from t h e m e a n i n g of r e n t in t h e e v e r y d a y u s a g e o f t h e t e r m r e n t , a n d w e m u s t first t r y t o u n d e r s t a n d h o w this r a t h e r specialised u s a g e of t h e t e r m rent grew u p .

T H E HISTORY OF T H E CONCEPT OF ECONOMIC RENT: In t h e early p a r t of

t h e n i n e t e e n t h c e n t u r y , w h e n E n g l i s h e c o n o m i c s w a s in its i n f a n c y , t h e r e was a c o n t r o v e r s y a b o u t t h e h i g h p r i c e o f c o r n ( t h e g e n e r i c t e r m for all grains). Some people held that corn h a d a high price because the landlords were charging very high rents to the farmers w h o were growing corn on t h e i r l a n d . I t w a s h e l d t h a t , i n o r d e r t o m e e t these h i g h r e n t s , t h e p r i c e t h a t f a r m e r s c h a r g e d for t h e i r c o r n h a d t o b e raised t o a v e r y h i g h level. T h u s , it was a r g u e d , t h e p r i c e of c o r n w a s h i g h b e c a u s e t h e r e n t s of a g r i c u l t u r a l l a n d w e r e h i g h . T h e second g r o u p , w h i c h i n c l u d e d D a v i d R i c a r d o , o n e of t h e g r e a t figures of E n g l i s h Classical e c o n o m i c s , h e l d t h a t t h e s i t u a t i o n w a s e x a c t l y t h e r e v e r s e . T h e p r i c e of c o r n w a s h i g h b e c a u s e t h e r e was a s h o r t a g e of c o r n c a u s e d b y t h e N a p o l e o n i c W a r s . B e c a u s e c o r n h a d a h i g h p r i c e t h e r e w a s k e e n c o m p e t i t i o n a m o n g s t f a r m e r s t o o b t a i n l a n d a n d this c o m p e t i t i o n b i d u p t h e r e n t s of c o r n l a n d . I f t h e p r i c e of c o r n w e r e t o fall so t h a t c o r n g r o w i n g b e c a m e less p r o f i t a b l e , t h e n t h e d e m a n d for l a n d w o u l d fall, a n d t h e p r i c e p a i d for t h e use of l a n d , i.e., r e n t , w o u l d fall a s well. T h u s , this school h e l d t h a t t h e r e n t of c o r n l a n d w a s h i g h b e c a u s e t h e p r i c e of c o r n w a s h i g h a n d n o t vice versa. T h e m o d e r n s t u d e n t of e c o n o m i c s will recognise in t h e R i c a r d i a n a r g u m e n t t h e i d e a of d e r i v e d d e m a n d . L a n d l o r d s , R i c a r d o w a s s a y i n g , c a n n o t j u s t c h a r g e a n y p r i c e t h e y w a n t for l a n d ; t h e p r i c e s t h e y g e t will d e p e n d o n d e m a n d a n d s u p p l y . T h e s u p p l y of l a n d is p r e t t y well fixed a n d t h e d e m a n d d e p e n d s o n t h e p r i c e of c o r n . T h e h i g h e r is t h e p r i c e of c o r n t h e m o r e p r o f i t a b l e will it b e t o g r o w c o r n , t h e h i g h e r will b e t h e d e m a n d for c o r n l a n d , a n d t h e h i g h e r will b e t h e p r i c e p a i d for its use. T h u s , t h e r e n t of c o r n l a n d d e p e n d s o n t h e p r i c e of c o r n . T h e a r g u m e n t was e l a b o r a t e d b y c o n s i d e r i n g l a n d to h a v e o n l y o n e use, t h e g r o w i n g of c o r n . T h e s u p p l y of l a n d w a s g i v e n a n d v i r t u a l l y u n c h a n g e a b l e , i.e., l a n d w a s in perfectly inelastic s u p p l y a n d l a n d o w n e r s w o u l d prefer to r e n t o u t t h e i r l a n d for s o m e r e t u r n r a t h e r t h a n t o leave it idle. N o t h i n g h a d t o b e p a i d to p r e v e n t l a n d from t r a n s f e r r i n g t o a use o t h e r t h a n g r o w i n g c o r n b e c a u s e it h a d n o o t h e r use, a n d n o self-respecting l a n d o w n e r w o u l d l e a v e his l a n d idle as l o n g as h e c o u l d o b t a i n s o m e r e t u r n , n o m a t t e r h o w s m a l l , b y r e n t i n g it o u t . T h e r e f o r e , so w e n t t h e a r g u m e n t , all of t h e p a y m e n t to l a n d , i.e., r e n t , is a s u r p l u s o v e r a n d a b o v e w h a t is necessary t o k e e p it in its p r e s e n t use. Given the fixed supply of land, t h e p r i c e will d e p e n d o n t h e d e m a n d for l a n d w h i c h is itself a function of t h e p r i c e of c o r n . R e n t , w h i c h w a s t h e t e r m for t h e p a y m e n t for t h e u s e of l a n d , t h u s b e c a m e t h e t e r m for a s u r p l u s p a y m e n t t o a factor over a n d a b o v e w h a t

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was n e c e s s a r y to k e e p it in its p r e s e n t use. S u b s e q u e n t l y t w o facts w e r e realised. First, factors of p r o d u c t i o n o t h e r t h a n l a n d often e a r n a s u r p l u s o v e r a n d a b o v e w h a t is n e c e s s a r y to k e e p t h e m in their p r e s e n t use. M o v i e stars, for e x a m p l e , a r e in v e r y s h o r t a n d p r e t t y well fixed s u p p l y , a n d t h e i r possible e a r n i n g s in o t h e r o c c u p a t i o n s a r e p r o b a b l y q u i t e m o d e r a t e ; b u t , b e c a u s e t h e r e is a h u g e d e m a n d for t h e i r services, they m a y receive p a y m e n t s g r e a t l y in excess of w h a t is n e e d e d to k e e p t h e m from t r a n s f e r r i n g to o t h e r o c c u p a t i o n s . S e c o n d l y , it was realised t h a t l a n d itself often has m a n y a l t e r n a t i v e uses a n d , from t h e p o i n t of view of any one use, p a r t of t h e p a y m e n t m a d e to l a n d w o u l d necessarily h a v e to b e p a i d to k e e p t h e l a n d in its p r e s e n t use. T h u s it a p p e a r e d t h a t all factors of p r o d u c t i o n w e r e p r e t t y m u c h t h e s a m e : p a r t of t h e p a y m e n t m a d e to t h e m w o u l d b e a p a y m e n t n e c e s s a r y to k e e p t h e m from t r a n s f e r r i n g to o t h e r uses, a n d p a r t a s u r p l u s o v e r a n d a b o v e w h a t w a s n e c e s s a r y to k e e p this factor in its p r e s e n t use. T h i s s u r p l u s c a m e to b e called E C O N O M I C R E N T . T w o M E A N I N G S O F T H E T E R M R E N T : T h e t e r m e c o n o m i c r e n t is a m o s t u n f o r t u n a t e o n e . T h e adjective e c o n o m i c is often d r o p p e d a n d t h e e c o n o mist often s p e a k s of r e n t w h e n h e m e a n s e c o n o m i c r e n t , t h u s c a u s i n g a c o n fusion b e t w e e n t h e c o n c e p t of a s u r p l u s o v e r a n d a b o v e transfer e a r n i n g s a n d t h e p a y m e n t m a d e to l a n d l o r d s for t h e h i r i n g of l a n d a n d b u i l d i n g s . W h e n a t e n a n t refers to his r e n t h e is r e f e r r i n g to w h a t h e p a y s his l a n d l o r d , m u c h of w h i c h is a transfer e a r n i n g n e c e s s a r y to p r e v e n t t h e l a n d a n d b u i l d ing in q u e s t i o n from b e i n g t r a n s f e r r e d to s o m e o t h e r use. It is u s u a l l y c l e a r from t h e c o n t e x t w h e t h e r t h e t e r m r e n t is b e i n g used to refer to a s u r p l u s o v e r a n d a b o v e transfer cost ( t h e e c o n o m i s t ' s usage) o r to t h e total p a y m e n t m a d e from t e n a n t to l a n d l o r d ( t h e e v e r y d a y usage) b u t it is i m p o r t a n t to g u a r d a g a i n s t confusing t h e t w o c o n c e p t s .
THE MODERN DISTINCTION BETWEEN TRANSFER EARNINGS AND ECONOMIC

R E N T : T r a n s f e r e a r n i n g s m a y b e defined as a n y p a y m e n t w h i c h m u s t b e ' m a d e to a factor to k e e p it in its p r e s e n t use, i.e., a p a y m e n t necessary to I p r e v e n t t h e factor from transferring to s o m e a l t e r n a t i v e e m p l o y m e n t . E c o - | n o m i c r e n t m a y b e defined as a n y p a y m e n t m a d e to a factor o v e r a n d a b o v e t h a t n e c e s s a r y to k e e p it in its p r e s e n t u s e ; e c o n o m i c r e n t , therefore, is t h e difference b e t w e e n the factor's a c t u a l e a r n i n g s a n d its transfer e a r n i n g s . I n m o s t cases t h e a c t u a l e a r n i n g s of a factor of p r o d u c t i o n will b e a c o m p o s i t e of transfer e a r n i n g s a n d e c o n o m i c r e n t ; it is possible, h o w e v e r , t o i m a g i n e l i m i t i n g cases in w h i c h all e a r n i n g s a r e e i t h e r transfer e a r n i n g s o r e c o n o m i c r e n t . C o n s i d e r s o m e i n d i v i d u a l firm o r s o m e i n d u s t r y faced w i t h a perfectly elastic s u p p l y c u r v e of a factor of p r o d u c t i o n ; it will b e a b l e t o o b t a i n all t h a t it w a n t s at t h e g o i n g p r i c e b u t , if it does n o t p a y this p r i c e , it

will n o t o b t a i n a n y q u a n t i t y of t h e factor. I n s u c h a case, w h i c h is i l l u s t r a t e d in F i g u r e 33.2, t h e w h o l e p r i c e p a i d to t h e factor r e p r e s e n t s transfer e a r n i n g s ; t h e a m o u n t t h a t is a c t u a l l y p a i d m u s t b e p a i d to p r e v e n t t h e factor from t r a n s f e r r i n g t o a n o t h e r use.

Fig 33.2 All of the income earned by the factor is transfer earnings.

Quantity N o w c o n s i d e r t h e case of a factor t h a t is fired in s u p p l y a n d h a s only o n e use. A s s u m e t h a t this factor is p u t o n t h e m a r k e t by its o w n e r s a n d sold for w h a t e v e r it will fetch, o n t h e g r o u n d s t h a t s o m e i n c o m e is b e t t e r t h a n n o t h i n g a t all. T h e w h o l e s u p p l y is o w n e d b y t h o u s a n d s of different o w n e r s so t h e r e is n o p o i n t in a n y o n e of t h e m w i t h h o l d i n g his o w n (small) s u p p l y

Fig 33.3 All of the income earned by the factor is an economic rent.

Quantity from t h e m a r k e t in a n effort to raise t h e p r i c e . S u c h a factor will b e in perfectly inelastic s u p p l y : t h e a m o u n t offered for sale will b e t h e s a m e w h a t e v e r t h e p r i c e . T h i s case is i l l u s t r a t e d in F i g u r e 3 3 . 3 . T h e w h o l e of t h e p r i c e t h a t is p a i d t o t h e f a c t o r is a n economic rent b e c a u s e , if a l o w e r p r i c e w e r e p a i d , t h e factor w o u l d n o t transfer to a n a l t e r n a t i v e use. I t m i g h t b e

t h o u g h t t h a t , in such a case as this, t h e factor w o u l d n o t c o m m a n d a n y p r i c e , b u t this is n o t t h e case. T h e p r i c e , as in all o t h e r f r e e - m a r k e t cases, is d e t e r m i n e d b y d e m a n d a n d s u p p l y . T h e fixed q u a n t i t y a v a i l a b l e is, in t h e e x a m p l e i l l u s t r a t e d in F i g u r e 3 3 . 3 , t h e a m o u n t Oa, w h i l e , if t h e p r i c e w e r e z e r o , t h e a m o u n t d e m a n d e d w o u l d b e Ob. T h u s a t a p r i c e of z e r o t h e r e w o u l d b e excess d e m a n d for t h e factor, a n d c o m p e t i t i o n a m o n g s t b u y e r s w o u l d force t h e p r i c e u p w a r d s u n t i l it r e a c h e d Op a n d t h e excess d e m a n d d i s a p p e a r e d . T h e e q u i l i b r i u m p r i c e p a i d to t h e factor is Op, t h e q u a n t i t y e m p l o y e d is Oa a n d , h e n c e , t o t a l factor i n c o m e is i n d i c a t e d by t h e a r e a of t h e r e c t a n g l e Opra.

Fig 33.4 Some of the income earned by the factor is a transfer earning and the remainder is an economic rent. F i g u r e 33.4 shows a n u p w a r d - s l o p i n g s u p p l y c u r v e of a factor of p r o d u c tion. G i v e n t h e d e m a n d c u r v e , D, t h e e q u i l i b r i u m price w o u l d b e Op a n d t h e e q u i l i b r i u m e m p l o y m e n t Og; t o t a l factor e a r n i n g s w o u l d b e Opzg. If Og u n i t s of t h e factor a r e to b e a t t r a c t e d i n t o t h e i n d u s t r y , a n d if a single price m u s t be p a i d , t h e n it is n e c e s s a r y to p a y t h e p r i c e Op. H o w e v e r , all b u t the last u n i t (i.e., t h e Ogth, w h i c h m i g h t , say, be t h e 15,000th) w o u l d b e p r e p a r e d to r e m a i n in t h e i n d u s t r y for a p r i c e less t h a n Op. I n fact, Oa of these u n i t s w o u l d b e p r e p a r e d to r e m a i n if t h e p r i c e w e r e as low as Or. If t h e price rose from Or to Os, a n a d d i t i o n a l ab units w o u l d b e a t t r a c t e d i n t o t h e i n d u s t r y ; if t h e p r i c e rose by a f u r t h e r st u n i t s , a n a d d i t i o n a l be u n i t s w o u l d e n t e r t h e i n d u s t r y . C l e a r l y , for a n y u n i t t h a t w e c a r e to pick, t h e p o i n t o n the s u p p l y c u r v e c o r r e s p o n d i n g to it shows t h e m i n i m u m p r i c e t h a t m u s t

b e p a i d in o r d e r t o k e e p t h a t u n i t in t h e i n d u s t r y (i.e., its transfer e a r n i n g s ) . E q u a l l y clearly, if t h e s u p p l y c u r v e slopes u p w a r d , all p r e v i o u s u n i t s h a v e l o w e r transfer e a r n i n g s . C o n s i d e r , for e x a m p l e , t h e Odth u n i t (possibly t h e 10,000th u n i t ) . T h e transfer e a r n i n g s of this u n i t a r e Ou; if a n y less is p a i d , this u n i t will n o t b e s u p p l i e d , a n d if a n y m o r e is p a i d , it is a r e n t a pay m e n t in excess of w h a t is necessary t o k e e p t h e factor in its p r e s e n t u s e . W e c o u l d r e p e a t t h e s a m e a r g u m e n t for every p o i n t ; w e c o u l d s h o w , for e x a m p l e , t h a t t h e transfer e a r n i n g s of t h e O a t h u n i t a r e Or, o f t h e Obih u n i t Os a n d of t h e Octh u n i t Ot. R e p e t i t i o n of this a r g u m e n t for e v e r y u n i t from t h e first t o t h e Ogth. shows t h a t t h e t o t a l transfer e a r n i n g s of the Og u n i t s is t h e w h i t e a r e a below t h e s u p p l y c u r v e . Since t h e total p a y m e n t m a d e is t h e r e c t a n g l e Opzg, it follows t h a t t h e e c o n o m i c r e n t e a r n e d b y t h e factor is t h e s h a d e d a r e a above t h e s u p p l y c u r v e a n d b e l o w t h e line pz. T h e following e x a m p l e illustrates w h y a rising s u p p l y c u r v e s involves r e n t s : if universities i n c r e a s e t h e salaries p a i d t o professors of e c o n o m i c s in order to attract additional economists into university teaching ( a n d a w a y from i n d u s t r y a n d g o v e r n m e n t ) , those e c o n o m i s t s w h o a r e p e r s u a d e d t o shift i n t o u n i v e r s i t y t e a c h i n g will b e r e c e i v i n g o n l y transfer e a r n i n g s . B u t those e c o n o m i s t s w h o w e r e a l r e a d y c o n t e n t t o b e u n i v e r s i t y professors will find t h e i r salaries h a v e i n c r e a s e d as well, a n d this i n c r e a s e will b e a r e n t t o them. F i g u r e s 33.2, 3 a n d 4 suggest t h e following i m p o r t a n t c o n c l u s i o n :

The more elastic the supply curve, the less the amount of the payment to factors that is a rent and the more that is a transfer earning. Kinds of Transfers
H o w m u c h of a g i v e n p a y m e n t t o a factor is a n e c o n o m i c r e n t a n d h o w m u c h is a transfer e a r n i n g d e p e n d s o n w h a t sort of transfer w e a r e c o n s i d e r i n g . If w e c o n s i d e r t h e transfer of a factor from o n e firm t o a n o t h e r w i t h i n a single i n d u s t r y for w h i c h t h e s u p p l y of t h e factor s h o u l d b e h i g h l y elastic, t h e n p r e t t y well all of t h e factor's e a r n i n g s will b e transfer e a r n i n g s . I f t h e firm in q u e s t i o n d i d n o t p a y t h e factor t h e g o i n g p r i c e , t h e n t h e factor w o u l d transfer t o a n o t h e r firm in t h e s a m e i n d u s t r y . I f we a r e c o n s i d e r i n g t h e transfer o f a factor from o n e i n d u s t r y to a n o t h e r , t h e n p a r t of t h e p a y m e n t m a y be a transfer e a r n i n g a n d p a r t a n e c o n o m i c r e n t , since m o b i l i t y will b e less a n d t h u s t h e s u p p l y c u r v e less elastic. W e c a n n o t p o i n t t o a g i v e n factor, a l a b o u r e r , say, a n d assert t h a t of his i n c o m e of 1 , 0 0 0 , 8 0 0 is a transfer e a r n i n g a n d 2 0 0 a r e n t , for it all d e p e n d s o n w h a t transfer w e a r e considering.

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Economic Rent and Transfer Earnings in the Payment to Labour

L a b o u r is a b l e to m o v e from j o b to j o b a n d s o m e t h i n g m u s t b e p a i d to k e e p a g i v e n u n i t of l a b o u r in its p r e s e n t u s e ; w h a t has to b e p a i d for this r e a s o n is a transfer e a r n i n g to l a b o u r . H o w m u c h h a s to b e p a i d to k e e p l a b o u r in its p r e s e n t use d e p e n d s u p o n w h a t t h e use is. L e t us say, for e x a m p l e , t h a t c a r p e n t e r s receive 3 for w o r k i n g a n o r m a l 8 - h o u r d a y . T h e n a single s m a l l c o n s t r u c t i o n firm will h a v e to p a y 3 p e r d a y o r it will n o t o b t a i n t h e ser vices of a n y c a r p e n t e r s . T o t h a t o n e firm t h e w h o l e 3 is a transfer p a y m e n t ; if t h e w h o l e 3 w e r e n o t p a i d , c a r p e n t e r s w o u l d not r e m a i n w i t h t h a t firm. B u t c o n s i d e r w h a t w o u l d h a p p e n if t h e c o n s t r u c t i o n i n d u s t r y e n c o u n t e r e d difficulties so t h a t all c o n s t r u c t i o n firms w e r e forced to r e d u c e t h e w a g e s offered to c a r p e n t e r s . I n this case c a r p e n t e r s c o u l d n o t m o v e to o t h e r c o n s t r u c t i o n firms to g e t m o r e m o n e y . If t h e y d o n o t like t h e w a g e s offered, they will h a v e to m o v e to a n o t h e r i n d u s t r y . If t h e best t h e y c a n d o else w h e r e is 2 \0s p e r d a y , t h e n they will n o t b e g i n to l e a v e t h e c o n s t r u c t i o n i n d u s t r y until w a g e s in t h a t i n d u s t r y fall b e l o w 2 \0s. I n this case t h e transfer e a r n i n g s of c a r p e n t e r s in c o n s t r u c t i o n a r e 2 \0s a n d , w h e n t h e y w e r e r e c e i v i n g 3 ( p r e s u m a b l y b e c a u s e t h e r e was a h e a v y d e m a n d for t h e i r services), t h e a d d i t i o n a l \0s was a n e c o n o m i c r e n t from t h e p o i n t of view of t h e c o n s t r u c t i o n i n d u s t r y . N o w c o n s i d e r w h a t w o u l d h a p p e n if t h e r e was a d e c l i n e in t h e d e m a n d for c a r p e n t e r s in all i n d u s t r i e s . T h e o n l y t h i n g left to d o , if o n e d i d n o t like t h e w a g e s , w o u l d be to m o v e to a n o t h e r o c c u p a t i o n : in o t h e r w o r d s o n e m u s t cease to be a c a r p e n t e r . If n o o n e was i n d u c e d to d o this u n t i l t h e w a g e fell to 2, t h e n 2 w o u l d b e t h e transfer e a r n i n g s for c a r p e n t e r s in g e n e r a l . T h e w a g e of 2 m u s t be p a i d to p e r s u a d e p e o p l e to b e c a r p e n t e r s at all. T h e i m p o r t a n t g e n e r a l m o r a l to this story is as follows: h o w m u c h of a n y g i v e n p a y m e n t r e p r e s e n t s transfer e a r n i n g s a n d h o w m u c h e c o n o m i c r e n t d e p e n d s on w h a t sort of a transfer w e a r e c o n s i d e r i n g ; o n e from firm to firm, o n e from i n d u s t r y to i n d u s t r y , o n e from o c c u p a t i o n to o c c u p a t i o n , or possibly o n e from a r e a to a r e a . S o m e v e r y h i g h l y specialised types of l a b o u r a r e in v e r y inelastic s u p p l y . T h i s is p a r t i c u l a r l y t r u e of p e r s o n s s u c h as singers a n d a c t o r s w h o h a v e a special t a l e n t w h i c h c a n n o t be d u p l i c a t e d , w h a t e v e r t h e t r a i n i n g . T h e e a r n i n g s t h a t s u c h p e r s o n s receive a r e mostly in t h e n a t u r e of a n e c o n o m i c r e n t : t h e y enjoy t h e i r o c c u p a t i o n s a n d w o u l d p u r s u e t h e m for very m u c h less t h a n t h e h i g h r e m u n e r a t i o n t h a t t h e y a c t u a l l y receive. T h e i r h i g h r e w a r d s result from t h e fact t h a t t h e y a r e in very scarce supply relative to the demand for their services. If t h e d e m a n d for t h e i r services w e r e to rise t h e i r e a r n i n g s w o u l d rise p e r m a n e n t l y , w h i l e if t h e d e m a n d fell t h e i r e a r n i n g s w o u l d fall p e r m a n e n t l y . An i m p o r t a n t policy i m p l i c a t i o n of t h e d i s t i n c t i o n b e t w e e n r e n t s a n d

transfer e a r n i n g s c o n c e r n s t h e effectiveness of w a g e increases o n s u p p l y . F o r e x a m p l e , if t h e C e n t r a l A u t h o r i t i e s feel t h a t it is in the n a t i o n a l i n t e r e s t to h a v e m o r e physicists, s h o u l d t h e y subsidise physicists' salaries ? I n t h e l o n g r u n , s u c h a policy m a y well h a v e a n effect u p o n s u p p l y . It m a y i n f l u e n c e school boys u n c e r t a i n a b o u t w h e t h e r to b e c o m e e n g i n e e r s o r physicists to b e c o m e physicists. B u t it will also m e a n t h a t a g r e a t deal of m o n e y will h a v e to b e s p e n t on e x t r a p a y m e n t s to p e o p l e w h o a r e a l r e a d y physicists. A n d these p a y m e n t s will b e e c o n o m i c r e n t s , since existing physicists h a v e d e m o n s t r a t e d t h a t t h e y a r e p r e p a r e d to b e physicists a t t h e i r old salaries. A l t h o u g h s o m e m a y h a v e b e e n c o n s i d e r i n g t r a n s f e r r i n g to a n o t h e r o c c u p a t i o n , such m o v e m e n t s a r e n o t c o m m o n . A n a l t e r n a t i v e policy, w h i c h m a y p r o d u c e m o r e physicists p e r p o u n d , is to subsidise s c h o l a r s h i p s a n d s t u d e n t s h i p s for s t u d e n t s w h o will t r a i n to b e c o m e physicists. T h i s policy o p e r a t e s o n l y o n those o n t h e m a r g i n of e n t e r i n g o r l e a v i n g t h e o c c u p a t i o n a n d d o e s n o t p r o v i d e e x t r a r e n t for those a l r e a d y in it. T h e D e p a r t m e n t of Scientific a n d I n d u s t r i a l R e s e a r c h in B r i t a i n a n d t h e N a t i o n a l S c i e n c e F o u n d a t i o n in t h e U S d o precisely this. I n t h e s a m e w a y , football t e a m s a n d m o v i e s t u d i o s p r o v i d e t r a i n i n g schools. If t h e s u p p l y c u r v e is q u i t e inelastic, a n i n c r e a s e in t h e q u a n t i t y s u p p l i e d m a y b e m o r e easily a c h i e v e d by shifting t h e s u p p l y c u r v e to t h e r i g h t t h r o u g h policies s u c h as those o u t l i n e d a b o v e r a t h e r t h a n b y m o v i n g a l o n g it by raising t h e m a r k e t price of t h e factor.
1

Rent and Transfer Earnings in the Return to Capital

If a p i e c e of c a p i t a l e q u i p m e n t h a s several uses t h e n t h e analysis of t h e last section c a n b e r e p e a t e d for t h e case of t h e m a c h i n e . M a n y m a c h i n e s , h o w ever, o n c e t h e y a r e c o n s t r u c t e d , a r e u t t e r l y specific, h a v i n g o n l y o n e use. I n this case, a n y i n c o m e t h a t is m a d e from t h e o p e r a t i o n of t h e m a c h i n e is in t h e n a t u r e . o f a r e n t . A s s u m e , for e x a m p l e , t h a t w h e n a m a c h i n e was in stalled it was e x p e c t e d to e a r n 5 0 0 p e r a n n u m in excess of all its o p e r a t i n g costs. If t h e d e m a n d for t h e p r o d u c t n o w falls off so t h a t t h e m a c h i n e c a n o n l y e a r n 2 0 0 , it will still be w o r t h w h i l e o p e r a t i n g it r a t h e r t h a n t h r o w i n g it a w a y . I n fact, a s s u m i n g t h e m a c h i n e to h a v e o n l y o n e use, it will p a y to k e e p it in o p e r a t i o n r a t h e r t h a n s c r a p it, as l o n g as it yields a n y r e t u r n a t all o v e r its o p e r a t i n g c o s t s . T h u s , if t h e m a c h i n e does yield a r e t u r n of, say,
2

1 The problem is different where international mobility is high as it is with physicists. One of the reasons for the considerable migration of trained physicists of all ages from Britain to the United States is very much higher monetary rewards to be earned in the U S compared with the U K . Clearly, many British physicists are being paid less than their international transfer earnings and the result is a steady, net flow from Britain to America. 2 This is just another way of stating the proposition given in Chapter 27, page 356, that it pays a firm to continue in operation in the short run as long as it can cover its variable costs of production.

 5 0 0 p e r a n n u m in a n y o n e y e a r , we c a n say t h a t all of t h e r e t u r n is a n e c o n o m i c r e n t b e c a u s e t h e m a c h i n e w o u l d still h a v e b e e n a l l o c a t e d to its p r e s e n t use - it h a s n o o t h e r - as long as it y i e l d e d e v e n 1 a b o v e its o p e r a t i n g costs. T h u s , once the machine has been installed, a n y n e t i n c o m e t h a t it e a r n s is a r e n t (i.e., a p a y m e n t n o t necessary to k e e p it in its p r e s e n t u s e ) . H o w ever, t h e m a c h i n e will in t i m e w e a r o u t a n d it will n o t b e r e p l a c e d unless it is e x p e c t e d to e a r n a r e t u r n o v e r its lifetime sufficient to m a k e it a g o o d i n v e s t m e n t for its o w n e r . T h u s , o v e r t h e l o n g r u n , s o m e of t h e r e v e n u e e a r n e d by t h e m a c h i n e is a transfer e a r n i n g ; if t h e p a y m e n t is n o t m a d e , a m a c h i n e will n o t c o n t i n u e to b e a l l o c a t e d to t h a t use in t h e l o n g r u n . I n a n y o n e y e a r , h o w e v e r , t h e i n c o m e e a r n e d c a n sink to z e r o w i t h o u t affecting t h e a l l o c a t i o n of existing m a c h i n e s to different uses in t h e e c o n o m y . I n this case, w h e t h e r a p a y m e n t m a d e to a factor is a n e c o n o m i c r e n t o r a transfer e a r n i n g depends on the time span u n d e r consideration. I n the s h o r t r u n all of t h e i n c o m e of a m a c h i n e is in t h e n a t u r e of a r e n t , w h i l e in t h e l o n g r u n s o m e of it is in t h e n a t u r e of a transfer p a y m e n t . F a c t o r p a y m e n t s w h i c h a r e e c o n o m i c r e n t s in t h e s h o r t r u n a n d transfer p a y m e n t s in t h e l o n g r u n a r e called Q U A S I - R E N T S .

Economic Rent and Transfer Earnings in the Payment to Land

T h e f o r m a l analysis is i d e n t i c a l to t h a t g i v e n in t h e case of l a b o u r . H o w m u c h of t h e p a y m e n t m a d e to a given p i e c e of l a n d is a transfer p a y m e n t d e p e n d s u p o n t h e n a t u r e of t h e transfer. C o n s i d e r , first, t h e case of a n i n d i v i d u a l w h e a t f a r m e r . H e m u s t p a y t h e g o i n g p r i c e of l a n d in o r d e r to p r e v e n t t h e l a n d from b e i n g transferred to the use of other wheat farmers. F r o m his p o i n t of view, therefore, t h e w h o l e of t h e p a y m e n t t h a t h e m a k e s is a transfer p a y m e n t . N o w c o n s i d e r a p a r t i c u l a r i n d u s t r y w h i c h uses l a n d . I n o r d e r to s e c u r e l a n d for, say, w h e a t p r o d u c t i o n , it will b e necessary to offer a t least as m u c h as t h e l a n d c o u l d e a r n w h e n p u t to o t h e r uses. F r o m t h e p o i n t of view of t h e w h e a t i n d u s t r y , t h a t p a r t of t h e p a y m e n t m a d e for l a n d w h i c h is e q u a l to w h a t it c o u l d e a r n in its n e x t m o s t r e m u n e r a t i v e use is a transfer p a y m e n t . If t h a t m u c h is n o t p a i d , t h e n t h e l a n d will in fact b e t r a n s f e r r e d to t h e a l t e r n a t i v e use. If, h o w e v e r , l a n d p a r t i c u l a r l y s u i t a b l e for w h e a t g r o w i n g is s c a r c e r e l a t i v e to t h e d e m a n d for it, t h e n t h e a c t u a l p a y m e n t for t h e use of this l a n d m a y b e a b o v e t h e transfer p a y m e n t ; a n y a d d i t i o n a l p a y m e n t is a n e c o n o m i c r e n t A s s u m e , for e x a m p l e , t h a t t h e m a x i m u m p a y m e n t t h a t c a n b e offered b y f a r m e r s w i s h i n g to use l a n d for t h e c r o p n e x t m o s t r e m u n e r a t i v e to w h e a t is 1 0 p e r a c r e . N o w w h e a t f a r m e r s m u s t offer 1 0 p e r a c r e to s e c u r e t h e l a n d . B u t it m a y b e t h a t t h e p r i c e of w h e a t is s u c h t h a t t h e profits of w h e a t g r o w i n g a r e v e r y h i g h w h e n o n l y 1 0 p e r a c r e is p a i d for t h e l a n d . A l a r g e n u m b e r of f a r m e r s will wish to

h i r e l a n d a t this p r i c e in o r d e r to g r o w w h e a t : t h e d e m a n d for w h e a t l a n d will exceed its s u p p l y . C o m p e t i t i o n will bid u p t h e r e n t offered until t h e d e m a n d is e q u a l to t h e s u p p l y . T h e r e n t a l finally e s t a b l i s h e d m i g h t b e , say, 1 3 p e r a c r e . I n this case, from t h e p o i n t of v i e w of t h e w h e a t i n d u s t r y as a w h o l e , 1 0 is transfer e a r n i n g s a n d t h e r e m a i n i n g 3 is e c o n o m i c r e n t . If t h e price of w h e a t falls a n d , as a result, the d e m a n d for w h e a t l a n d falls, t h e n the r e n t p a i d for w h e a t l a n d will also fall. T h i s will c o n t i n u e u n t i l t h e r e n t offered falls to 1 0 a n d t h e n l a n d will b e g i n to b e t r a n s f e r r e d o u t of w h e a t i n t o o t h e r uses. T h i s transfer will c o n t i n u e a n d t h e s u p p l y of w h e a t will d i m i n i s h u n t i l t h e p r i c e of w h e a t rises sufficiently so t h a t t h e r e m a i n i n g w h e a t f a r m e r s c a n offer to p a y t h e 1 0 transfer cost to k e e p t h e l a n d o u t of o t h e r uses. L a n d is v e r y m o b i l e b e t w e e n a g r i c u l t u r a l uses b e c a u s e t h e l o c a t i o n is u s u a l l y of little i m p o r t a n c e . I n t h e case of u r b a n uses, h o w e v e r , l o c a t i o n of t h e l a n d is critical a n d , from this p o i n t of view, l a n d is of c o u r s e c o m p l e t e l y i m m o b i l e . If t h e r e is a s h o r t a g e of l a n d in c e n t r a l L o n d o n , s u c h l a n d as is a v a i l a b l e will c o m m a n d a h i g h p r i c e b u t , n o m a t t e r w h a t t h e p r i c e p a i d , this will n o t c a u s e l a n d in r u r a l a r e a s to m o v e i n t o c e n t r a l L o n d o n . T h e v e r y h i g h p a y m e n t s m a d e to u r b a n l a n d a r e in t h e n a t u r e of e c o n o m i c r e n t s . T h e l a n d is s c a r c e r e l a t i v e to d e m a n d for it a n d it c o m m a n d s a p r i c e v e r y m u c h a b o v e w h a t it c o u l d e a r n in a g r i c u l t u r a l uses. T h e p a y m e n t w h i c h it receives is t h u s well in excess of w h a t is n e c e s s a r y to p r e v e n t it from t r a n s ferring from u r b a n b a c k to a g r i c u l t u r a l uses. F r o m t h e p o i n t of view, h o w ever, of o n e p a r t i c u l a r t y p e of u r b a n use, h i g h r e n t s a r e a t r a n s f e r p a y m e n t w h i c h m u s t b e p a i d to k e e p t h e l a n d from t r a n s f e r r i n g to o t h e r u r b a n uses. M o t i o n p i c t u r e c i n e m a s , for e x a m p l e , p r o v i d e b u t a s m a l l p o r t i o n of t h e total d e m a n d for l a n d in c e n t r a l L o n d o n ; if t h e r e w e r e n o c i n e m a s a t all, : r e n t a l s of l a n d w o u l d b e a b o u t w h a t t h e y a r e n o w . T h u s t h e c i n e m a i n d u s ! try faces a perfectly elastic s u p p l y of l a n d in c e n t r a l L o n d o n , a n d the w h o l e J of t h e p r i c e t h a t it p a y s for its l a n d is a transfer p a y m e n t w h i c h m u s t b e p a i d to k e e p t h e l a n d from t r a n s f e r r i n g to o t h e r u s e s .
1

A D I G R E S S I O N ON THE V A L U E OF ASSETS
T h e a b o v e analysis leads n a t u r a l l y to a discussion of t h e r e l a t i o n b e t w e e n t h e e a r n i n g p o w e r of a n asset a n d its m a r k e t p r i c e . T h e discussion a p p l i e s to a n y asset t h a t c a n e a r n a r e v e n u e w h e t h e r it is a factor of p r o d u c t i o n (such as l a n d ) o r a stock o r a b o n d . C o n s i d e r first a n e x a m p l e of t w o pieces of l a n d of e q u a l size, o n e g r o w i n g w h e a t a n d r e t u r n i n g , after costs, a profit
1 Thus the old examination question, 'Discuss the view that the price of cinema seats is high in central London because the price of land is high', should be answered in the affirmative, not in the negative as examiners often seemed to expect.

of 1 , 0 0 0 p e r a n n u m ; t h e o t h e r g r o w i n g oats a n d r e t u r n i n g , after all costs, a profit of 5 0 0 p e r a n n u m . A s s u m i n g t h a t t h e s e c o n d p i e c e of l a n d is as g o o d as t h e first, t h e p e r s o n f a r m i n g it w o u l d b e likely to transfer it from oats to w h e a t p r o d u c t i o n . A s s u m e , h o w e v e r , t h a t this c a n n o t b e d o n e or t h a t t h e first piece of l a n d is s u i t a b l e o n l y for g r o w i n g w h e a t a n d t h a t t h e s e c o n d p i e c e is s u i t a b l e o n l y for g r o w i n g o a t s . U n d e r these c i r c u m s t a n c e s , t h e first p i e c e of l a n d is c l e a r l y w o r t h twice as m u c h as t h e s e c o n d p i e c e of l a n d . If, for e x a m p l e , t h e t w o pieces w e r e offered for sale at prices of 1 0 , 0 0 0 a n d 7 , 5 0 0 , n o o n e w o u l d b u y t h e s e c o n d p i e c e in p r e f e r e n c e to t h e first o n e . T e n t h o u s a n d p o u n d s i n v e s t e d in b u y i n g t h e first piece of l a n d yields 1 , 0 0 0 p e r y e a r , w h e r e a s t h r e e - q u a r t e r s as m u c h m o n e y , i.e., 7 , 5 0 0 , i n vested in t h e s e c o n d piece yields o n l y h a l f as m u c h i n c o m e , i.e., 5 0 0 p e r y e a r . C l e a r l y , t h e first piece of l a n d is a b e t t e r i n v e s t m e n t t h a n t h e s e c o n d o n e , a n d n o o n e w o u l d be p r e p a r e d to b u y t h e second p i e c e . If, h o w e v e r , t h e first p i e c e w e r e offered for 1 0 , 0 0 0 a n d t h e second p i e c e for 5 , 0 0 0 , t h e n b o t h pieces w o u l d r e p r e s e n t e q u a l l y g o o d i n v e s t m e n t s . T h e r a t e of r e t u r n p e r p o u n d invested w o u l d t h e n b e t h e s a m e for e a c h p i e c e of l a n d . W h e n p e o p l e b u y a n asset - a piece of l a n d , a g o v e r n m e n t b o n d , a c o m m o n stock - they a r e i n v e s t i n g t h e i r m o n e y in r e t u r n for s o m e e x p e c t e d yield. Self-interest on t h e p a r t of investors e n s u r e s t h a t t h e r e l a t i v e prices of v a r i o u s assets will reflect t h e i r r e l a t i v e e a r n i n g p o w e r s . If o n e asset b r i n g s a n i n c o m e twice as big as t h a t b r o u g h t by a n o t h e r asset, ceteris paribus, t h e o n e asset will c o m m a n d t w i c e t h e p r i c e of t h a t c o m m a n d e d b y t h e o t h e r asset. If this is t h e case, t h e n a p o u n d invested in e i t h e r asset will b r i n g t h e s a m e r a t e of r e t u r n . W e r e this n o t t h e case, a p o u n d invested in o n e asset w o u l d b r i n g a h i g h e r r e t u r n t h a n a p o u n d invested in t h e o t h e r a n d all i n vestors w o u l d prefer o n e asset to t h e o t h e r . T h i s c o m p a r i s o n b e t w e e n assets c a n best b e m a d e by expressing the r e t u r n on e a c h asset as a p e r c e n t a g e of t h e p u r c h a s e p r i c e . I n t h e a b o v e e x a m p l e , t h e a n n u a l e a r n i n g s a r e 10 p e r c e n t of t h e p u r c h a s e p r i c e : a n y o n e b u y i n g e i t h e r piece of l a n d w o u l d h a v e a n a n n u a l i n c o m e e q u a l to 10 p e r c e n t of his i n v e s t m e n t . N o w , a s s u m e t h a t t h e g e n e r a l r a t e of r e t u r n t h a t c a n b e m a d e on invest m e n t s of a g i v e n d e g r e e of risk is X p e r c e n t . I n this case, t h e p r i c e of a n y single asset of a c o m p a r a b l e d e g r e e of risk will b e d e t e r m i n e d in t h e m a r k e t , so t h a t it also yields a r e t u r n of X p e r c e n t . If t h e p r i c e w e r e lower, e v e r y o n e w o u l d r u s h to b u y this asset r a t h e r t h a n t h e o t h e r s t h a t yield X p e r c e n t ; if the price w e r e h i g h e r , n o o n e w o u l d wish to b u y this p a r t i c u l a r asset w h e n all o t h e r s y i e l d e d X p e r c e n t . A s s u m e , for e x a m p l e , t h a t t h e g o i n g r a t e of r e t u r n is 5 p e r c e n t . A p a r t i c u l a r asset y i e l d i n g a n e t i n c o m e of 2 0 0 p e r y e a r indefinitely w o u l d c o m m a n d a price of 4 , 0 0 0 . If t h e p r i c e w e r e less, say, 2 , 0 0 0 , t h e e a r n i n g s

>

w o u l d b e in excess of 5 p e r c e n t ; in fact, t h e y w o u l d b e 10 p e r c e n t , a n d e v e r y o n e w o u l d r u s h t o b u y this asset. T h e c o m p e t i t i o n a m o n g p o t e n t i a l purchasers would push u p t h e price. If the price were higher t h a n 4 , 0 0 0 , say 8 , 0 0 0 , t h e n t h e yield w o u l d b e less t h a n 5 p e r c e n t - in fact, 2 5 p e r c e n t in this case - a n d n o o n e w o u l d wish t o p u r c h a s e t h e asset a n d its p r i c e w o u l d h a v e t o fall.
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The price of an asset is directly related to its earning capacity. If there is competition among purchasers of assets, asset prices will tend to be set at levels that yield the same rates of return on each asset.
T h e a b o v e discussion o f t h e p r i c i n g of assets c a n b e a p p l i e d t o o n e p r o b l e m t h a t is e x t r e m e l y i m p o r t a n t i n s u b s e q u e n t p a r t s of this b o o k . A b o n d is e v i d e n c e of d e b t . I t u s u a l l y takes t h e form of a piece of p a p e r r e c o r d i n g a p r o m i s e to r e p a y t h e s u m of m o n e y o r i g i n a l l y b o r r o w e d ( t h e p r i n c i p a l ) a t s o m e f u t u r e d a t e , a n d t o p a y a s t a t e d s u m of m o n e y e a c h y e a r in t h e i n t e r i m ( t h e i n t e r e s t o n t h e l o a n ) . A stylised p i c t u r e of such a b o n d is p r e s e n t e d here:

A s s u m e t h a t I l o a n 1 , 0 0 0 t o this c o m p a n y b y p u r c h a s i n g this b o n d a t a t i m e w h e n t h e m a r k e t r a t e of interest is 5 p e r c e n t . N o w a s s u m e t h a t a few y e a r s l a t e r t h e m a r k e t r a t e of i n t e r e s t rises t o 10 p e r c e n t so t h a t firms issuing n e w b o n d s s i m i l a r t o t h e o n e i l l u s t r a t e d will h a v e to offer 1 0 0 p e r y e a r b y w a y of i n t e r e s t p a y m e n t . N o w , if I s h o u l d wish to sell m y existing 1 , 0 0 0 b o n d , p a y i n g 5 0 interest p e r year, I will b e u n a b l e t o o b t a i n 1 , 0 0 0 for it.

)
S i n c e investors c a n p u r c h a s e a n e w b o n d y i e l d i n g 10 p e r c e n t , n o o n e will p u r c h a s e m y b o n d s for 1 , 0 0 0 , as this will yield t h e m o n l y 5 p e r c e n t . T h u s a p u r c h a s e r w o u l d offer m e a p r i c e sufficiently b e l o w 1 , 0 0 0 so t h a t h e w o u l d receive 10 p e r c e n t o n his i n v e s t m e n t .

A rise in the current rate of interest entails a fall in the market price of all existing bonds, the fall being sufficient so that a purchaser of an existing bond will receive the same return on his investment as he could receive by buying a new bond. Thus the current rate of interest on new loans and the market price of exist ing bonds vary inversely with each other.
L A N D RENTS, LAND VALUES A N D L A N D T A X E S : T h e relation between the

e a r n i n g s of l a n d a n d t h e v a l u e of l a n d is j u s t a special case of h o w t h e v a l u e of assets is d e t e r m i n e d . Q u i t e clearly, t h e l a r g e r t h e yield t h a t c a n b e o b t a i n e d for a n y g i v e n p i e c e of l a n d , t h e h i g h e r t h e r e n t (in t h e e v e r y d a y sense o f t h e w o r d ) t h a t c a n b e o b t a i n e d for t h e l a n d ' s services, a n d t h e h i g h e r t h e p r i c e t h a t c a n b e o b t a i n e d from selling t h e l a n d . T h e sale v a l u e of a p i e c e of l a n d is therefore d i r e c t l y r e l a t e d t o t h e r e n t t h a t c a n b e a s k e d for t h e l a n d ; b o t h of these reflect t h e s a m e t h i n g , e a r n i n g p o w e r . T h i s is a l l v e r y o b v i o u s b u t it is s u r p r i s i n g l y easy t o forget it i n p r a c t i c e . C o n s i d e r t w o s e p a r a t e q u e s t i o n s : (1) W h a t w o u l d b e t h e effects of a 10 p e r c e n t t a x o n all r e n t s p a i d for t h e use of l a n d ? a n d (2) W h a t w o u l d Tie t h e effects o f a 10 p e r c e n t t a x o n t h e v a l u e of all l a n d i n a c o u n t r y ? M o s t s t u d e n t s w o u l d h a v e little t r o u b l e w i t h t h e first q u e s t i o n . T h e y w o u l d a n s w e r s o m e w h a t a s follows: since t h e t a x is levied o n all r e n t s t h e r e l a t i v e p r o f i t a b i l i t y of different uses will b e u n a f f e c t e d a n d t h u s t h e r e will b e n o a l l o c a t i v e effects. L a n d will n o t b e forced o u t of use b e c a u s e l a n d w h i c h is v e r y u n p r o f i t a b l e will c o m m a n d little r e n t a n d so p a y little t a x . T h u s t h e r e will b e n o c h a n g e in t h e s u p p l y o f goods w h i c h a r e p r o d u c e d w i t h t h e a i d of l a n d a n d , since t h e r e is n o c h a n g e i n s u p p l y , t h e r e c a n b e n o c h a n g e in prices. Thus the tax cannot be passed on to consumers. F a r m e r s will b e willing t o p a y j u s t as m u c h ( a n d n o m o r e ) as t h e y w o u l d h a v e offered p r e v i o u s l y for t h e use of l a n d . A g r i c u l t u r a l prices a n d r e n t s will b e u n c h a n g e d a n d t h e w h o l e of t h e t a x will b e b o r n e b y t h e l a n d l o r d . T h e n e t r e n t s e a r n e d b y l a n d l o r d s will fall by 10 p e r c e n t a n d t h e sale v a l u e of l a n d will fall c o r r e s p o n d i n g l y .
1

B u t n o w c o n s i d e r t h e s e c o n d q u e s t i o n . A t a x o n l a n d v a l u e s will h a v e a n i d e n t i c a l effect to those a n a l y s e d a b o v e ! T h e r e is n o w a y i n w h i c h l a n d lords c a n pass t h e t a x o n to t e n a n t s . T h e t a x will b e b o r n e w h o l l y b y l a n d lords a n d t h e s a m e l a n d l o r d s will p a y t h e h e a v i e s t taxes as i n t h e case of a
1 Assuming that persons using their own land would have a market rental assessed by the tax department and the tax then levied on this assessed rental.

t a x o n r e n t s ; this is b e c a u s e t h e l a n d s w h i c h e a r n t h e h i g h e s t r e n t s will also b e those w i t h t h e h i g h e s t v a l u e s . P r e s e n t e d o n l y w i t h t h e s e c o n d q u e s t i o n , h o w e v e r , it is easy to forget t h a t e a r n i n g s a n d sale v a l u e s a r e j u s t t w o w a y s of expressing t h e s a m e t h i n g a n d t h a t t h e results of a t a x o n l a n d v a l u e s w o u l d b e t h e s a m e as a tax o n r e n t s . I t s h o u l d b e n o t e d t h a t t h e g e n e r a l a r g u m e n t t h a t t h e t a x on r e n t s (or o n l a n d values) is b o r n e w h o l l y by l a n d l o r d s d e p e n d s o n t h e c o n d i t i o n t \ a t t h e fall in t h e p r i c e of l a n d will n o t i n d u c e l a n d l o r d s to w i t h d r a w l a n d from t h e m a r k e t . U n d e r c o m p e t i t i v e c o n d i t i o n s , taxes a r e passed o n w h e n e a c h i n d i v i d u a l p r o d u c e r is i n d u c e d by t h e t a x to r e d u c e t h e q u a n t i t y of t h e p r o d u c t w h i c h he offers for sale. T h e r e will t h u s b e a r e d u c t i o n in t o t a l s u p p l y , w h i c h will c a u s e t h e p r i c e to rise. O f c o u r s e , a t a x p l a c e d o n l y o n l a n d u s e d to g r o w w h e a t w o u l d c a u s e l a n d l o r d s to transfer l a n d from w h e a t p r o d u c t i o n to o t h e r u s e s ; t h e s u p p l y of w h e a t w o u l d b e r e d u c e d ; the p r i c e of w h e a t w o u l d rise; a n d t h e tax w o u l d b e passed o n , a t least in p a r t , to c o n s u m e r s . T h e s u p p l y of l a n d to w h e a t p r o d u c t i o n is v a r i a b l e , b u t if t h e t o t a l s u p p l y of l a n d to all uses does n o t r e s p o n d to t h e t a x o n r e n t a l s , t h e n t h e t a x c a n n o t b e shifted by l a n d l o r d s . W e h a v e a l r e a d y w a r n e d a g a i n s t t h e a s s u m p t i o n t h a t t h e t o t a l s u p p l y of a r a b l e l a n d c a n n o t b e r e d u c e d in " s u p p l y . S o m e taxes o n l a n d m i g h t d i s c o u r a g e l o n g - r u n c o n s e r v a t i o n policies so t h a t t h e total s u p p l y of c u l t i v a b l e l a n d w o u l d d i m i n i s h . If this w e r e t r u e , t h e prices of a g r i c u l t u r a l c o m m o d i t i e s w o u l d rise a n d p a r t of t h e effect of t h e t a x w o u l d b e passed o n to t h e c o n s u m e r s of a g r i c u l t u r a l p r o d u c e .

THE

SINGLE-TAX MOVEMENT

T a x a t i o n of l a n d v a l u e s h a s h a d e n o r m o u s a p p e a l b o t h i n t e l l e c t u a l l y a n d politically. T h e p e a k of its a p p e a l w a s 80 y e a r s a g o . T h e 'single-tax m o v e m e n t ' of w h i c h H e n r y G e o r g e ( 1 8 3 9 - 1 8 9 7 ) , a n A m e r i c a n p r i n t e r , was t h e g u i d i n g g e n i u s , c a u g h t t h e i m a g i n a t i o n of h u n d r e d s of t h o u s a n d s of p e o p l e o n b o t h sides of t h e A t l a n t i c . T h e policy w a s to t a x a w a y t h e ' u n e a r n e d i n c r e m e n t ' t h a t a c c r u e d to l a n d o w n e r s . W h a t w a s t h e a p p e a l ?

1

'

T h e t o t a l s u p p l y of l a n d in a c o u n t r y t e n d s to b e p r e t t y well fixed. A s b o t h p o p u l a t i o n a n d i n c o m e s rise, t h e r e will b e a n i n c r e a s e in t h e d e m a n d , for l a n d . T h i s rise in d e m a n d will c a u s e a n i n c r e a s e in t h e r e n t s , a n d , since v a l u e s d e p e n d o n w h a t c a n b e e a r n e d , it will also c a u s e a n i n c r e a s e in t h e ; v a l u e s of l a n d . T h u s t h e o w n e r s of l a n d g a i n from t h e n a t u r a l progress of i society w i t h o u t t h e i r h a v i n g to c o n t r i b u t e a n y t h i n g .
2

1 George ran for Mayor of New York City in 1886, and very nearly won. He campaigned on the issue of the single tax. His book Progress and Poverty (Appleton, 1880) is probably the all-time best seller on an economic issue. 2 See page 487 for a discussion of the validity of this prediction that was made by the Classical economists of the early nineteenth century.

W e c a n n o t , o n t h e basis of positive e c o n o m i c s , m a k e a m o r a l j u d g m e n t on this s i t u a t i o n . I t is sufficient to p o i n t o u t t h a t m a n y p e o p l e h a v e b e e n i n c e n s e d a t this ' u n e a r n e d i n c r e m e n t ' a n d , w a t c h i n g t h e h u g e f o r t u n e s a c c r u i n g to l a n d l o r d s in a r a p i d l y g r o w i n g society, t h e y h a v e p r o p o s e d v a r i o u s m e a s u r e s for r e m o v i n g this ' u n e a r n e d w e a l t h ' from t h e l a n d o w n e r . It s h o u l d be n o t e d t h a t t h e n o r m a t i v e issue h e r e is n o t necessarily o n e of the 'rich l a n d o w n e r ' versus t h e ' p o o r w o r k e r ' . M a n y l a n d o w n e r s ( f a r m e r s a n d o w n e r s of family residences) m a y b e r e l a t i v e l y p o o r , w h e r e a s a m i l l i o n a i r e m a y invest in c e r t a i n assets w h o s e v a l u e s d o n o t rise a u t o m a t i c a l l y w i t h t h e p r o g r e s s of society. T h e less e m o t i v e , b u t m o r e e n d u r i n g a p p e a l of taxes on l a n d v a l u e s arises from t h e fact t h a t e c o n o m i c r e n t c a n b e t a x e d a w a y w i t h o u t affecting t h e a l l o c a t i o n of r e s o u r c e s . T h u s , for s o m e o n e w h o d o e s n o t wish to i n t e r f e r e w i t h t h e a l l o c a t i o n r e s u l t i n g from t h e free p l a y of t h e m a r k e t , t h e t a x a t i o n of e c o n o m i c r e n t is a t t r a c t i v e . I t s h o u l d b e n o t e d , h o w e v e r , t h a t e c o n o m i c r e n t is n o t u n i q u e to l a n d l o r d s ; it a c c r u e s to t h e o w n e r s of a n y f a c t o r t h a t is fixed in s u p p l y a n d t h a t faces a rising d e m a n d . If t h e r e is, for e x a m p l e , a fixed s u p p l y of first-class o p e r a singers in t h e c o u n t r y , t h e n t h e y will g a i n in e x a c t l y t h e s a m e w a y as l a n d l o r d s d o w h e n t h e society b e c o m e s r i c h e r a n d the d e m a n d for o p e r a s increases w i t h o u t t h e r e b e i n g a n y c o r r e s p o n d i n g i n c r e a s e in t h e s u p p l y of singers.
1

1 We must be careful not to forget the meaning of our terms. The statement in the text refers to economic rent as described; it does not refer to the payment actually made by tenants to landlords. What is called rent in the world is partly an economic rent and partly a return on capital invested by the landowner. The policy implications of the statement in the text depend on being able to identify economic rent in practice. At best this is a very difficult thing to d o ; at worst, it may be quite impossible.