.jpeg)
Ricardo's Theory of Rent
The theory of rent propounded by classical economist David Ricardo in 1817 is named the Ricardian Theory of Rent after him. This theory is also known as the classical theory of rent. Ricardo stated that rent is obtained only from land.
According to D. Ricardo, "Rent is that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil."
Thus, rent is the payment made by a tenant to a landowner for the use of land, and it is obtained only from land.
Ricardo's theory of rent is based on the following assumptions:
(a) Rent is obtained only from land.(b) Land is a free gift of nature.
(c) The supply of land is fixed.
(d) Land is original and indestructible.
(e) Land has no alternative use, i.e., land is used only for cultivation.
(f) Cultivation on land is done in decreasing order of fertility.
(g) The law of diminishing returns applies to agriculture.
Ricardo explained the theory of rent through extensive cultivation and intensive cultivation methods. Here, only the extensive cultivation method is discussed.
Under the extensive cultivation method, cultivation is done on different pieces of land of the same size and area but with different fertility, using the same amount of capital and labor. Initially, production is increased by expanding cultivation to the most fertile land first, and then gradually to less fertile land.
To explain rent determination under extensive cultivation, Ricardo imagined four types of land pieces of the same size and area but with different fertility. He divided these land pieces into four categories, from the most fertile to the least fertile, as first, second, third, and fourth categories. People first cultivate the most fertile first category land piece.
Rent is not obtained from this land piece as long as the production from the first category land piece meets the food demand of the existing population. If the population increases and the production from the first category land piece cannot meet the food demand, people start cultivating the second category land. If the demand exceeds the production from the second category land, people start cultivating the third category land.
Similarly, if the demand exceeds the production from the third category land, people cultivate the fourth category land. Here, the fourth category land is the least fertile land. Therefore, the fourth category land is called the least productive land or marginal land or rent-free land. The production and production cost of such land are equal.
Land that yields more production than marginal land is called super-marginal land. Here, production is done using the same amount of capital and labor units on all four categories of land.
Under extensive cultivation, rent is the difference between the production or production value of super-marginal land and marginal land. In other words, rent is the surplus remaining after subtracting the production of marginal land from the production of super-marginal land.
Thus, rent is obtained from all categories of land that yield more production than marginal land. Rent can be measured in monetary units in addition to physical units.
The determination of rent according to Ricardo's theory of rent is explained with the help of hypothetical Table 3.2.
Table 3.2: Ricardo's Theory of Rent
| Land Type/Category | Production of Different Land Categories (Wheat in kg) | Production Cost or Marginal Land Production (Wheat in kg) | Rent (Wheat in kg) |
|---|---|---|---|
| First | 20 | 5 | 15 |
| Second | 15 | 5 | 10 |
| Third | 10 | 5 | 5 |
| Fourth | 5 | 5 | 0 |
Here, wheat is produced using the same amount of capital and labor on the first, second, third, and fourth categories of land, respectively. Rent and production cost are measured in physical units (wheat in kg). When wheat is produced using the same amount of capital and labor on the first, second, third, and fourth categories of land, respectively, 15 kg of wheat is obtained as rent from the first category land, 10 kg from the second category land, and 5 kg from the third category land.
However, no rent is obtained from the fourth category land because the fourth category land is marginal land or rent-free land. The production (5 kg of wheat) and its cost (5 kg of wheat) obtained from this fourth category land are equal. Here, 5 kg of wheat is considered as production cost because it is paid as interest and wages, respectively, for the capital and labor used in production.
Ricardo's theory of rent is also explained with the help of Figure 3.2.
Figure 3.2: Ricardian Theory of Rent under extensive cultivation
According to the figure, 15 kg, 10 kg, and 5 kg of wheat are obtained as rent from the first, second, and third categories of land, respectively. Here, the production of wheat from the fourth category land only covers its production cost. No rent is obtained from this land. Therefore, the fourth category land is called marginal land or rent-free land.
Thus, under extensive cultivation, rent is the difference between the production of super-marginal land and marginal land.
Criticisms of Ricardo's Theory of Rent
The criticisms of Ricardo's theory of rent are as follows:
-
Ricardo's theory of rent is based on the assumption that land, which is provided free of charge by nature, has original and indestructible power (fertility). However, critics argue that the fertility of land is not original but man-made. For example, barren land can be made fertile by plowing, using fertilizers, and irrigating.
-
Ricardo's theory of rent imagines rent-free or marginal land. However, critics argue that in real life, there is no land that does not yield rent because the demand for land is higher than its supply.
-
Ricardo's theory of rent assumes that there is perfect competition in the market, but the market found in real life is imperfect competition.
-
Ricardo's theory of rent is based on the assumption that the law of diminishing returns applies to agricultural production. However, critics argue that the law of increasing returns can be made possible in agricultural production by using improved technology, irrigation facilities, and modern fertilizers and seeds.
-
Ricardo used land only for crop cultivation in his theory. However, critics argue that land has various alternative uses in real life.
-
Ricardo assumed that rent is obtained only from land. However, modern economists have stated that rent is obtained from all factors of production and that rent is the surplus income remaining after subtracting transfer income from the current income of a factor.
The Economic Frontline is a dynamic, authoritative platform featuring real-time financial updates, expert economic analysis, and in-depth market insights in a sleek, user-friendly structure.
