THE RICARDIAN THEORY OF RENT

Distinguish between Economic rent and Contract rent. Discuss the Ricardian theory of rent.

Land is one of the most important factors of production. The share of land is called rent. In ordinary language
rent means the amount of money that an individual contracts to pay to the landlord for the use of land or
building. This is contract rent. It includes payments for the use of capital invested by the landlord. Economic
rent is defined as that part of the total payment which is made for the use of land only as distinguished from
the payment for the capital invested there. If a tenant is paying monthly Rs 500/- to the landlord, it is contract
rent. If out of the total money Rs 100/- represents interest on capital invested in the form of tube well, the
remaining Rs 400/- being only for the use of land is economic rent.

David Ricardo, an English economist, defined rent as “that portion of the produce of the earth which is paid
to the landlord for the original and indestructible powers of the soil”. According to him, rent arises because
the supply of land is limited as it is a gift of nature and there are different grades of land with different
fertility.

Suppose in a particular locality there are different plots of land with different fertility. Initially the more
fertile plots are cultivated to satisfy the demand of the people. But gradually, when population increases the
demand for food increases and the inferior lands are being brought into cultivation. By applying the same
amount of labour & capital the farmers in the inferior lands will be able to produce less volume of crops than
what they would produce from the more fertile plot of land. But expenses of cultivation remain the same.
Suppose the expenses of corn cultivation is Rs.100/- in each plot of land while the amount of production
from the more fertile plot is 100 kgs and 80 kgs from the less fertile land. The price of corn per kg will be Rs
1/- per kg in the more fertile land to cover the cost of production but in the less fertile plot it has to be at least
Rs 1.25/- per kg. Otherwise the less fertile plot will not be cultivated. Then the farmers in the less fertile plots
will just cover their costs of production while the farmers in the more fertile plots will earn Rs 125/-. So they
will receive Rs 25/- excess over the cost of production. This according to Ricardo will be charged as rent.
Thus, according to Ricardo, rent is a surplus over the cost of production. So when the lands are of different
fertility superior lands are rent earning lands and the inferior lands which are in the margin of extensive
cultivation are not giving any rent. So it is said that marginal lands are no rent lands. Thus in Ricardian
theory rent is also known as a differential surplus.

The Ricardian theory also says that rent may arise due to limitation in the supply of land. If the land supply is
limited there may be scarcity of land after all the lands are being brought into cultivation and scarcity rent
may arise.

Suppose in a particular locality all the lands are equally fertile. When the population increases more and
more lands are being brought into cultivation. When all the lands will be taken into cultivation, then if
population increases, demand for food grains say corn will increase. As supply is no more the price of corn
will increase. As a result, the farmers will get some revenue excess over the cost of production which will be
charged as rent. This is known as scarcity rent.

Ricardo discussed about another source of rent. To him, rent may arise due to difference in situation. Some
plots may be situated in the centre of the town and some plots away from the town. The better suited plots
which have to bear less transport charges will enjoy a surplus over the distant ones. This will be another
source of rent. Ricardo calls it situation rent.
P

R 100KGS

O 80KGS

D 50KGS

25KGS

O A B C D

GRADES OF LAND

TABLE

GRADE PRODUCTION PRICE REVENUE COST SURPLUS/RENT

I 100 KGS 1.00 100.00 100.00 0
1.25 125.00 100.00 25.00
2.00 200.00 100.00 100.00
4.00 400.00 100.00 300.00
II 80KGS 1.25 100.00 100.00 0
2.00 160.00 100.00 60.00
4.00 320.00 100.00 220.00
III 50KGS 2.00 100.00 100.00 0
4.00 200.00 100.00 100.00
IV 25KGS 4.00 100.00 100.00 0

In the diagram, we have shown four plots of land. CD is the marginal land and so a no rent land. But OA, AB
& BC are intra marginal land and produces surplus. They pay rent. They are rent earning land.

Ricardian theory of rent has been subjected to severe criticism on the following grounds.

1. To Ricardo, rent arises due to original powers of the soil. But sometimes workers improve the fertility
of land with the help of fertilizers, machines etc. Ricardo did not consider these improvements which
are possible by workers.
2. To Ricardo, powers of the soil are indestructible. But continued cultivation exhausts the fertility of
land.
3. Ricardo considered rent as a surplus over the cost of production. Cost of production determines price.
As rent will not enter into cost of production it will not help in determining price. But actually
modern economists showed that one part of rent enters into cost of production and determines rent.
 That part of rent is called transfer earning. To Ricardo, transfer earning is zero. If the land is not used
for cultivation it will be kept as idle land. But, to modern economists land can be utilsed for different
purposes and they have transfer earning. Transfer earning means alternative earning or earning in the
next best occupation.
4. Ricardo considered total supply of land as inelastic or fixed because he considered land and rent from
the point of view of the whole economy. But in modern theory land is considered from the point of
view of a particular industry or use and so supply of land is elastic.

Though there are some limitations, still Ricardian theory of land occupies an important place in the
theory of distribution.