapid agglomeration of population in restricted areas has been a wonderful growth of rents, or unearned increment. A quarter of an acre of land in the city of Chicago which was bought in 1830 for $20, at a time when the population was only fifty, and which in 1836 was sold for $25,000, was valued at $1,250,000 at the time of the International Exhibition in 1894. It has been calculated that the increase in ground-rents in London between 1870 and 1895 is represented by no less a sum than £7,000,000. Hyde Park, bought by the City of London in 1652 for £17,000, is to-day valued at about £8,000,000. M. d’Avenel states that in Paris a piece of land belonging to the Hôtel Dieu which was valued at 6 fr. 40 c. a square metre in 1775 is worth 1000 fr. to-day,[1148] and M. Leroy-Beaulieu mentions a piece of land in the neighbourhood of the Arc de Triomphe which between 1881 and 1904, i.e. in twenty-three years, has doubled its value and is now selling at 800 fr. a metre as compared with 400 fr. formerly.[1149] We have merely quoted a few isolated examples, but they may be regarded as typical.
Carey and Bastiat have not made many converts, evidently. The majority of economists have either accepted Ricardo’s theory or, having been induced to examine his position thoroughly, have been led to develop it, but none of them has denied the reality of the income derived from land. Hence the very curious twofold evolution which the theory presents.
On the one hand there has been discovered a whole series of differential revenues analogous to the rent of land, which, according to the expression of a great contemporary economist, “is not a thing by itself, but the leading species of a large genus.”[1150] On the other hand (and this second line of development is perhaps more curious than the first), while Ricardo considered that the rent of land was an economic anomaly resulting from special circumstances, such as the unequal fertility of the land or the law of diminishing returns, modern theorists regard it simply as the normal result of the regular operation of the laws of value. The rent of land and similar phenomena seem to fit in with the general theory of prices, and the theory of rent so laboriously constructed by the Classical school falls into the background as being comparatively useless. Despite its prestige throughout the nineteenth century, in a few more years it will be regarded as a mere historical curiosity.
This double evolution is the result of simultaneous efforts on the part of a great number of economists. It is almost impossible to trace a regular sequence of advances from one to the other, and we shall content ourselves with a mere mention of the names of those who have contributed most to it, their actual words being quoted whenever possible.[1151]
(a) In the first place, we have a number of differential revenues which are exactly analogous to the rent of land. Equal quantities, or, as the English economists prefer to put it, equal doses of capital and labour applied to different lands yield different revenues: such was the classic statement of the law of rent. Ricardo attributed the existence of rent to the presence of particular phenomena appertaining only to land, such as diminishing returns, unequal fertility, greater or lesser distance from a market. But it has long been realised that agriculture is by no means the only domain in which capital and labour yield unequal returns.
All natural sources of wealth—mines, salt-works, and fisheries—give rise to exactly similar phenomena. Their productivity is not identical, their fertility (if the term is permissible) presents the same differences and their position relative to a market the same variety as in the case of cultivated lands. Consequently every mine, every salt-work and fishery that is not on the margin of cultivation yields a differential revenue or rent because of its greater productivity or more convenient situation. Ricardo had recognised this in the case of mines, and Stuart Mill insisted upon its farther extension.[1152]
Further, land is not employed for tilth only; it is also frequently used for building purposes. The services which it renders in this connection are not less important than the others, and between different sites there are as many distinctions as there are between the various grades of cultivated lands. Their commercial productivity, if we may so put it, is by no means uniform. “The ground-rent of a house in a small village is but a little higher than the rent of a similar patch of ground in the open fields, but that of a shop in Cheapside will exceed this by the whole amount at which people estimate the superior facilities of money-making in the more crowded place. In this way the value of these sites is governed by the ordinary principles of rent.”[1153]
But why even confine attention to land and its uses? Degrees of productivity and differences of returns are equally evident in the case of capital. The machinery in one shop may be better, the organisation more efficient, division of labour more fully developed than in another because of the relatively greater abundance of capital, with the result that the production in the one case will exceed the production in the other, resulting in a supplementary gain in the case of the first shop.[1154] Similarly, the production of one worker as compared with another is frequently unequal. One man without any greater effort may get through more work than another, and the earnings of that man will exceed those of the other, so that even a workman may enjoy a supplementary gain of the nature of a differential rent. And not among workmen only do aptitudes differ, but also among entrepreneurs. Rent of ability plays an important rôle in determining the different degrees of success experienced by different undertakings and the unequal revenues which they yield. “The extra gains which any producer or dealer obtains through superior talents for business or superior business arrangements are very much of a similar kind.” That is how Mill[1155] expressed it, content merely to repeat an idea which Senior had expressed in his Political Economy as early as the year 1836, where he applies the term “rent” to “all peculiar advantages of extraordinary qualities of body and mind.”[1156]
The simple suggestion thrown out by Mill and Senior has long since been developed into a full-blown theory by Francis Walker, the American economist. The conception of profits as the remuneration of the entrepreneur’s exceptional skill is examined in his Treatise on Political Economy, and is further treated in considerable detail in the Quarterly Journal of Economics for April 1887.[1157]