The thread that runs right through this paper requires readers to understand what we mean when we talk about rent. No doubt many people, if they think about “rent”, think of, predominantly, what people without a home of their own pay to live in someone else’s spare property, or, more broadly, a fee one pays to hire someone else’s capital goods. And, while this is probably the most common understanding of “rent”, it doesn’t really reflect what economists think of as “rent”.
Since at least the school of economics known as the Physiocrats, the immediate 18th century predecessors of luminaries such as Adam Smith and the “classical” school, rent in economics has been understood as any payment for a factor of production in excess of what would be required to bring that factor into production.
We’ll look further at factors of production shortly, but to apply this most simply to the current subject, this planet, indeed the entire universe so far as we know, and all the natural resources in and on it, simply exist. Nobody produced them and they have no cost of production. Nobody invested capital and labour into producing them. Payment to use something with no cost of production is therefore nearly all this “economic rent”.
As an aside, “economic rent” applies to many other fields, such as where artificial scarcity limits the competition in an occupation, like most licensed professions or intellectual property and competition rules on who can develop and profit from an idea or skill as well as unique artefacts such as works of art. The remedy for the resulting “superprofits” however is usually to do with opening up competition and increasing supply: something which, we will soon see, is either impossible or very difficult with land and natural resources.
This is why I refer to rent as “rapacious”, literally, “inordinately given to grasping or taking”. All production, and all life to maintain production, requires some of the space and resources of this one, finite, rock hurtling through space that has existed since billions of years before anyone came along to claim exclusive ownership of any part of it. Indeed, it created us; we didn’t create it. While we can increase the supply of doctors or lawyers, or change intellectual property law to reduce the economic rent their scarcity creates, by and large we cannot increase the supply of land and natural resources on which we all depend.
When humans first enclosed pieces of land in order to cultivate sufficient for survival, while there was plenty for everyone else to do the same, it would not command any rent: anyone who wanted some could take another piece without too much inconvenience. But once one group of people, Norman monarchs, perhaps, or Spanish Conquistadors, or British Colonials, claims ownership of more than they can use, and in doing so prevent by force others from having sufficient to survive on, then they can charge a rent for what they deign to let others work on.
Similarly, when society becomes more sophisticated through the division of labour, and the opportunities for economic gain become concentrated in particular locations, such as factories or offices in towns and cities, the locations from which it is possible to reach those opportunities also become scarce and start to generate rent. Not even Eric Idle could actually “get up in the morning at ten o’clock at night, half an hour before I went to bed…[and]…work twenty-nine hours a day down t’mill”!
But it gets worse: the rent a location can generate is not just the result of negotiation between a producer and a buyer, as might be the price of most other commodities, and which might produce a fair market price. Because locations and natural resources are relatively scarce compared with the people who need to use them to access economic opportunities or in production the owners of those locations can bid up the price as monopolists and the would be tenants become price-takers.
In fact, as David Ricardo showed in the early 19th century, and Tim Harford described in “The Undercover Economist” land rent can absorb all of the returns to production over and above what it costs the buyer or tenant to barely survive in the least advantageous locations.
Before we move on to look more into what constitutes “land and natural resources” in this discussion, we should note a final, and crucial aspect of rent. I can almost hear some of you saying “but I own my home, so I don’t pay rent”. In fact, once all of a territory is claimed as private property, everyone pays rent at some point. When you buy your house you are in fact, even if you don’t think about it this way, trying to second guess the future flows of rent that you will save by going to a bank, borrowing a whole load of money at interest and paying the vendor what they will accept to forego that future flow of rent. The value of the building on your chosen location will inevitably depreciate: you have to spend money constantly maintaining it if you want that bit to retain its value. The future rent you are paying, and are hoping will grow to justify you paying all that interest to the bank, is on the land, so that when you come to sell, you can ask the next buyer for more future rent to make you give up your right to claim it.
Later in this paper, we will look into the “Culture of Cheating” around land ownership, but as a taster here, I will say that since once, over centuries, all land in this country was taken by mainforce from those who had rights to work it to produce a living, you who buy your home have been engaged in a long running scheme of handling long ago stolen goods. Most of you barely benefit: your next house generally costs proportionately more, and you just go and borrow, and pay back, more to the bank. The only real gainers are those with more than they need who let their spare capacity out, and the children of those who die leaving them a significant inheritance. We are, mostly, tenants and buyers alike, in a similar boat, long term.