Ricardian Theory of Rent, History of Economic Thought

            How does rent arise in Ricardian Economics

David  Ricardo  (1772-1823  )propounded his theory of rent on the basis of the idea of  Adam  Smith and  Malthus.  Ricardo finds rent as, “Rent is that portion of the produce of the earth which is paid to the landlord for the use of original and indestructible power of the soil.”

 The Ricardian theory of rent assumes the operation of two principles –the different principle and the marginal principle. The first principle explains the different nature of the land, while the second gives the measure of rent. In differential, principle rent arises either  Through extensive cultivation or Through intensive cultivation. In place of extensive cultivation with different quantities of labour and capital, more fertile lands will yield greater rents and less fertile lands will yield lesser rents. In case of intensive cultivation, due to the law of diminishing returns, the output differs when the equal quantity of capital and labour are used, successively on the same land.  Here rent arises due to the law of diminishing returns.

 

 Under the marginal principle, the rent is the surplus of revenue over the cost of production of the marginal producer. So long as the most fertile land is available, the question of rent will not arise. Rent arises when less fertile land starts cultivation.  Let us suppose the first-grade land produces 6 quintals grains and the 2nd grade of equal area produces 5 quintals. Thus the difference of 1 quintal will be the rent, the second-grade land being the marginal land. If the 3rd-grade land is brought under cultivation which yields 4 quantal only, then rent arises as follows:-

           On the first plot of land: 6-4 =2 quintal

           On the 2nd plot of land: 5-4=1  quintal

Ricardo illustrated further how rent would appear in case of intensive cultivation.

Dose of capital and labour	Marginal product  (corn  )under same grade land                                             A
1	80
2	70
3	60
4	50

 

 

 In the above table, the price of capital and labour is  Rs.50. Under intensive cultivation, on  A grade land, the 4th dose of capital and labour is the marginal or no rent land, because its cost is just equal to the return  ( Rs-50  ). 1st ,  2nd and 3rd doses on   A grade get rent worth  Rs  (80-50 )= Rs 30, Rs (70-50 )= Rs20,and  Rs  (60-50 )= Rs10 respectively. Thus, rent arises due to marginal land where for all intra-marginal lands rent appears.

 Limitations of the Ricardian  Theory of land:-

1.       Ricardo couldn’t understand the full meaning of the marginal principle that he used in his analyses.

 

2.         Critics argued that the powers of the soil are neither original nor indestructible. The fertility of the land can be improved by adopting better farming methods.

3.        The critics pointed out that rent is not due to fertility but to the scarcity of land. The fertile land will not yield rent so long as its supply is in excess of demand. 

 

      4.    Ricardian  Theory of rent has further been criticized is viewed of its assumption of free competition and employment.