Ricardo on rent

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?


6 thoughts on “Ricardo on rent”

  1. This is the same explanation I have come up with. Unfortunately, as with every single idea, we can only try to track the person who has made it popular first, not the one who actually was the first one to formulate it.

  2. Of course Ricardo’s law still holds.

    1. Location values are still hugely important to e.g. the retail sector and most services (you mention banks) and land values are hugely important to farming (by definition).

    2. Even if the industry hardly depends on location values (power stations), it still needs people to man it. And those people live somewhere. The nearer you want to site your power station to where people are (shorter supply lines; more workers hence lower wage bill) the more expensive land is and the more expensive it is getting permission to put your power station there (whether in terms of land cost or bribing councillors to bribe local Greenies and NIMBYs etc).

    3. You seem to ignore residential land, which makes up three quarters of UK land by value. A large chunk of the price of the house (even ignoring the bubble element) is purely payment for the location value (shops, places of work, schools, railway station, nice view, whatever).

    4. Pulling in the opposite direction is the fact that we have e.g. more mail-order nowadays (or ‘ordering over the internet’) so people can have DVDs sent by post instead of going to the cinema.

    Only I’m not sure that Ricardo was so daft as to predict that an ever rising amount of GDP would accrued to landowners (if he did, then my bad). There is a basic split of profits between rents, wages and entrepreunerial profits which appears to be pretty immutable.

    Which is why in the long run, land values, wages and share prices increase roughly in line with each other. It’s only that workers and entrepreneurs are actually doing something to generate that income, while landowners aren’t.

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