This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 12. Unsuitability of the renting-contract in commerce.
The renting-contract has always proved to be unsuited to most transactions of commerce and manufactures. As these classes of industry were developing rapidly in cities near the end of the Middle Ages and throughout the sixteenth, seventeenth, and eighteenth centuries, borrowing and lending in the form of or in terms of money was more and more employed, and in this respect there was a striking contrast between city industries and agriculture, where the renting-contract was almost universal.
The materials and appliances needed for manufacture and commerce are so manifold, and are so varying in quality, that the renting-contract is very cumbersome and difficult to enforce. A merchant embarking on a trading journey would find great annoyance in renting a ship and a stock of goods. He must agree to repay the loan in goods of the same kind and quality as those received, a contract most difficult to interpret and execute, and giving occasion to costly tests and countless disagreements. It was much easier for the merchant if he had not means enough for his enterprises to get others to go in on shares (a very common method) or to obtain a loan under the interest contract, i.e., either a money loan, with which to buy the goods, or an agreed price in money for all the goods borrowed. "With the growth of industry and commerce, wealth increased in towns, more and more taking the form of goods which could not conveniently be rented, such as ships, wagons, tools, and stocks of merchandise.7
7 This simple difference in practice created and long fostered an illusion in the minds of economists, that land-rent was an income of a peculiar nature, governed by quite different laws from those that govern the income yielded by the machines, tools, and other agents in manufacturing and commerce. Various curious explanations of this contrast were given, all resting on the notion of some inherent differences in the kinds of goods, rather than in the form of contract. Traces of this notion still appear in the classification of wealth into land and artificial agents (often called capital) and in the assumption that rent and interest must in the very nature of things proceed from different classes of goods.
§ 13. Definition of rent. Let us now consider the term applied to the payment made under the renting-contract. The word rent comes from the Low Latin renta from renda, or rendita, in turn from redditus, that which is given, yielded, given back or returned. The French rendre (English render), to give or return that which belongs to one, was used very early. Chaucer used "rente" as income: "Cattle had he enough and rente," "cattle" probably meaning chattels (goods, wealth) and "rente" meaning income. The larger incomes of that time were derived as payments from vassals or tenants of estates. Rental is a collective term for a number of rents; the total yield of an estate was called its rental, and a list of the various sources of income, including all payments due from tenants in money, produce or services, constituted its rent-roll.
The word rent has continued to be used popularly as the amount paid by one person to another for the use of material things which must be returned to the owner after the time of use agreed upon. "We speak of the rent of a house, boat, etc., using the word as a synonym for hire. In the European languages the word is used generally in that sense, tho with various shades of meaning. In French la rente means the income from any kind of property; but corporate securities and national bonds particularly are called les rentes (probably because they are a form of investment yielding a permanent income), and one who has a fixed income from rents is called a rentier. In German the term Rente is used more broadly than in English, as an income of any sort, Grund-rente meaning the rent of land, and Capitalrente (like Capi-talzins) the income usually in English called (according to conditions) either dividends or interest.
With this usage and the problem in view, we may define rent as the price paid for the temporary possession and use of a more or less durative agent which is to be returned to the owner at the end of the specified period. Thus broadly understood, rent as a contractual payment includes not only the price of the true usance, but usually also something more to cover repairs, wear and tear, services of the owner in preparing and taking care of the use-bearer, collecting the rent, etc. It is useful to distinguish between the whole payment, the gross rent and the true, or net, rent which is that part of the payment that is left, after making due allowance for all the other items of cost. Net rent is the estimated price of the net usance.
In the next chapter we have to examine how the general principles of price are exemplified in the problem of rent.
Note Various meanings of rent. Various other meanings have been given to rent as used in economics which may be called to the student's attention that he may be on his guard against misunderstanding. The English economists from Adam Smith on restricted the meaning to the most striking of the cases of rent, as seen in their day, and defined it in the words of Ricardo as: "The price paid to the landlord for the use of the original and indestructible qualities of the soil." Most of the landlords of England did not themselves cultivate the soil, and their incomes were paid to them by tenant farmers. Where lands were cultivated by the owners, there was a value in the use of the land considered logically apart from the value in the cultivator's own labor and from other costs; in other words, there was a usance-value in the land, and economists, having no name for this, widened the application of the word rent to include this as well as the price paid to a landlord. But they did not widen it to include the usufructuary value of other agents, and thus they contrasted rent with interest from money loaned, with the income (called by them profits) from agents employed in commerce and manufacture, and with wages of labor. The authority of this definition of rent has rapidly waned since criticism has shown its accidental origin and its illogical limitations. When it was recognized that there was a difference between the usance of an agent to the owner and the price paid to him by another for its uses, the attempt was made to call the former economic rent and the latter contract rent. But this has proved to be confusing and has never gained a place in popular usage. In business practice the term rent is rarely if ever applied to the usance, but only to a contractual payment for the use. In the attempt to remedy the lack of logic in the definition some economists have widened the term to indicate any advantage secured in exchange (the margin of advantage), using such expressions as consumers' rent, producers' rent, buyers' rent, sellers' rent, and thus have lost all touch both with the original economic definition and with popular usage. Our analysis puts an end to this variation and inconsistency, by its identification of the separable use as the object of valuation. Thus usance and rent are seen to be the value and the price aspects of the same problem.