Talk:Economic rent

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You make some very good points

I'm workin on it! I will update the talk page when I'm done. Tthere will be several intervening updates to the page. I'd guess I'm spose to use the "sandbox" whatever that is but I. like everyone else, am strapped for time.

Detailed historical terminology

Was tagged for neutrality, moved to talk for discussion and possible rewrite for neutrality and clarity

In the 1700s it was observed that higher wages and interest will draw additional labor or capital into production. As wages and returns to capital development increased then people came to the cities to work for wages and to help in the construction of capital. The early “capitalists” sought the interest that flowed from industrialization. People who would have died in the countryside were alive because they were able to find employment in the city. But attempting to increase rents merely resulted in unused land. The freeholders of land historically rented or made useful all the land they had at whatever the market would bear. Still, users were willing to pay higher rents for particular sites because these sites offered some beneficial opportunity for production or commerce. But no rent whatsoever was needed to "bring" land into production. In a free market all of the fees paid to insure exclusive use of land over some period of time can be attributed to allocation of land by market forces. It was/is assumed that the user that can/will pay the most for the use of the land will be the most productive user of that particular section of land. This is described as "allocating the land to best use".

Virtually all of the land rent could be assigned to the allocative function using market prices, while only a small portion of wages (the income earned by labor) or interest (the income earned by capital) could be attributed to allocation. This was so, as discussed above, because wages and interest also serve to draw these factors into productive use. Johann Heinrich von Thünen was especially influential in developing the spatial analysis of rents, which highlighted the importance of centrality and transport. Simply put, it was density of population increasing the profitability of commerce and providing for the division and specialization of labor that commanded higher municipal rents. And the high rents determined that land in a central city would not be allocated to farming, but would be allocated instead to more profitable residential or commercial uses.

One implication of the classical analysis is that while a tax on wages or interest income would affect the quantity of labor or capital offered to productive use, almost the whole of land rent could be taxed away without affecting the quantity or quality of available land. Later in the 1800s Henry George, seeing that a properly designed tax on land rent would have none of the efficiency-reducing adverse effects of other taxes, advocated a single tax on land as a way of financing government.

Karl Marx agreed with Henry George and with the classical economists that land rent was a form of exploitation. Landowners were able to get "something for nothing" just because they controlled such important natural resources. To Marx, the landowners received a part of capitalist society's surplus-value that was redistributed from the industrial sector, where workers produced it. However, unlike George, Marx also saw industrial capitalists as rentiers who simply extracted economic surplus from labor, while otherwise contributing nothing to the economy. Henry George was adamant that land and capital are two different factors of production not to be aggregated under the umbrella of "means of production." George saw that economic rent derived from political privilege (primarily land ownership) was the proper place to levy direct taxes while leaving wages and interest untaxed.

In the latter part of the 19th century, as neoclassical economics was being formulated, it was realized that the classical definition of rent made the non-contributory nature of the landowner's participation in economic activities rather too apparent, leading to calls for recovery of publicly created land rents for the purposes and benefit of the public that created them (most famously by the American Henry George), and even for nationalization of land and other natural resources as demonstrably more economically efficient than their private ownership (most notably by Karl Marx). A new basis for consideration of economic rent had therefore to be devised, which would permit a logical and moral defense of long-standing institutional arrangements that many in positions of authority found highly congenial, and that (then as now) few people considered it conceivable (or at any rate convenient) to do without.

In addition, certain kinds of rent-like income flows have long been obtained through other means than ownership of land, such as the royal patent monopolies on trade in salt, spices, silk, etc., or the privileges of exacting tolls from travelers on public roads. More modern parallels to these sorts of government-issued privileges had also begun to be established by the late 19th and early 20th century in the form of utility monopolies; production, import and export quotas; drug regulation and alcohol prohibition; intellectual property monopolies; labor union certification; and legal barriers to entry in law, medicine and other professions. The common characteristic of the additional income derived from such privileges with land rent income, and what distinguishes possession of such privileges and ownership of land from contribution of labor or capital to production, is that the economic rent incomes obtained thereby are obtained not by contributing anything to the production process, but by controlling others' access to otherwise accessible production opportunities. Since publication of the seminal paper, "The Welfare Costs of Tariffs, Monopolies, and Theft," by Gordon Tullock in 1967, a substantial economic literature has been developed around the concept of rent-seeking behavior and its social and economic consequences.

Consequently, in modern neoclassical economic theory economic rent income is defined not by how it is obtained, but by whether it is greater than some other (typically unknown, or even unknowable) sum: i.e., it is defined as either the difference between the income realized by the owner of a factor of production in some particular use of that factor and the cost of bringing that factor into that use (classical factor rent), or the difference between the income realized in the current use of the factor and the income that would be realized in its next most profitable use (Paretian factor rent). Unfortunately, while these definitions of economic rent usefully encompass the kinds of privilege-based incomes enumerated above in addition to ordinary land rent, they also have the effect of encompassing large amounts of wage and interest income, and introducing substantial uncertainty as to what portions of production can accurately be accounted wages, interest and rent.

References