Ricardian theory of rent / Classical theory of rent

Ricardian theory of rent / Classical theory of rent:-

The Ricardian theory of rent was developed by David Ricardo in his book, “Principles of Political Economy and Taxation” published in 1817 A. D. According to him, “Rent is that portion of the produce of the earth which is paid to the landlord for the use of original and indestructible power of soil”.
              This theory has the following assumptions:-

• Rent is earned only on land.
• The land is fixed in supply.
• The land possesses indestructible and original power.
• Land can be used only for farming.
• Land can be used only in diminishing order of their fertility.
• Law of diminishing returns operates in the land.
• Land differs in quality.
• Perfect competition prevails in the market.
• More population increases more productivity.
• Existence of marginal land.
• It is based on the long-run concept.

Ricardian theory of rent can be developed by intensive technique and extensive technique. The process of rent formation on both techniques is explained below:-

1. Rent under extensive cultivation:-

Extensive cultivation is a type of farming under which farm production is increased by using more and more plots of land. Ricardo assumes 4 grades of land which are equal in size but different in quality. Grades of land A, B, C, and D are ranked in diminishing order of their fertility. People cultivate on grade A land because it is the most fertile. If the demand for food grains is more, then people cultivate in successive grades of land B, C, and D. Grade D land is called marginal land because it is least fertile and covers just the cost of production. Each grade of land is cultivated by using the same unit of labor and capital.

Under extensive cultivation, rent is the surplus produced of intramarginal land over marginal land. So, all grades of land which produce more than the marginal land earn rent. Rent under extensive cultivation can be explained with the help of the following schedule and diagram:-

Grades of land	Production (in kg)	Cost of production (in Kg)	Rent
A	40	10	40-10=30
B	30	10	30-10=20
C	20	10	20-10=10
D	10	10	10-10=0

  In the above figure, the grades of land and production are measured along X-axis and Y-axis respectively. The amount of rent earned by different grades of land A, B, C, and D are shown by the shaded area. The production from the land D covers just the cost only. So, land D is called marginal or no rent land. So, rent under extensive cultivation is the surplus product of intra-marginal land over the production of marginal land.

2. Rent under intensive cultivation:-

Intensive cultivation is a type of farming under which the quantities of labor and capital are used successively on the same plots of land to increase production. In this case, the rent arises due to the operation of the law of diminishing returns in the cultivation of land. This law states that if more and more units of labor and capital are employed on a given plot of land per unit of time, the total product increases at a diminishing rate. When first, second, third, and fourth units of inputs are used successively on the same plots of land, the last dose of labor and capital employed on land is called marginal units and previous doses are called intra-marginal units. The surplus of output on these intra-marginal units over the marginal unit is called rent.

Rent under intensive cultivation can be explained with the help of the following schedule and diagram:-

Doses of labor and capital	Production (in kg)	Cost of production (in kg)	Rent
1st	40	10	40-10=30
2nd	30	10	30-10=20
3rd	20	10	20-10=10
4th	10	10	10-10=0

 In the above figure, the doses of input and production are measured along the x-axis and y-axis respectively. The shaded area represents the rent obtained by using different doses of input. It is because, under intensive cultivation, the rent is the difference between the output produced by an intra-marginal dose of input and the marginal dose of input. The production from the fourth dose covers just the cost only. It earns no rent.

Criticisms of Ricardian Theory of Rent:-

1. No original and indestructible power of soil:-
The ricardian theory assumes that the land possesses original and indestructible power. This view is not acceptable because the productivity of land can be increased through scientific techniques. Fertility can be destroyed by intensive use of land, soil erosion, flood, drought, and so on.

2. No single use of land:-
Ricardo assumes only one use of land. The land has no next best alternative. However, in real life, land can be used to grow various types of crops, for industrial purposes or real estate purposes.

3. The wrong assumption of ‘no rent land':-
Ricardian theory of rent assumes the existence of land which is available free of rent but in real life, nobody can obtain any land which is free of rent. Likewise, a plot of land regarded as marginal land for 1 crop maybe intra-marginal land for other crops.

4. The wrong assumption of perfect competition:-
Ricardian theory of rent assumes the existence of competition in the land market. But in real life, the market that we find in land is imperfect competition. Similarly, the landlord may charge the monopoly rent.

5. Wrong idea of application of the law of diminishing returns:-
Ricardian theory of rent is based on the application of the law of diminishing returns in agriculture production. But the production can be increased at an increasing rate by the use of improved technology, irrigation facility, modern fertilizers, hybrid and improved seeds.

6. All the factors of production earn rent:-
Ricardo assumes that the land is the only one factor of production that earns rent. According to modern economists, all the factors of production earns rent.

7. Rent arises due to scarcity:-
Ricardo opines that rent arises due to the differences in fertility and situation of land. In critics view, rent arises not only because of the land's fertility and situation but also due to the scarcity of land.