2 - Supply-side marginalism: Ricardo and the theory of rent

Summary

The development of marginalism on the supply side (namely, the production of goods) is often associated with the theory of rent, which is paid to landlords for the use of their fertile land. In the last chapter, we mentioned that the theory of rent is a cornerstone of classical political economy. While several authors (such as Anderson, Torrens, West and Malthus) have been named as founders of this theory, the best-known version is associated with David Ricardo. In what follows, first we describe Ricardo’s theory of rent, in which the idea of diminishing returns appears. There are diminishing returns in agriculture, because fertile land is not available in an unlimited quantity. We then go on to investigate Samuel Mountifort Longfield’s Lectures on Political Economy Delivered in Trinity and Michaelmas Terms, in which he elaborates on diminishing returns in agriculture and extends the theory to diminishing returns in manufacturing. Finally, we will investigate the Isolated State of Johann Heinrich von Thünen, who applies mathematics, and in particular differential calculus, to discuss the notion of diminishing returns.

Ricardo’s principles of political economy

In Ricardo’s society, landlords, who own fertile land, are an important social class. Their land is rented by farmers, who use their own labour (and the labour of their families) to farm the land to produce agricultural goods. According to Ricardo (1817: 45), “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil”. Let us suppose that a farmer can produce 100 kilogrammes of corn on a given piece of land (within a year), and that he has to pay 20 kilogrammes of corn to the owner of the land as rent. In this case the farmer would pay a rent of 20 per cent, taken from his output (or “produce”), to the landlord.

Rent does not emerge as a phenomenon in very early stages of a society’s economic development, when fertile land is available in abundance. At this early stage of development, land would be similar to air and water, which is available in unlimited quantity and can therefore be appropriated without giving anything in exchange.