Now we know that David Ricardo was in fact wrong on this point:
Ricardo\’s prediction that most of national output would end up going to the landlords.
And it got me to musing. Why was he wrong? The Law of Rent does pretty much imply that as a country fills up, as marginal land is brought into production, then more of the economy will indeed end up in the hands of landlords.
And we do indeed see it happening in certain sectors, as in the locations of coffee shops as Tim Harford so elegantly pointed out,.
But we don\’t see it right across the economy. Why?
Apologies to those who have already worked this out…as someone without an advanced training in economics, with only what I come across as I read around, there are times that I come up with explanations that are either wrong or blindingly obvious to those with such advanced educations. Or, as I think is probably the case here, something that someone else pointed out a century or two ago.
Anyway, here goes.
The important point about wages are that they are not set by the productivity of labour on productive land, but by their productivity upon marginal land (rent of course being the other part of it, the residual in this model). OK, that works just fine for farming and as a country fills up with farmers that will end up being the case.
However, farming, where this relationship is demonstrably true, is some 1-2% of our economy. Manufacturing is 16% or so and services the rest (ish). Some services are indeed highly location (I\’m equating that to "productive") dependent, like those coffee shops. However, the vast majority of the economy is actually operating upon marginal land.
Yes, OK, there are advantages to location, you\’ve got clustering and all sorts of such effects which make one place or another better for a specific trade or service (rents in The City certainly show that). But for some huge chunk of the economy where you are, or at least where you are to within some tens of miles, really doesn\’t matter a damn.
And what the land is like underneath your factory or office block is something you really don\’t care about.
So what I\’m edging towards is the idea that while Ricardo could in fact be correct in the supposition, that eventually larger and larger portions of the economy will accrue to landlords, this is dependent upon the country filling up. And as so much of our economy does not depend upon land quality and only mildly upon location, we\’re not full up yet and thus landlords aren\’t getting an ever greater portion of the economy.
Although with zoning and planning permissions politicians are working hard to correct that.
Anyone want to tell me how blazingly stupid this idea is? Or who thought of it first?