This section is from the "Elementary Principles of Economics" book, by Richard T. Ely and George Ray Wicker. Also available from Amazon: Elementary Principles Of Economics: Together With A Short Sketch Of Economic History
As in the study of the factors of production we first discussed the factor land, so here in our study of the distribution of the social income among the factors that contribute to its production, we may logically begin with a discussion of the return to the first factor.
Meaning of the Term. As used by economists, the word " rent" means that which is paid for the use of land or other natural agents. The popular meaning of the word " rent" is less exact. In everyday life we hear people use the word to describe that which is paid for the use of a house or other building. But such so-called rent contains two elements, one of which is not economic rent at all. The amount paid for the use of a house includes the amount paid for the use of the land upon which the house stands, which is economic rent; but it also includes payment for the investment of capital in the form of a building, and this latter return is therefore not rent, but interest. The reason for the popular confusion lies in the fact that both are usually paid to the same person. In some cities, however, separate ownership of lot and building is not uncommon. One man may own the building site and lease it for a long term of years to another man who erects a building upon it. In such a case the building becomes the property of the landowner at the expiration of the lease, unless the lease is renewed. In other cases the separation in ownership is permanent, the houseowner paying an annual sum to the landowner for the use of the ground. This is the case, for example, in Baltimore, where ground rents are an important feature in the economic life of the city. Let us remember, then, that in economic discussions, the word " rent" means only that which is paid for the use of land or other natural agents. Inasmuch as land is the chief natural agent appropriated by man to his uses, it is usual to speak of land as if it were the only natural agent for which rent is paid. It is therefore necessary to caution the student at this point that when the word " land " is used in the following pages, it will almost always be possible to substitute for it the more general term. In other words, the same forces which determine the rent of land determine in the main the rent of other natural agents.
1. The Quality of the Land.The first thing to be noted about land is its quality. Differences of fertility of agricultural land are familiar to every one. They depend upon what one of the early economists described as the "natural and indestructible properties of the soil." In recent years many writers have objected to this statement. It has been said by way of denial that soil is not "indestructible"; that it may be and often is exhausted; that it may be removed from the land altogether, and that on the other hand it may be created by fertilization, etc. The disagreement which these writers express is due in large part to their use of the word " soil" in its narrow sense. If we use the word " soil" only to distinguish the thin top layer of the land that contains certain chemical elements necessary to plant life, then some of the objections just stated are valid ones. Such "soil," as distinguished from subsoil and the ground lying underneath, may indeed be carted on or off the land at pleasure and may be wasted or replenished. But even granting this, there still remain certain qualities of the land that are practically or entirely indestructible and unproducible, and which affect the productiveness of the land so directly that we may without impropriety speak of them as " properties of the soil." Such a property is the conformation of the land. A steep gravelly hillside does not equal a plain in fertility, nor is the north side of a mountain as productive as the south side, other things being equal. Again, climate, although strictly speaking not a " property of the soil," is an inseparable condition of the land, upon which to a very great degree the productiveness of the land depends. It would be better to speak of these forces governing the quality of the land as the inseparable conditions affecting its productiveness. Of these, extent (standing room), conformation, and climate are essentially natural and indestructible.
As we have just seen, under the " original and indestructible qualities of the soil," or, to use the phrase suggested, the inseparable conditions affecting production, we must include the general physical environment, and this means much more than many modern critics have recognized. Concrete instances will aid us in appreciating the significance of this environment. In the western part of New York State, along the shores of Lake Erie, we find a region which is admirably adapted to the production of table grapes. This is due in part to the properties of the soil itself, but more particularly is it due to the presence of Lake Erie, which, by absorbing the heat in the springtime, delays the appearance of vegetation, and by giving off heat in the fall retards the action of the frost, thus giving the grapes time to ripen. If we go to Palisade in the western part of Colorado, we find a region so admirably adapted to the production of peaches that some of the land is valued at $1000 per acre. This is due, not merely to the properties of the soil, but also to the peculiar location of the region, which is of such a character that the breezes keep off the frost. Land thirty miles to the west, which is apparently similar in quality, will not produce peaches and is far less valuable. Careful consideration of actual agricultural conditions leads to the conclusion that, while man can do much to create fertility, it is a serious error not to attach great significance to the inseparable conditions affecting the productivity of the soil.
While it is true that the soil can be removed and that fertility can be increased or decreased, and consequently is not indestructible in a physical sense, we may speak even of fertility as economically perpetual, just as one modern economist has called "capital value" perpetual. While the land yields an annual return, its fertility may be maintained and even increased by wise husbandry. It is only, then, by a wasteful and prodigal agriculture that the original gifts of nature in the fertility of the soil are exhausted. Similarly the value of the capital invested in a manufacturing plant is maintained under wise management, though the concrete capital forms are undergoing constant destruction. But, as it is easier to retain the fertility of the soil in perpetuity and to increase it than it is to maintain and increase the value of capital, land has in this particular a superiority.
Fertility, even when artificial, becomes essentially a part of the land. The farmer, when he invests his capital in fertilizers, makes a contribution which becomes indistinguishable from the soil itself. From such a case, when capital is embodied in the land and assimilated to it, we pass by insensible gradations to fences, barns, houses, etc., which more and more retain their distinct character as removable and reproducible capital. Where, then, is the line between land and capital to be drawn ? We might, to be sure, restrict the term " land " to strictly natural land, and apply the term " capital" to all products, including even the soils of old lands which have been kept productive by fertilization. But this distinction, while perhaps logical, would for practical purposes be confusing. On the other hand, if we include under land all capital that has been insensibly incorporated in it, we must acknowledge that there is no hard and fast line of division between land and capital. Here again we are reminded that in economics, as in everyday life, distinctions are governed by convenience, and are good or bad according as they are more or less useful.
The distinctions between land and capital are now undergoing discussion and may be regarded as debatable ground in economics. We cannot enter into the controversy in this place or give all the reasons why it seems to us that the differences between land and capital are fundamental in their theoretical and practical significance.
2. The Situation of the Land. The second great fact to be noted about land is its situation. On one side this is closely connected with climate. Thus, the significance of situation near a large body of water or near a mountain range has already been pointed out. But the situation of land with regard to the consumers of products is of even greater significance. Other things equal, land a hundred miles from market is more valuable than land a thousand miles from market. This difference is really one of communication and transportation, and therefore, of accessibility, which depends mainly upon distance. But land may be far away, yet easy to reach, or near, yet difficult of access. Changes in the cost of transportation therefore affect rents profoundly. Thus, the agricultural rents of England have been revolutionized during the last century by cheap ocean transportation, which has practically brought distant lands very near to her shores.
To this fact of situation we must ascribe almost wholly the enormous rents paid for city lots, as contrasted with the rents paid for lots in suburban places or in small towns. Here, too, rapid and easy transport powerfully affects rents. Good means of rapid transit increase the value of suburban lots and check the rise of rents for residence sites in the cities themselves.
And now, having noticed that all the minor economic differences in land resolve themselves into differences of quality or of situation, we may go one step farther and reduce these two differences, for the purpose of convenience, to one, viz., desirability. Suppose, for instance, that a man in New York City owns two farms, one in the state of Dakota, the other in his own state. If the Dakota farm produces thirty bushels of wheat to the acre, and it costs the price of ten bushels per acre to get the crop to market, while the New York farm raises twenty-two bushels per acre and it costs two bushels per acre to get the crop to market, the farms are equally productive as far as the owner is concerned. Other conditions being the same, the two pieces of land are equally desirable. In short, we may say that they are equally good land. Whenever we speak of good land therefore in connection with the subject of rent, we mean land which for all reasons taken together is desirable. It will be absolutely necessary to keep this in mind in studying the following pages.