Posts Tagged ‘Ricardo’

On the Economists' use of Rent*

Wednesday, 21 December 2016

Ordinary language typically uses rent to mean a recurring payment for the use of some good or service, especially for the use of land. The word has various other meanings in ordinary language; but, in economics, rent is used to mean something given in exchange, above and beyond what would have been the minimum necessary to effect the exchange in the absence of some restraint of trade. Usually, this concept is applied to pecuniary payment for a good or service above and beyond the minimum necessary to get that good or service, but one should see that exchanges without money might still involve such increased payment of one good or service for another, and that the same basic idea could be applied to cases in which someone were compelled to deliver more of a good or service than the minimum otherwise necessary to secure some amount of money.

It's mostly because of David Ricardo (18 April 1772 – 11 September 1823), an influential economist, that rent has this meaning. Ricardo used the word rent to refer to payment for the indestructible powers of land. That is to say that rent meant payment for the use of those properties of land that were not diminished by use; payment for harvesting things such as preëxisting plants and minerals would not, strictly speaking, be rent. Perhaps the only thing that could literally meet this criterion would be specific area, but Ricardo favored simplified models, so one might consider highly durable or naturally renewed properties as indestructible.

In Ricardo's mind, if someone renting land were given a right to cut down trees already on the land, or to quarry marble from it, then this right were essentially of the same sort as the right of someone buying lumber or stone at a mill; we certainly don't label the prices of such commodities as rent. Ricardo wanted to identify what were distinctive and essential in what we called rent, and to reserve the word rent just for those components of payments.

Ricardo imagined land as of different qualities, even when viewed only in terms of indestructible properties, but imagined the existing quantities of lands of each quality as not something ever increased by human action. And, in the context of his models, he concluded that rent were not determined by its cost of manufacture nor otherwise by some minimum below which the land-owner could not afford to produce it; rent, according to Ricardo, were purely an artefact of monopoly in the provision of land.

So long as this belief prevailed, it was natural for economists to extend the use of the word rent to other payments which they regarded as perfectly analogous. The word rent came to stand for any payment above and beyond the minimum necessary to effect an exchange were there a non-monopolistic market. And, even when most economists moved away from Ricardo's theory, as classical economics yielded to more thorough-going marginalism, they held onto this extended use of the term rent.

Because this use of rent can certainly be confusing, both when economists are interacting with lay-persons and when economists are attempting to discuss markets in which commodities are leased, sometimes instead of the bald word rent, they use the term economic rent. (This solution is imperfect, as that term can in ordinary language refer to a leasing payment which is in some sense reasonable for a lessee or potential lessee to bear.)

Economic rent, and the pursuit of rent — called rent-seeking — are considered quite important by most economists.

Rent-seeking, perhaps often unconscious but certainly almost never acknowledged, is wide-spread, and explains a very great deal of the political process.

Rents cannot be paid unless they are paid by someone; often, those paying them do not even realize that they are bearing these costs, or mistake their sources. Worse, rents typically transfer wealth inefficiently, with more lost by whoever is made to pay the rent than would be lost by some other transfer mechanism. Still worse, rent-seeking imposes costs even when it is unsuccessful.

Within a neo-classical framework, rent (or economic rent) might be alternately be defined as something given in exchange, above and beyond the opportunity cost of producing that for which it is exchanged. When the frequent assumptions of complete preferences, continuous divisibility of goods and of services, and ignorability of small costs hold, this new definition is equivalent to the original definition. But, exactly because one ought not to over-commit to those assumptions, it is best not to adopt the alternate definition as such.

I have encountered professors of economics asserting things to be rents that certainly were not. For example, one simply declared that the salary of a specific basketball player were a rent, but the professor had lost himself in a taxonomy which imagined the player simply as playing basketball or as idling. In fact, the player could have played for teams other than the one that hired him, and could have applied his abilities to something other than playing in professional basketball. If there were a rent in his salary, it may not even have been the major portion.

* This entry is primarily infrastructural. I want to be able to refer to rent and to rent-seeking in later entries, without there defining the associated terms.