The Ricardian Theory of Rent (With Diagram)
1. Explanation of the Theory
2. Assumptions of the Theory
3. Reasons for Existence of Rent
4. Deductions from the Theory
5. Criticisms of the Theory
Explanation of the Theory:
David Ricardo, an English classical economist, first developed a theory in 1817
to explain the origin and nature of economic rent.
Ricardo used the economic and rent to analyse a particular question. In the
Napoleonic wars (18.05-1815) there were large rise in corn and land prices.
Did the rise in land prices force up the price of corn or did the high price of corn
increase the demand for land and so push up land prices. Ricardo defined rent
as, “that portion of the produce of the earth which is paid to the landlord
for the use of the original and indestructible powers of the soil.” In his
theory, rent is nothing but the producer’s surplus or differential gain, and it is
found in land only.
Assumptions of the Theory:
The Ricardian theory of rent is based on the following assumptions:
Rent of land arises due to the differences in the fertility or situation of the
different plots of land. It arises owing to the original and indestructible powers
of the soil.
2. Ricardo assumes the operation of the law of diminishing marginal returns in
the case of cultivation of land. As the different plots of land differ in fertility,
the produce from the inferior plots of land diminishes though the total cost of
production in each plot of land is the same.
Ricardo looks at the supply of land from the standpoint of the society as a
whole.
4. In the Ricardian theory it is assumed that land, being a gift of nature, has no
supply price and no cost of production. So rent is not a part of cost, and being so
it does not and cannot enter into cost and price. This means that from society’s
point of view the entire return from land is a surplus earning.
Reasons for Existence of Rent:
According to Ricardo rent arises for two main reasons:
(1) Scarcity of land as a factor and
(2) Differences in the fertility of the soil.
Scarcity Rent:
Ricardo assumed that land had only one use—to grow corn. This meant that
