Post Modern Economic Theory of Rent

Theories of Rent

As per the theory of David Ricardo land that is infertile will never produce rent and therefore has to remain fertile to the owner of the property. According to him the land that doesn’t yield any rent is not worth cultivating. However, Ricardo, the great classical economist remained true to land only as the only scarce factor of production that if infertile produces no rent to its owner.

The modern economists however rejected this theory on the grounds that rent is not the only factor of production any other factor of production that is scarce produces rent. The modern theory also states that rent is the surplus over the transfer earning of whichever factor of production. For them rent arises not out of fertility of land, but due to the scarcity of land as land is fixed and cannot be increased on this planet. This means that greater the demand for land the greater will be its rent and vice versa. This again means that the supply of land is inelastic.

Further, the modern theory of rent also explains that the land is subject to the law of diminishing returns and this inevitably follows that if the land subsequently starts yielding less produce or becomes less fertile then it yields less rent and hence the demand for land goes down.

The quasi theory of rent introduced by Alfred Marshall states that there are other factors to be considered while ascertaining rent. He says that any income that is derived from machines or other tools of production yields rent to the owner even though this may be short run and not in the long run. This means that whenever there is rise in demand for machines then they produce something similar to rent. Again, the supply of machine (due to the time taken for making them) is limited in the short run the demand for the same is inelastic while in the long run they may remain quite elastic. This is again because a machine manufactured for one use cannot be utilized for another purpose. Therefore, the machine produces quasi rent in the short run to the owner.

The above theories have been introduced with the intention of defining what land is and what other factors of production are. Again, the theory states which factors of production yields rent and which does not and how they earn a return for their owners. The same has been said about labor too in the modern theory where a labor earning a fixed amount z will have to be paid the same elsewhere equal to the opportunity cost or transfer earnings. The amount the labor earns above the amount z is his rent.

Post Modern Economic Theory of Rent

The above theories might have served their purpose quite well in the past, but the society is passing into a more dynamic area of activities where there is need to get an overall picture as clear as possible as far as the factors of productions are concerned and whether there is need for ascertaining the same in lieu of the interaction between three utmost important factors of production namely ‘LAND’, ‘LABOR’ AND ‘CAPITAL’. Since, the dawn of civilization these are three most important factors that were considered to be within the term ‘economic activities’. It is also implied that when one of these three is missing whether directly or indirectly then there is no proper economic activity. This also means that if one of them is set aside then there is no proper economic activity, but a connivance of the bureaucracy to form a rot within the society. Of course one might argue that selling or purchasing food items, stationery, machines and financial businesses between individual persons and other activities do not employ labor as such and yet are done without any hindrance to the society. It is however not so as each of these activities and other like minded activities are engaged in economic activity after having gone through the process of land, labor and capital to produce the ultimate product for which there is trade and are not scarce commodities in the long run.

However, when a scarce commodity is economically transacted without its having undergone any interaction with other factors of production, and thus it remains so in that form for a length of time, then that factor is said to be hoarded or in the process of being hoarded. In other words, any factor of production that is not brought into circulation through continued economic interaction is said to be not good factor from the society’s point of view.  Economic interaction would obviously mean interaction with land, labor and capital.

This theory is important from the society’s side that there is continuous economic activity going on between the scarce factors of production and other generally available factors of production. This in turn would result in better yields, more crops, more industries and more employment.

Scarce factors are rare and not easily available due to it being limited in supply. Land is one such important factor and hence must be judicially involved in the betterment of the society through increasing production of crops and industrial goods for employing people living within the society.

Thus, this theory defines land as a scarce product limited in supply and is very fertile at all places, times and seasons. Further, all land wherever these may be situated yields rent in one form or other. This theory also states that rent is in the form of tangible or intangible benefits or both and each owner always enjoys a surplus over the transfer earnings. Again the same is true for all other scarce product whose demand remains very high due to the very shortage of such factors in the society.

Before detailing with the above we must first look into the state of art of technology around the world that makes it possible to turn even impossible things into a possibility. This may not have been the case a few decades earlier, but there is revolutions going in research and technologies world wide that makes almost anything possible. Therefore, this gives us reason enough that all land which are scarce can be made fertile with the state of art of technology available with us. Again, any piece of land found in the inaccessible area of earth can be brought into cultivation through the help of technology or can yield rent due to the reason of economic fertility factor alone. Here, fertility again is not used in crop fertility alone, but a much broader term and meaning ‘economic fertility’.

So what is the term ‘Economic Fertility?’ Economic fertility with respect to land means all lands are fertile to the crops and plantations, fertile to the industries, fertile to mining, fertile to forests and parks, fertile to sports and adventure, fertile to residents and fertile to the labor employed on it. This again implies emphatically that there is no waste land on this planet and all have potential to yield a return and hence ‘rent’. Here the word industries would encompass all activities of manufacturing, technology, IT, holiday resorts, tourism industry, construction, power and any other activity that yields return to the owners. However, passing a power transmission line overhead and such things are not economic activities except at the source where they originate. Although technology cannot increase the quantity of land available it can easily render a land as economically fertile in one or more above cases. The only exception that may perhaps be counted are the pathways interconnecting one land with the other and no more and that too based on a standard length and breadth called pathway in a country.

       Now here there is clear emphasis on land where labor is employed and this is also for residential land occupied for the owner, his or her tenant or their relations. The land under such occupation with a permanent shelter as per the act of the government of the respective country should be called residentially fertile land as the same employs the owner and his family, tenant and his family or the relations. When the land is under such stated occupation it is inevitable that the land is under cultivation as part of it will be under some crop or other while the other part shelters the owner as labor along with his or her family to look after the yield . Even in residential tall apartments it is implied that the residents in unison have already contributed to the fertility through collective taxes and surcharges to the government and have the potential of cultivating terrace crops in their balconies and spaces. However, residential land should not cross a bare minimum threshold of say four times the size of residence (average size as per the country’s law), and the remaining extended land should be treated at par with that of the other four basic fertile group of land and must be declared as fertile and eligible for any below said economic and social activity.

Basic fertile groups of land

The four basic fertile types of land are fertile crop and plantation land, industrial land, industrially idle land and forest land including small parks to be used for public.  The definition of land if brought into these fold makes it easier for the government to tax and enact rules and regulations for the scarce factor of production of earth. Further, this would enable a lot more idle land or in our definition idle industrial land to be brought to the fold of either industries or agriculture so as to provide food security to the people and pave way for gainful employment to people. It is imperative that all crop and plantation lands are intensively and extensively cultivated and not just a few grasses are grown here and there. Without any restrictions whatsoever all other land if lying idle with shrubs and bushes and other parasitic plants ought to be provided in the group of forest and park lands for environmental and social reasons.

Lands that are declared forest and park lands even if detached from any main forest or parks and are still in the midst of the town and cities should be introduced as such with a bare minimum of ten cents in Indian conditions. Isolated pieces of land if found to remain idle for as long as even six months without proper interaction of labor, capital and land as the main factors of production should be declared as industrially idle land.

The implication of this theory would enable labor to be employed fruitfully and generate crops or plantation that would otherwise strain to make land as fallow land to be later stored and hoarded for value alone.

Those owners who wish to keep land as it is are allowed to do so and must be seen to be receiving rent from them in the form of a very important tangible asset known as ‘status’ ‘prestige’ and the appreciable value of the land they hold. Here, rent is an appreciable difference of a scarce asset over its previous value and is independent of any surplus earnings and transfer earnings.

Industrially idle land

All industrially idle land if segregated can be brought under the preview of the government to charge special yields for the substantial rent earned by the owner on his property by the virtue of remaining idle. Status and prestige with ego cannot be had with scarce commodities or assets as economic returns and social returns are a must for the society to function justifiably. Therefore, all industrially idle land should be taxed by the government as they would likely to have been active as an industrially fertile land on a bare minimum basis. The bare minimum basis is the criteria that all industrially idle land should be levied with an average of work by one labor on current standard wages on every five cent land for a period of one year. This means that the wage of the worker working under average wage rate of the area or the region on a daily basis multiplied by the number of days in the year. This will be the tax that the government should demand for the rent earned by the owner. The larger the land so also the rates and they ought to be calculated as one worker working full time on each of the five cent of land. This means that for 100 cents of land the labor employed for the purpose of calculation ought to be 20 workers.

It is immaterial whether the land under crop would yield less or more when compared to industries, as the basic assumption is that the land ought to be properly utilized and not allowed to strain to non-productive purposes and must be able to satisfy the society’s basic needs for food, employment and environment protection.

The above factor if brought into consideration inevitably follows that land even on top of Mt Everest, The Alps or the Sahara Desert would provide rent to owners if they purchase part of it as they would get rent in the form of status and entertainment value. Therefore in principle all land otherwise should be under the protection of forest reserve and parks so that the rent derived in the form of oxygen and providing ecological balance is for the vital benefit of the whole society.

Implication of the theory

The following are the direct implication of the theory:

§  Land, Labor and Capital are not independent of each other in any way and their interaction is a must for the society at large

§  Land is a scarce asset and therefore there will be no remote control of the same without justifiable yield or produce under any one of the four basic groups of land namely (1) crop and plantation land, (2) industrial land, (3) industrially idle land and (4) forest reserves and park lands.

§  Categorization into the above four types would lead to better governance and transfer of land as well as better taxation procedure.

§  All industrially idle land although fertile economically have been deliberately turned to idle land by the owner for his or hers whims and fancies

§  The present strain on land that entails it to be easily declared fallow or waste land will be avoided and there will more strain on the reversal manner as all idle lands will be straining to yield and become economically fertile with the implementation of latest technologies.

§  It is assumed that land which has become industrially idle land will attain ‘hoard level’ as it will never try to yield crops, industries or employment.

§  Land lying industrially idle with rotting factory sheds should also be considered industrially idle land for the purpose of taxes as the same gives rent to the owners in the form of status

§  Any hoarded land is a bane to the society if does not yield any return in the form of taxes

§  The above categorization can bring several industrially idle land into crop fertility and thereby reduce the food inflation

§  Again the above categorization would yield revenue for the government in the form of investment and employment and thereby reduce the country’s fiscal deficit

Hoardings of Land and other scarce commodities

Just like land all other factors that are scarce in supply in relation to their demand on earth can be hoarded for future appreciable value. Any commodity like gold, silver, diamonds or other precious minerals and metals can be stored and hoarded by people for their value increase in the future. Here, economics is primarily interested in the value of these commodities in the larger context of the society than in their individual value worth. A scarce commodity for an individual having a lot of emotional appeal and attachment can be hoarded and stored, but the same if not generally a product that are scarce in relation to its physical supply then the commodity is of no importance to economics.

It is seen that although scarce commodities by their very virtue of being a scarcely available factor do improve the living conditions of people when they are brought out in circulation at a future date. Yet the same scarce commodity if allowed to be retained for a considerable long time or passed from generation to generation in a society may yield no tangible gain for the people apart from its appreciable value for a handful of a few people who have had the good luck to hoard them quite early at a low price. The dilemma that arises with the hoarded commodities that are scarce in relation to their demand is that the same commodity may be the main cause of poverty amidst plenty in some countries.

Take the case of a typical Indian situation here. A couple who had half starved themselves by slowly and steadily purchasing gold as and when their wages could afford have accumulated ten sovereigns of this metal in the form of jewelry. Their malnourished school going children can just about make out that the metal is of yellow color and not green or blue. When the situation becomes difficult and unbearable the couple neither let go the gold nor try to think out practical ways of making the best of it by either pledging or undertake any other work. This may be a rare instance, but the example shown here justifies that the gold held simply in hand neither produces anything tangible or allows proper thinking for taking other productive risks. The same is the case with gold and other precious materials kept inside the lockers of banks, places of worship or any other. In this example the couples need not sell the gold, but can make use of its smaller portion or dust to keep them going.

Scarce materials locked indefinitely for a period of time can usher in poverty in the midst of plenty in countries which thinks it as a part of its culture. However, the government can take steps in bringing the same into circulation.

Scarce commodities are scarce due to their inelastic supply and these occurs both due to hoarding tendency among the people as well as the bureaucratic connivance in facilitating the process of hoarding. Banks and other financial institutions are part of this process.

Hoarding as such over a period of time gives very little benefits to the society and the same is not an economic activity as there is no periodical interaction with all the three main factors of production LAND, LABOR and CAPITAL.

Doesn’t the Central Bank of country hoards gold as reserve? Here, the Central Bank of a country doesn’t hoard gold, but the same is a participant in keeping the currency’s current value stable for any possible disaster on value in the future due to inflation, fiscal deficit and current account deficit.

What about the gold hidden in bank lockers by individuals? Such gold in lockers are hoarded or otherwise they must have been made a participant in keeping the currency balance as stable. It can be done if the bank which has these lockers pledges them to the Central Bank or to other foreign banks to stabilize its currency. If not, then in difficult financial crisis or looming large fiscal deficit the value of the currency will take a beating. However, this trend can be arrested and the currency value appreciated if there is growth in GDP. This means that the value of a country’s currency is directly proportional to the growth in the economy and is inversely proportional to the value of the total hoardings.

This would mean that when the hoarded wealth of the country goes up then its currency value goes down as the wealth is never interacting with any of three factors of production namely Land, Labor and Capital for a period of time. It can be explained thus:

                               C = k/H

Where C is the value of currency and H is the Hoarded wealth of the country. ‘k’ is the constant rate of interaction at which C & H are inversely proportionate. This means that the value of C goes down when the H the hoarded wealth goes up and vice versa. In order to thwart the heavy down slide of currency in relation to the hoarded wealth, the banks can pledge their vault and lockers of gold for a definite period with the Central Bank. During such time no locker would be allowed to be opened by individuals or groups during that specified period of time. The Central Bank then either gives collateral security of the same or its own reserve gold to the other nation with whom the country has bilateral trade or multilateral trade.

This is not necessary if the economy grows strongly and the hoarded wealth is insignificant factor in the value of the currency. However, there is no reason to believe that there is no pressure on the currency as hoarded wealth lying with individuals or the country always and continuously exerts a pressure for devaluation while the growth trajectory lifts the currency from falling further.

A country can for better international trade cut the value of its currency so as to increase its exports. It must be remembered that in international trade when one country lowers the value of its currency then it also affect the other country or countries that trades with it. In order to justify this, the country X that lowers its currency value contracts its own economy (size of its budget is contracted). The earlier budget is scrapped and a new budget is adopted to give reason for the currency cut and also a percentage of its hoarded wealth in the form of gold, land and other scarce commodities are made accessible to the aggrieved country Y on whom there is direct implication due to trade advantage by X.  The percentage of accessible wealth will be proportionate to the value of the cut proposed by the first country in relation to X country’s hoarded wealth. This will bring in equilibrium in the bilateral or multilateral trade between the countries. If not then it results in anomalies of trade.