Ricardian Theory of Rent

In the beginning of 19th century there arose a political debate in England which led to so
many so many theoretical discussions in the economic history of Europe. As it was said that in
the period of 1711 to 1794, the price of corn remain stable. But during the period of 1795 to
1800. There is a three-fold increase in the price of corn, and it went on increasing in the
coming two decades. As the corn was the basic food item, the increase in its price led to
create the trouble for the laborers. This creates political resentment. Many people died due
to starvation, and the employers unwillingly increase the wages as the price of the corn
increasing.

Amongst the economist of that time, there was a group who thought that the price of corn
went up due to collusive behavior of landlords so that they could earn higher rent. As at that
time most of the corn production is produce with the help of lands avail on rent. The other
group headed by David Ricardo, who wrote his book “principles of the political economy and
taxation” in 1872, was quite opposite to that of the above group. According to Ricardo the
corn prices rose due to Napoleonic wars in Europe from 1805 to 1815. These wars created
shortage of corn leading to increase its price. This made more profitable to produce corn. As a
result the demand of lands increases pushing the use price of land. On the other if the price
of corn decreased it will be less profitable to produce corn. Accordingly the price of land or
rent of land decrease. As Ricardo says,”the price of corn did not increase because the farmer
has to pay the rent, because the rent has to be paid because of increase in the price of corn. It
means to say that according to Ricardo, the prices of corn did not increase because of
increase in rent, but rent rises due to the increase in the price of the corn. It shows that firstly
the price of the corn rose then the rent came into being. Thus according to Ricardo the rent is
determined by price, not the price which is determined by the rent. Ricardo rejects the
proposition of first group.

Ricardo and his associates have had a long of struggle to abolish English Corn Law 1815 with
the purpose of importing more qualities of corn in the country so the price of corn depressed
because of increase in their supplies. Assumptions of Ricardo theory of rent are given below.

Assumptions of Ricardian theory of rent

1) The quantity of land is fixed in a country and the land have on use which is to produce
corn
2) The farmers are well aware of fertile land i.e. the land which is less fertile or the land
which is more fertile. Again the farmer cultivates the fertile land first.
3) There exists a perfect competition. Moreover, the marginal product of labor and
capital and their prices are equal.
4) The qualities of lands are inherent and indestructible, and farmer pay the price of use
of these qualities
5) There applies a law of diminishing returns on production
6) The land whose produce just meets its costs is called its marginal land or rent less land of
Ricardo

Working of Ricardian theory of rent

Rent is that part of land which is paid by the cultivator to its owner of the land against
the use of inherent or indestructible qualities of land. As the tract of land differs on
the basis of locality and fertility, therefore the yield the different output with the
same cost of production. Accordingly the difference between the outputs of superior
lands or marginal land is called Rent. This theory helped with an example.