This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 5. Differences in location as affecting rent. Still another case is presented when fields are of equal fertility but are at various distances from the market where the product is used and the price is fixed. Assume that the costs of transportation to the market are equal to the differences in the cost of cultivation in the last case. This is represented in
Figure 26. When it becomes necessary to resort to tract B for products on which the transport-costs would be two bushels per acre, a rent on A would arise equal to the freight charges; and so on as in the preceding examples.3
§ 6. The general doctrine of rent. The principle in each of these three simple cases is reducible to the one proposition, that the rent (in money) of an agent is equal to the excess of the price of its gross products above (money) costs (other than the rental) needed to obtain them and take them to market. This is equally true when the three conditions are combined in varying proportions, the excess being partly due to a larger product, and partly to lower costs either of cultivation or of transportation.
The comparison of quantities of products might be made in terms of bushels, pounds, tons, yards, etc., provided that all of the products were of the same kind and quality. Likewise the comparison of costs might be made accurately in terms of day's labor provided labor were the only cost and were all of the one kind and value. But these conditions are rarely, if ever, present. To compare the items, therefore, it is necessary to express them all in common terms of monetary prices. A comparison may thus be made between the most varied products, and between costs of most varied kinds and the most varied kinds of agents.
3 It need hardly be said that this figure represents a formal regularity of gradations of freight rates not to be found in reality. This is a schematic representation, not an actual photograph. If a navigable stream or a good turnpike, or a railroad, should run from D to M, then a point such as 13 more distant from the market in miles, would be much nearer, measured by costs, than would a point 2b from which goods must be drawn in wagons over dirt roads. The general principle is valid when expressed in reference to money-costs rather than with reference to actual miles; that the price of the usance conforms to the net price of the product after paying the cost of bringing it to market.
It must not be thought that in these examples the order in which cultivation proceeds from more fertile to less fertile, from more easily to less easily cultivated, from nearer to more distant fields, is intended as a historical account. This, too, is merely schematic. Changes in the methods of agriculture may cause some kinds of fields to become less, others more productive at a later stage than when first taken into use. Tracts A and B might be first taken up because of greater fertility (in Figure 24), or of ease of cultivation with the tools then used (Figure 25), or on account of nearness to the market (in Figure 26) ; and later after drainage, or with the invention of better tools, or after a new road had been built, tracts C and D might be found more productive than A and B. We are not concerned here with the historical order of change, but with the point of equilibrium of competitive rent under any given set of conditions.
The commercial rent paid by the user of a durative agent of any kind is a gross sum which usually is more (or conceivably may be less) than the price of a true usance, according as repairs and depreciation have been attended to by the borrower (see Chapter 14, section 3). A net or true rent, however, is that which leaves the use bearer in condition to yield an unchanging income (see above, section 2).
§ 7. Dependence of rent on proportionality. It may here be clearly seen that the origin and the existence of rent is dependent on the operation of the law of proportionality. If intensive use of field A met with no resistance there would be no motive ever to cultivate another field. A whole nation could be fed from the single acre of land. But in fact, applying more and more labor and other agents to tract A will not increase the crop of grain proportionally. In applying any fund of complementary agents a point is found where it is better to go over to the cultivation of the tracts B, C, D, successively, each less fertile (case 1), or more difficult to cultivate (case 2), or less accessible and costing more for transportation (case 3), than to go on cultivating tract A with more and more labor or, it may be, at higher and higher money costs. When this is done the return imputable to the additional (marginal) unit of cost on the intensive margin of cultivation in A just equals that of the additional unit on the extensive margin of B, C, D, etc. There comes about a static equilibrium, a best apportionment of agents to the different tracts under the existing circumstances.
This best apportionment of complementary agents has, of course, the result of maximizing the net incomes from the various tracts. The better agents are more intensively cultivated than the poorer agents for the reason that in this way labor is most advantageously utilized. This difference in degree of use appears generally in the form of differences in the kinds of products as well as in the amounts, each agent being used for the purpose in which it promises to yield the maximum usance, and, consequently, rental. A may be given to commerce, manufacturing and residences, uses of varying degrees of intensiveness; B, to market-gardening, C, to ordinary farming, D, to grazing, forestry, and other extensive modes of use. And the simple guiding principle in the matter is this: that each thing is put to the use which seems to promise the maximum income. This, of course, is true of labor, buildings, tools and machinery of all kinds, as well as of land.
§ 8. Rent and intensive utilization. The origin and existence of usance-value and hence of rent is essentially due to the limitation of supply of uses in the better grades and not to the existence of poorer grades forming an extensive margin of utilization. If A were the only grade, rent must arise when it is used intensively. If in accordance with the principle of proportionality the successive units of labor (or of all money costs) are applied so that they become less effective, usance-value must arise. If now, B is there waiting to be used, the rent on A would have to equal about 2 bushels per acre before cultivation could go over to B. The effect of the presence of the poorer grade B, is not to cause the rent on A, but merely to check the rise of usance-value through affording a substitute good. And so, in turn successively lower grades of agents become part of the supply as rent rises, and thus they limit its rise. The problem of usance-value and of rent here touches on the border of the problem of the value of the complementary agent, labor, and may better be explained under wages.4 Rent is not an isolated price problem, but it is interrelated with that of the prices of all agents uniting to obtain a product.
4This is the same principle explained above under usance-value,