Law of Rent

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The Law of Rent was formulated by David Ricardo around 1809. It was the first clear exposition of the source and magnitude of land rents, and is among the most important and firmly established principles of economics. The Law of Rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the same purpose, given the same inputs of labor and capital.

This law has a number of important implications, perhaps the most important being its implication for wages. The Law of Rent implies that wages bear no systematic relationship to the productivity of labor, and are instead determined solely by its productivity on marginal land^[1], as all production in excess of that amount will be appropriated by landowners in rent. This is not the notorious iron law of wages, which predated Ricardo and is most commonly associated with the writings of Thomas Malthus. Indeed, the Law of Rent explains why the Iron Law of Wages consistently fails to predict actual wages: if there are highly productive land sites available for free, wages will tend to be high, cet.par.; if the only available free land yields little, wages will tend to be lower.

The Law of Rent makes it clear that the landowner has no role in setting land rents: he simply appropriates the additional production his more advantageous site makes possible, compared to marginal sites. The Law also implies that the landowner cannot pass on the burden of any cost such as land taxes to his tenants, as long as such costs do not affect the relative productivity of his land and marginal land.

[edit] Notes

^ Henry George extended the Law of Rent by recognizing that marginal productivity of labor on intramarginal land (the intensive marginal product) would equalize the extensive productivity of labor on marginal land: "the process will not stop until, either by the extension of cultivation to inferior lands or to inferior points on the same land, or by an increase in the relative value of manufactured products ... the yield to labour and capital [has] been brought again to the same level. ... And thus to say that rent will be the excess in productiveness over the yield at the margin or lowest point of cultivation is the same thing as to say that it will be the excess of produce over what the same amount of labour and capital obtains in the least remunerative occupation." See Progress and Poverty, "Rent and the Law of Rent".