This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. Divergence of actual rents from competitive rents. § 2. Cross and net rent to the owner. § 3. Different grades of fertility as affecting rent. § 4. Different costs of cultivation as affecting rent. § 5. Differences in location as affecting rent. § 6. The general doctrine of rent. § 7. Dependence of rent on proportionality. § 8. Rent and intensive utilization. § 9. Divergent subjective valuations of different bidders. § 10. Example of competing bids. § 11. Complexity of the situation lying back of each bid. § 12. Personal efficiency as affecting the valuation of agents. § 13. Variability of rents.
§ 1. Divergence of actual rents from competitive rents. Every rent paid by one person to another grows out of some agreement, explicit or implied, between two parties, and in a very general sense may be called a contractual payment. But the agreements in force at any moment differ in regard to the time that has elapsed since they were made, in regard to the conditions that existed when they were made, and in regard to the changes that have taken place meantime affecting the value of the uses of the wealth. It must often happen, therefore, that the rent which the borrower is obligated to pay is either more or less than the usance-value as estimated at the present moment. It is necessary to distinguish, therefore, the terms customary rents, lease rents, and competitive rents. A competitive rent is the rent that is (or would be) arrived at under the free operation of the actual competitive market conditions.1 A large part of the rents actually paid, especially for lands and houses, are not at this rate, but at a rate determined at an earlier date and under more or less restricted competition. Some may be customary rents which were fixed in former generations and are not subject to revision. Custom, in the case of a large part of the land holdings of the older countries of Europe, Asia, and Africa, prevents the landlord from charging all that the usance of the land is now worth. Presumably, when the feudal agreements were made in Europe a thousand years or more ago, there was a rough equivalence in the benefits accruing to the landlord and the tenant, respectively. In cases where the customary tenant and his descendants have the right to continue at a rate below a competitive rent, the tenant is to some degree a sharer in the ownership; the value of the usufruct is divided between the two parties. In communities where customary rents are common, a rent of the full annual value of the tenement, or near it, is called a rack rent. It often has resulted from some encroachment by the landlord upon the tenant's rights, and therefore the term has an evil implication.
1 See ch. 8, Competition and monopoly.
In other cases, notably in England, leases of agricultural land are made for periods as long as 30 years, and the tenants have often been the losers because, before the end of the time, the prices of agricultural products had fallen. Even in America city land is sometimes leased at a quit-rent for 99 years, and railroads are leased to other railroads for 999 years. Here the contractual rent actually paid each year varies greatly from what the competitive rate would be if fixed annually. The annual rent agreed upon at the signing of a long-time lease is not likely to be the competitive rent of the then current year, but rather an equalization of the varying rents of the whole period, as forecast by the bidders for the agents. Divergent actual rents for the same grade of agents may therefore exist side by side, according to varieties in customs and contracts.
§ 2. Gross and net rent to the owner. The renting-con-tract is rarely found in its pure form. Rarely is the borrower, or tenant, required to keep the agent in perfect condition ; therefore when the rent is fixed, a certain amount of repairs and some provision for ultimate replacement is allowed for and included. The house-owner usually has to look after the fire insurance, nearly always has to pay the taxes, usually has to reshingle, repaint, and repaper from time to time, has often to employ a janitor, and where there is an elevator, to pay for its operation. Evidently the rent must cover all these items before we can speak of the remainder as a net income to the landlord. A large part of the rent of boats received by some boatmen is used to pay their attendants and the rent of the docks they use; and a considerable part of the rent received for the docks is expended by the owners to replace rotting piles and boards and otherwise to keep up the repairs. The owner nearly always has in mind certain costs of the business which must be deducted from the sum spoken of as rent. This difference between the borrower's view and the lender's view must not be overlooked in any specific case. The borrower's idea of rent is what is generally understood by the term rent in a contract, namely, the amount he pays; the lender's idea of rent is often the corrected amount, the net-rent which is attributable to the sale of the usance of the particular agent. This sum, since it is the price of the usance, is an absolutely net income. As far as can be foreseen it is an income "in perpetuity," that is, accruing each year and likely to accrue each year into the indefinite future. But whether a given contract rent is gross or net is immaterial for our present purpose. In either case its amount is determined in the same way that the market price of present direct goods is determined. (See Chapter 7.) It is the resultant of individual valuations which, in a true market, mutually influence each other, and generate a market price. It is the price which brings as near as possible to equilibrium the amount offered and the amount demanded. § 3. Different grades of fertility as affecting rent.2 The theory of rent, as usually presented, deals with very simple conditions, which may be illustrated as follows. Assume that there are several fields, all equally accessible to the market, and all requiring the same amount of labor and of materials for their cultivation. With a small population only the most fertile tract A would be tilled and there would be no rent. As soon as it became necessary to cultivate B, a rent of two bushels an acre would begin on A. Just as it became necessary to seek a part of the food supply on D, the rent on the C tract would be two bushels, on B would be four bushels, and on A would be six bushels an acre.
2 Everything here said of fields as agents may be said mutatis mutandis of any other class of agents which are of different grades or which are used with different degrees of intensiveness.
§4. Different costs of cultivation as affecting rent. Or changing our hypothesis we may suppose, in accordance with some cases that actually occur, that all the tracts yield practically the same gross product per acre, say 24 bushels, but require different outlays per acre because of hills, rocks, needs of supplying fertilizer, or any other reason. Under these conditions the rents would be the same as in the other case.
A yields 24 bushels less 18 for costs, rental, 6 bushels.
B yields 24 bushels less 20 for costs, rental, 4 bushels.
C yields 24 bushels less 22 for costs, rental, 2 bushels.
D yields 24 bushels less 24 for costs, rental, 0 bushels.