[1]Principles of Political Economy, by John Stuart Mill.
§3. The Differential Aspect. Most ordinary commodities are not produced on a single, uniform pattern. As a rule there are many variations of grade and quality, and consequently of price. But these variations are usually designed to meet the differences of taste among the purchasers, and we do not expect to find that any variety of an ordinary commodity will be produced, which is so poor in quality as to be entirely valueless. But since it is nature which has produced the land, without any assistance or guidance from man, there are many pieces of land which are so unfertile, or are otherwise so unsuitable for productive purposes, as to be quite valueless from the economic standpoint. Even in a densely populated country like Great Britain, there are considerable tracts of land which it is unprofitable to employ for any economic purpose whatsoever, and which possess no further value than what the mere pride of ownership may give them. This fact makes it possible to apply the conception of the margin to the case of land with particularly illuminating results.
In the first place, however, it should be observed that the value of any piece of land does not depend solely on the intrinsic fertility of the soil. The fact that land is an immobile thing makes its situation a factor of great importance. In the case of urban land, situation is, of course, the only thing that counts. The value of a site in Bond Street or the City is entirely unaffected by its capacity or incapacity for potato-growing purposes. But even for agricultural land, situation is a most important matter. A farm, which is so remote that considerable transport charges must be incurred to bring its produce to market, will be less sought after, and less valuable, than one which is much better situated though somewhat less fertile. In what follows, therefore, we must speak of the "quality" of a piece of land in a broad sense to include advantages of situation, as well as of fertility. Let us now, imagine the different pieces of land in Great Britain to be arranged in order of quality, so that we have a long series, with land of the best quality at one end, and of the poorest quality at the other. At the latter end, we will have such land as is found near the top of Snowden or Ben Nevis, which it clearly does not pay to cultivate at all. Somewhere, then, between these two extremes, we shall come to a point where the land is just, but only just, worth cultivating, or where, to revert to a form of words we previously employed, it is a matter of doubt, whether the land is really worth using for a productive purpose. Such land we can regard as the "marginal land"; and since the variety of nature is at once infinite and fairly minutely graduated we shall probably find that on one side of this margin there is much land which is only slightly superior, and on the other, much which is only slightly inferior, to the marginal land itself. What, then, is likely to be the value and the rent of this marginal land, this land which is just on the "margin of cultivation"? Some readers may find the answer startling. The rent of the marginal land will be nil, because it will not pay to cultivate it, if any appreciable rent is charged. A piece of land for which it is worth a tenant's while to pay an appreciable rent, will not be the marginal land, because there will be land just slightly inferior to it which it will also pay to cultivate if a somewhat lower rent is charged. And so we can pass to poorer and poorer qualities of land, with an ever diminishing rent, until at the margin of cultivation the derived utility of the land is negligible and the rent vanishes.
This certainly is a somewhat abstract conception; but it is by no means so remote from reality as may at first sight appear. The reader may protest that in the course of an extensive and varied acquaintance with landowners, he has not yet run across this peculiar marginal type, who lets his land for no rent at all. But there, if his experience is really extensive, I think he is mistaken. It so happens that the ordinary agricultural landowner leases out his land, not by itself, but together with a variety of other things such as farm buildings, which it costs him a considerable sum of money to provide. He will not as a rule be willing to go to this expense, unless he sees his way to obtain for the farm an annual payment, which represents at least a fair return on this capital outlay, as big a return as he could have got, for instance, by investing the same amount of money in some gilt-edged security. This annual payment will, it is true, be called rent; but the significance of this is that what we term rent in ordinary life is usually a complex thing, made up of two essentially distinct elements, viz. the normal return on the capital goods supplied together with the land, and what we may call the "net rent," or the "pure rent" attributable to the land itself. Now will any reader make so bold as to say that there is no land under cultivation, in respect of which this net rent is either nil or negligible? The landowners will not agree with him. It is not a question, it should be observed, as to whether the rent obtained represents more than a fair return on the purchase price paid for the land; that is quite another matter. The question is whether the rent obtained exceeds a fair return on the capital sum spent on the buildings, etc.; with which every farm must be equipped to let at all. In fact there are not a few farms where there is no such excess, and where accordingly there is no "net rent" or "pure rent" which can be attributed to the land.
The question whether it would be profitable to cultivate any piece of land, turns upon whether the receipts which would be obtained by selling the produce would exceed the costs of cultivation: and under these costs of cultivation we must include, of course, the remuneration of the farmer's services. Farmers, like other people, have to live; and they would not take on the troublesome job of farming, unless there seemed a prospect of making a living out of it. The remuneration of the farmer takes, of course, the form not of a salary, but of profits: and these profits vary very much from year to year, and from place to place, and from man to man. But they are essentially payment for work done, and an ordinary profit must be regarded therefore as part of the necessary costs of farming. Thus it will not be worth while to cultivate a piece of land, and the land will in fact lie unused, upon which a careful farmer might obtain a profit in the ordinary sense, of no more than $50 or $100 a year. The marginal land will be land which yields a decent profit to a decent farmer, as well as a gross rent to the landowner, sufficient to compensate him for his capital outlay, but nothing further.
What, then, will be the rent of a fertile and well-situated farm, about which there is no doubt that it is well worth cultivating? Part of the gross rent which the landowner receives must again be regarded as merely a return for the capital expended in equipping the farm for use; but in this case, there will be a residue left over, which constitutes the net rent of the land. The net rent will measure the derived utility of the land to its occupier, and will in general represent (very roughly, of course, in practice) the differential advantage of cultivating the land in question rather than land on the "margin of cultivation." This differential advantage may take either, or both, of the forms, of a larger produce per acre, or a lower cost of production and marketing. But, in any case, the extra profit, which, if no rent were charged, a decent farmer could obtain by cultivating the farm in question, rather than a marginal farm, will be roughly equal to the net rent which his landlord can exact from him, if his landlord so chooses. The landlord may, of course, not choose to exact a rent as high as this; and as a matter of fact, in a country like Great Britain landlords often content themselves with less. The traditions associated with the ownership of agricultural land, and with the relations between landlord and tenant serve to soften the edge of economic law, and to subject the rents which are actually fixed to the control in no small measure of the general sense of what is fair or customary. In such cases the landlord makes the farmer a present, for the time being, of part of the economic rent. On the other hand, as Irish agrarian history well illustrates, the landlord may sometimes expropriate under the name of rent, permanent improvements which are due to the labors or the expenditure of the tenant. This is, of course, particularly likely to happen, whenever it is the custom to leave to the tenant the obligation of providing the capital equipment of the farm, which in Great Britain is, for the most part, the recognized duty of the owner. Again, in the case of urban land in the South of England, expropriations of this kind are an essential and well-understood feature of the leasehold system. The owner grants a lease for a long period of time, usually ninety-nine years, for a ground rent, which is notoriously below the true economic rent of the land, subject to the condition that the leaseholder must erect upon the land and keep in good repair certain buildings, which on expiry of the lease will become the property of the ground owner. Here the nominal ground rent is only part of the total rent which is really paid; the ultimate transference of the buildings representing often the more important part. There is, in fact, a great variety of systems of land tenure, some of which are highly complex, the respective merits of which vary greatly, and which constitute a most important problem for statesmen and legislators. Considerations of this kind in no way diminish the importance of the general analysis of rent, which we are pursuing in the present chapter. Rather they make it the more important, because we cannot properly weigh the merits of any system of land tenure, until we have grasped clearly the principles governing the rent of land in the purest form. But certainly we must never forget that the rent we are discussing may differ very greatly from, though it will vitally influence, the money payments which are called rent in actual life. It is the pure economic rent, the rent which represents the full annual payment which it would be worth paying to obtain the use of the land alone, which will measure, as we have said, the differential advantage of the land in question over land on the margin of cultivation.
A clear grasp of this relation helps us to perceive that an increase in the prosperity of the community may sometimes influence rents in an unexpected way. It all depends on the causes which have given rise to the increased prosperity. An advance, for instance, in agricultural science will facilitate a more abundant supply of foodstuffs; but it will not necessarily increase the aggregate rents of agricultural land. For if it takes the form, say, of the discovery of some new artificial manure, it will very likely facilitate production on the less fertile soils far more than it will on the more fertile soils where artificial manures are not so necessary. It will thus tend to diminish the differential advantages of working on the more fertile farms, and their rents will accordingly fall, possibly by much more in the aggregate than any increase in the rents of the farms near the margin of cultivation. The point may, perhaps, be better understood if we pass from agricultural to urban land, and ask what would be the effect on site values of a great improvement in the facilities of internal transport. Push the case to an extreme, and suppose passenger transport to become so cheap and so quick that there ceases to be any advantage in living in a town so as to be near your place of work. Urban landlords would no longer be able to obtain the high rents they now receive for the sites of houses in or near a town. For most people would prefer to move out into the country where sites can be obtained at little more than an agricultural rent. The country covers so large an area relatively to the towns that the supply of rural sites would be still very plentiful as compared with the demand. Their rents would not, therefore, rise by very much, although the rents of the housing sites in towns would fall heavily. Of course, there are other factors to be taken into account before we could pronounce upon the effect on aggregate rents. Central sites for shops might, for instance, fetch a higher rental than before. The purpose of this discussion is not to generalize but to show the danger of generalizing about rents in the aggregate, or land as a whole.
§4. The Margin of Transference. The last illustration may serve, however, to remind us of an obvious fact which we must now take into account. The same piece of land may be used for a variety of purposes. It may have been used for growing corn, and later it may be devoted to the building of houses, or, as at Slough, to a repair depot for motor vehicles. It need hardly be said that the land will, as a general rule, be put to the use in which its value is greatest; or to speak more strictly, in which the biggest rent, or the biggest selling price can be obtained. But the notion of the differential advantages which a piece of land possesses over the marginal land becomes decidedly more complicated when we take account of this variety of uses. Let us turn our attention, for instance, to the sites used for shop and office purposes, and consider what we can regard as the marginal site in this connection. Clearly it will not be the marginal land of which we spoke above, which it only just paid to cultivate, and which yielded no rent at all. For this will probably be agricultural land in an out-of-the-way district, where no one would dream of setting up an office or a shop. Any site upon which a sane man would contemplate setting up a shop will certainly possess value for other purposes, such as house-building. Hence the marginal site for shopkeeping purposes will not be like our marginal farm, a site which yields no rent.
As regards many pieces of land, there is no doubt as to the purposes for which they can most profitably be used. This piece will command a much higher rent as a shop site than in any other capacity; for that piece house-building is the obvious employment; for another, agriculture. But in quite a number of instances there is considerable uncertainty. It is not clear whether upon this site it will be better to erect a house or a shop, or if the latter, what kind of a shop. It is not clear whether it will pay to use that farm land for a building scheme; and, within the domain of agriculture, which of course comprises an immense variety of really different *ferent industries, it is often a very moot point indeed whether a certain field should be left under grass, or brought under the plow. Cases of this sort are not phantoms of the imagination; they emerge on every side as concrete problems with which some one or other is dealing every day, and it is these cases which constitute the marginal land for the purposes of a particular occupation. The marginal sites for shops are the sites for which it is only just worth while to pay rents sufficient to entice them away from houses. And the rent for a site in Bond Street, or elsewhere, which is so much more suitable for shop purposes that no alternative use would be worth considering, will exceed the rent paid for one of these marginal sites by, roughly speaking, the extra advantage it possesses for shop purposes. Or will fall short of it, it may be well to add, to the extent of its comparative disadvantage. For there may be many such marginal sites, some of which will fetch low rents, and others very high rents indeed; the same site being often of great potential utility for a large variety of occupations. Between any two occupations there will thus usually be a margin of transference, which we must conceive not as a point, but as an irregular line, upon or near to which there will be many pieces of land, differing greatly in the rents which they fetch. These variations of rent will correspond to the differences between the advantages or derived utilities which the sites possess for both the occupations in question. The position of such margins of transference will of course alter as industrial conditions change, and, when they alter, the rents of sites which are not near any margin of transference will be affected also. Thus an increased demand for the products of any particular industry will make it profitable for that industry to offer higher rents, and thus draw land away from other occupations. This will have the effect of raising, though possibly to a very slight extent, the rents of sites which still remain in other uses; for there will be fewer of them available; and their derived utilities will consequently be increased.
But here, as everywhere, it is upon the margin that our attention should be focussed, because it is round about the margin (wherever it is found) that the changes are taking place which really matter for society. When Mr. Mallaby-Deeley buys an estate in Covent Garden from the Duke of Bedford, the transaction hardly deserves the degree of public interest it excites. Nothing has happened which is of material consequence to anyone except the two gentlemen concerned; the various sites are still used for the various purposes for which they were used before; nothing has occurred that really matters. But when houses are pulled down for the erection of a cinema, or when a field is diverted from tillage to pasture, something has happened which affects for good or ill the interests of the whole community. Conversion from tillage to pasture represents, indeed, a tendency which has been very marked in Great Britain during the last generation, and has aroused misgivings in many public-spirited observers. Possibly for a variety of reasons, these misgivings may be justified; certainly the problem is well worthy of attention. But when in this way the issue is raised of tillage versus pasture, it is essential, if we are to discuss it rationally, that we should envisage it clearly as applying only to a limited portion of agricultural land, to the portion which lies somewhere near the margin of transference, as things are now, between the two forms of agriculture. It might be socially desirable to bring under the plow a field which the farmer finds it only slightly more profitable to lease under grass; but this would be highly improbable in the case of a field where the balance of argument to the farmer in favor of pasture is overwhelming. The position of the margin of transference between different uses may, in other words, be somewhat out of place from the social point of view, and it may be desirable by appeals and propaganda, even conceivably by the devices of State subsidy and compulsion, to push it forwards or backwards in greater or less degree. But it will be necessarily a matter of degree, and nothing could be more foolish than to speak as though there was, or could be, some ideal method of cultivation equally applicable to all lands, without regard to their climatic and other conditions. Needless to say, none of the agricultural experts who sometimes deplore the decline of arable farming are guilty of such foolishness. But the sense of the diversity of nature which is very vivid to them may sometimes be lacking in people who live in towns, and a firm grasp of the marginal notion may serve best to keep the latter from forgetting it.