Essentials of Economic Theory / As Applied to Modern Problems of Industry and Public Policy

by John Bates Clark

It would also mean another thing. The extending of the margin of cultivation which makes it include poorer grades of land causes that part of the area now tilled which does not command any rent to yield one. After the margin should have been greatly extended and finally located in a region where getting anything out of the soil would require a struggle, it would appear that all of the lands newly annexed to the cultivated area except the last and poorest would command a rent. All but those on the new margin would add a definite quota to the supply of wheat, and this contribution would be their rent. Entering into the supply, it would of course count in the adjustment of price.

What can reasonably be conceded concerning Rent and Price.—There is another possible meaning of the phrase "Rent is not an element in price"; and, whether it was clearly in the minds of those early economists who made the assertion or not, it is what their argument proves. The payment of rent by tenants to landlords has no effect on the market value of the produce. "Food would not become cheaper," says Professor Fawcett, "even if land were made rent free." There would be the same need of food stuffs as before, and the tillage of lands would be pushed to the present margin, where the yield is smallest. The cost, in labor and capital, of that marginal part of the supply of food which has come from these poorest lands would continue to be what it has been heretofore. The farmers would, of course, get from the good lands the same surplus that they get at present; but the fact that land had been made rent free would enable them to keep it. This surplus is, of course, rent, and transferring it from landlords to tenants does not affect prices. So much of the doctrine formerly current is true; and it would have forestalled much confused thought as well as much controversy if the statement concerning rent and price had made it clear that any rent in its original form is an element in the supply of produce, and the existence of it helps to determine prices, while the payments made by tenants to landlords do not affect them. If these payments should cease and the tenants should retain the rent, prices would continue to be what they now are.[4]

FOOTNOTES

[1] Whether such an instrument should or should not be called a capital good is a question of mere nomenclature; but in this treatise we consider that every part of what we term capital produces an income, and therefore a no-rent instrument is not a capital-constituting good—otherwise termed a capital good.

[2] If the fund for replacing a costly capital good, such as a ship or a building, were allowed to accumulate for a term of years before being spent, the parts of it remaining on hand for some time would earn interest for their owner, and in his bookkeeping this would figure as reducing the amount he must save from the product of the ship or the building in order to replace it. This does not affect the general law of self-replacement, for the ship or building really produces what results from this compounding.

[3] In computing both of these values for comparison one should use a labor-cost standard, and we shall later see under what limitations such a standard may legitimately be used.

[4] The claim that rent is not an element in price making might be made in the case of artificial instruments of production as reasonably as it can be made in the case of land. If it means that the existence of the rent has no effect on price, it is wholly incorrect in both cases. The statement may be so changed as to tell what is true concerning the rent of land, and it will then also tell the truth about the product of the artificial instruments, which is interest in its original form. These statements may be made in parallel columns, and one will be as true as the other and no truer.

A needed part of the supply of wheat is grown on marginal land.	A needed part of the supply of woolen cloth is woven on marginal looms.
The price of the wheat must pay for the labor and capital used on this land.	The price of the cloth must pay for the labor and capital that, in the woolen manufacture, are combined with these looms.
The price of wheat raised on good land is the same as that of wheat raised on the marginal zone, and it affords a surplus above wages and interest paid by farmers for labor and capital used in the tilling of the good land.	The price of cloth woven on good looms is the same as that of equally good cloth woven on marginal ones, and it affords a net surplus above the cost of maintaining the stock of looms and the wages and interest paid by manufacturers for further capital used in connection with the good looms.
The existence of this surplus in its original form, that of wheat, affects the supply and the price of that product.	The existence of this surplus in its original form, that of cloth, affects the supply and the price of this product.
The fact that farmers pay landlords for this surplus has no effect on the price of wheat.	The fact that entrepreneurs pay capitalists for this surplus has no effect on the price of cloth.

The more important facts concerning rent have reference to the original form of it, namely, a product in kind. Whatever constitutes a part of the supply of anything affects the price of it. The surplus afforded by good looms is an element in the supply of cloth, and that afforded by good land is an element in the supply of wheat. They make these two supplies larger than they would otherwise be, and of course they are of cardinal importance in determining price. The rent of anything is an element in the supply of some kind of goods, and the annihilation of it would reduce the supply and raise the price of product in which, in its first estate, it consists.