In a vast variety of special instances, such as those used above for illustrative purposes, Rent exacts from the flow of Wealth a continuous allocation which depends for its proportions to the aggregate flow upon the desirability of different qualities and locations of Land (as the Natural Resource factor in the production of Wealth) relatively to the desirability of such qualities and locations as may be had for the taking.
“The rent for any piece of land,” writes Max Hirsch, the Australian economist,[8] “is determined by the excess of its productivity over that of an equal area of the least desirable land in use, after the sum of exertions which in both cases yield the most profitable result has been deducted.”
[8] Page 127 of “Democracy vs. Socialism.”
All such exactions are phenomena of natural Economic law. Land exists in quantities to which Nature assigns impassable limits, and this limited supply of Land varies in fertility and in desirability of location. He who produces from and upon better grades will naturally achieve greater or better results with the same expenditure of Labor than he who produces from poorer grades. This difference is measureable by variations in the productive grades of Land, from nothing in excess of production cost on the lower side of the Margin of Production—the poorest in demand, the Economic frontier—to something in excess of production cost on the higher side of the Margin, the hither side of the Economic frontier, and to more and more for higher and higher grades up to the best.
It should be observed in this connection that the Margin of Production, the Economic frontier, is not a surveyor’s line, like the boundaries of a farm or a county or a State. It is a term for an Economic difference, from lower to higher degree in the desirability of particular Natural Resources though they be separated by long distances or short ones.
Nor need the intervening space recede from highest to lowest by geographical degrees, or relative desirability depend upon richness of soil or mineral deposits.
Trading opportunities may do much to determine the Margin. A rich gold deposit beyond the reach of trading possibilities lies below the Margin, for it cannot be utilized. A farm twenty miles away from a trading center would be nearer the Margin than one two miles away, even though the two farms were equally productive, because the marketing costs would affect the Value of the product prejudicially. Space for a building-site a hundred and fifty feet from the nearest street line would be nearer the Margin than one fronting on the street.
Although the old conception of the Margin of Production—“margin of cultivation,” as it was called—as bounding an open space of free agricultural land be obsolete, the principle of the Margin remains, namely, that the better the opportunity to profit by use of any location on our earth over use of the most profitable location thereon to be had for nothing, the higher will the Rent of the former be. That marginal principle will persist so long as some locations are preferable to others. And in those circumstances Rent will continue and be allocated with reference to “marginal” or zero-value Land. The better the opportunity to profit by the use of any location above the most desirable to be had for nothing, the higher will be the Rent of the former.
Whether the surplus of Production or possible Production be called Rent for Land, or deductions from Wages for superior opportunities to Labor, or be otherwise distinguished from Wages for Labor, it none the less exists as a distinct and natural allocation of Wealth produced from and upon Land by Labor. Although Rent depends wholly upon Labor for its Production it is a differential gain in Wealth which is due not to superior productiveness of Labor but to relative superiority of different kinds and locations of Land.
This continuous allocation to Rent of shares of Labor-produced Wealth may—it constantly does—take on Capitalized forms. As Wealth is produced it flows toward the productive factors in two distinct and continuous streams—Wages for Labor and Rent for Land. But as Land has in business custom the rank of a commodity, the legal right of its owners to appropriate Rent assumes the form of Capitalized Land Value. An annual income from Rent, for example, be that income actual or only potential, may be bought and sold in business intercourse for a Capital sum or “purchase money.” Commonly it is so sold along with the legal Land title by which it is secured to the owner, but often with Artificial improvements, the whole being called “real estate,” as if the improvements and the Land were fundamentally identical.