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Landed Property and the Distinction between Royalty and Rent

Author(s): Ben Fine
Source: Land Economics, Vol. 58, No. 3 (Aug., 1982), pp. 338-350
Published by: University of Wisconsin Press
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 Landed Property and the Distinction Between
Royaltyand Rent
Ben Fine

The purposeof this paper is to exam- concludingremarksconcerningthe rele-

ine a debate that took place among
economistsat the turnof the centuryon
whetheror not a mineralroyalty consti-
tuteda rent.Beforeexaminingthe debate
itself, we investigatewhy it shouldhave
takenplace at all. This investigationis in
two parts. The first part, treatedin sec-
tion I, attempts to discover why there
should have been any interest in royal-
ties. We suggestthat towardsthe end of
the nineteenth century, the system of
landed propertyin Britainbegan to im-
pede the organizationof the coal industry
so that the system of private royalty
ownershipcame underquestionbut was
not yet found seriously wanting. Ac-
cordingly,having stimulatedan interest
in royalties, which was found to be un-
necessary for practicalpurposes, a de-
bate over the royalty/rent distinction
could be used for other theoreticalpur-
poses. This forms the second partof our
investigation in section II, where we
arguethatat the turnof the centurythere
was disagreementover the meritsof par-
tial and generalequilibriumanalysis.The
royalties controversy was a weapon in
this second debate, althoughthe debate
itself was confined to those who sub-
scribedto partialequilibrium.In section
III we review the debateitself and show
how positions taken correspond to
broadertheoreticalpositions in relation
to partialand generalequilibriumanaly-
sis. Finally,in section IV, we drawsome
Land Economics, Vol. 58, No. 3, August 1982
0023-7639/82/0003-0338
$1.50/0
? 1982by the Boardof Regentsof the Universityof WisconsinSystem
vance of the debatefor modem econom-
ics.
I. THE HISTORICALBACKGROUND
The source of intereston the econom-
ics of royaltieswas clearly derivedfrom
the Britishcoal industry,even if the de-
bate itself madelittle referenceto Britain
or the specific mineralcoal. The British
industry experienced an enormous ex-
pansion over the 50 years precedingthe
first worldwar.1From 1850to 1913,em-
ploymentincreasedfrom 250,000to over
a million.Outputincreasedfromsixtymil-
lion to almostthreehundredmilliontons.
Nevertheless,the industrywas not with-
out difficulties.It was characterizedby
pronouncedcyclical movements around
its trend of expansion.From the last de-
cades of the nineteenthcenturyit began
to sufferfrom stagnationand even to de-
cline in productivity.From as early as
1863,Jevons, in The Coal Questionhad
anticipatedthis decline. He saw coal re-
placing agricultureas the source of the
Ricardianextensive marginthroughthe
The authoris with the Departmentof Economics,
BirkbeckCollege,Universityof London.Researchinto
the U.K. royaltysystemhasbeenfundedby SSRCGrant
HR5724/1andby the NuffieldFoundation.
1 For a discussionof the industryoverthisperiod,see
Taylor(1968).

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Fine: Royaltyand Rent
exchange of manufacturedexports for
food imports, with the inevitable di-
minishingreturnsfrom less fertile mines
leadingto a stationarystate. Finally, the
industry also had to contend with the
risingcompetitionfrom the development
of coal industriesin othernations.
In the climate generatedby the Great
Depression of 1873, concern for the
British economy became expressed in
the setting up of Royal Commissions.
One of these, the Royal Commissionon
MiningRoyaltiesof 1890,is of concernto
us. It had the task of investigatingthe
extent to which the separation of the
ownershipof land and its mineralsfrom
the ownershipof the workingcapital of
mines impededthe progressof industry.
It set about this task in two ways. The
firstinvolvedan empiricalexaminationof
how the royalty system worked, and it
was carriedout in greatdetail. The com-
mission discoveredthat there were a va-
rietyof ways in whichroyaltieswere paid
(acreage, tonnage, rental) with fixed,
dead, certain or minimumrents, sliding
scales accordingto the price of coal and
varyinglengths and conditionsof leases.
No major objections were made to the
royalty system by mine owners. Never-
theless, difficultieswere recognized for
transportingthe coal, as this might in-
volve a wayleave royalty for carrying
coal throughworked-outland, as well as
the need to gain access to railwaylines.
Otherwise,there were perhapsno more
complaintsthanone mighthave expected
in the negotiationof complexleases.
The second method employed by the
commission to investigate what they
called the "economic operation of the
royalty system" was theoretical rather
than empiricaland cursory rather than
detailed. Their concern was with the ef-
fect thatroyaltieshad on the priceof coal
and manufacturesproducedwith it, and
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339
consequently, the effect of royalties on
foreign competitiveness. Their conclu-
sions can be summarized as follows:
There is a differencebetween a royalty
and a rent because one involves the re-
moval of a mineral while the other, in
principle, leaves the land unchanged-
the level of royalties evening out profit-
abilitydifferencesbetween differentmin-
ing conditions. Consequently, the only
additionthat royalties make to price is
given by the minimumroyalty charged,
other royalties being price-determined
rather than price-determining.We shall
returnto these argumentslaterin section
III. For the moment, it is importantto
point out that the economic assumption,
on which they are based have not been
linkedto the earliermentionedempirical
analysisof the royalty system. What the
economictheorypresumesis that capital
can flow freely onto the land and be-
tween lands so that royalties drop out,
technicallydeterminedby differingmin-
ing conditionsquiteindependentlyof the
system of landownershipinvolved.
These remarksare borne out by the
commission's consideration of alterna-
tive systems of royalty ownership.
Again, their empiricalanalysis was sub-
stantial,as a surveywas madeof the roy-
alty system prevailing in many other
countries. What was found without ex-
ception in Europe is that the royalties
had been taken into state ownership a
hundredyears or so before. The reasons
for this were made clear by representa-
tives from various countries who were
questionedby the commission.The pre-
vailing patterns of landownershipwere
so subdividedthat,for a reasonablysized
mineto be established,termswouldhave
to be arrangedwith many separateland-
owners. Thus, "it is unanimously ad-
mitted that the fertile results follow the
absolute distinctionthat exists between
340
surfacepropertyand the workingrightof
mines. In a countrywherepropertyis so
minutely subdividedas it is in France,
the reasonable and active working of
mines would be impossibleon any other
system (thanstate ownership),"for Ger-
many "in many industrialdistrictsof the
country the ownershipof the surface is
so dividedthat it wouldbe impossibleto
carry on deep mining under any other
principles"and
Besides, in many cases a strata of minerals extends
underneath the property of several landowners,
and it would be almost impossible to work different
mines scattered on the larger or smaller plots be-
longing to different owners, and to this would
come the additional difficulty of arriving at an
agreement between the owners with regard to the
working of mines . . . it has been arranged in
Austria-Hungary to make them (minerals) entirely
independent from the landowner .... This system
has specially promoted the establishment of mines.
The same story is also told for Spain,
Portugal,Italy, and Luxembourg;land-
ownershipis so fragmentedthatminerals
had been taken into state ownershipto
promote the development of mining.
Withoutthis, capitalcouldnot flowfreely
onto and between lands. By contrast,for
Great Britain this problem scarcely
seems to have been considered by the
commission who simply observe that
"where a large mineralfield is the prop-
erty of one individualno difficultyarises
in respectto its full development."
The reason for this is not difficultto
discern. In Britain the pattern of land-
ownershipwas not fragmented,owner-
ship was highly concentratedand much
the same was true of royaltyownership.2
Rather than small landownersobstruct-
ing mining through the charges that
wouldbe madefor the smallquantitiesof
coal that they owned, it was more a case
of large landowners encouraging a
number of mineowners to extract as
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Land Economics
much coal as possible and this explains
the occurrenceof fixed rents to be paid
irrespectiveof the quantityof coal re-
moved but againstwhich royalties were
set.
It is this patternof large landedprop-
erty that made nationalizationof the
royalties unnecessary in Britain. The
same is also true of those countriessuch
as India, Australia, America, and
Canada,where Englishlaw prevailedbut
large concessions and often the coinci-
dence of land and mine ownershiphad
been created.In otherwords, it is not the
state or privateownershipof royaltiesas
such thatwas importantbut the extent to
which large enough coalholdingscould
be leased to formminesof adequatesize.
Indeed, in many of the Europeancoun-
tries, mineralrightswere no soonertaken
into state ownershipthan they were sold
as concessions to private individuals.
These concessions could then be traded
and amalgamated.Furtherregulationof
this to prevent concessionaires ob-
structing the development of mining
through outrageous charges does not
seem to have been a major problem.
Where it was, state regulationwas still
possible and this could also be used to
guardagainstmonopolyof supply. Thus
"the tendencyin Belgiumis towardsthe
amalgamation of several neighboring
concessions, these being often of small
extent,
It is a commonpracticefor concessionairesto sell
or let theirconcessionsto companieswho under-
take the working of the mines.... There is abso-
lutely no guardagainst companiesenlargingtheir
holdingsthroughpurchaseof other undertakings:
in fact this is proceedingvery rapidlyin all the
Germancoal fields withoutcheck
2 For an analysisof
the ownershipof land in Britain
coveringmanysources,see CatalanoandMassey(1979).
In 1925the SamuelCommissionfound that there were
3,789 royaltyowners, of which the most fortunate100
alone received 51%of revenue and the top ten over 12%.
Fine: Royalty and Rent
"in the northof France at least, conces-
sions are commonlyunited and are gen-
erally worked by companies" and "in
Austria-Hungary,concessions can be
and are freely sold."
In the light of this evidence, the com-
mission was perhaps justified in con-
cluding on empirical grounds that the
system of privateroyaltieshadpresented
no substantial impediment to the de-
velopmentof the Britishcoal industry.It
preferredto draw that conclusion, how-
ever, on theoreticalgrounds by consid-
ering the effects of alternativeroyalty
systems. If the royaltieswere taken into
state-ownership, then apart from the
minimumroyalty, the state could simply
charge the same as private landowners
and there would be little change. If the
royalties were abolished, production
would be concentratedon better mines
given competition,and this would dislo-
cate the tradeof the worst minesby low-
ering price. Whateverthe merits of this
argument,the commission'sconclusions
are drawn,paradoxically,by refusingto
consider alternativesystems of royalty
ownership. For nationalizationof the
royalties, they presume that the private
system is reproducedso that what hap-
pens is independent of the system of
landownership.Their treatment of the
abolitionof the royalties is made in the
absence of a considerationof the system
by whichthe rightto minea piece of land
would be determined.Their conclusions
are in any case an aberrationfrom their
normal line of argument. If a royalty
owner workedhis own minerals(an indi-
vidual abolition of the royalty), the
equivalent would accrue to him rather
than to another.Were royaltiesto be re-
ducedby a landowner,then the reduction
would simply produce a transferof the
royaltyto the lessee. A generalreduction
in royalties (in the absence of a method
for doing this) would ultimatelybenefit
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341
the mineowner or consumer, although
this was seen again merely as a passing
on of the royalty revenue. In other
words, whether the royalties remained
private, were nationalized, or abol-
ished, there would be very little ef-
fect on the industry so things might as
well remainunchangedand subjectto in-
dividualinitiative.
The best way to summarizethe com-
mission's deliberationsis as follows. On
the basis of theirempiricalinvestigations
they came to the view that the royalty
system in Britainposed no problemfor
the developmentof the coal industrybe-
cause capital could flow easily onto the
coal lands.3They elevated these empiri-
cal observationsto a theoreticaltruism:
as long as capitalcould flow freely onto
the land, any royaltysystem would have
little or no effect on the industry. The
system of royaltyownershipand the mo-
bilityof capitalare treatedindependently
with the latter being determinant.The
size and effects of royaltiesis separated
from the system of landownership,this
merely determiningthe beneficiariesof
the royalty revenues, which are them-
selves predeterminedby the mobilityof
capital across different mining condi-
tions.
The opinionof the commissionin 1890
on the royalties in Britainwas perhaps
the last that could be so favorable.Mine
sizes were expandingas the fixedcosts of
deeper and more difficultconditionsin-
creased and as extractionfollowed the
3 In
part, the commission believed that the industry's
record spoke for itself and this alone proved that there
was nothing wrong with the royalty system. Unfortu-
nately, the same record of success did not exist for iron
ore extraction, which suffered from internationalcompe-
tition at this time. However, this empirical evidence was
forgotten when drawing conclusions on mineral royalties
as a whole. An exception to the commission's conclu-
sions was also to be found in Ireland's peculiar system of
landed property, but this was also ignored.
342
extending seams. Propheticevidence of
this is to be found in the commission's
investigationsas increasinglyminingbe-
comes dependentuponrelationsbetween
morethanone landowner,significantlyin
arrangingtransportandwayleavesrather
than multiple leases. As mine size ex-
pandsrelativeto a given patternand dis-
tributionof landownership,so the same
obstacle that plagued the Europeanin-
dustry in its infancy and necessitated
state ownership of royalties, comes to
the Britishindustryin its adolescence.
The associated difficulties matured
extremely rapidly so that by 1919 the
Sankey Report found mineowners'rep-
resentatives unanimously supported
nationalizationof the royalties.The rea-
sons for this are to be found reported
elsewhere. The Acquisitionand Valua-
tion of Land Committeeof the Ministry
of Reconstruction discovered an in-
tensificationof the problemsinvestigated
by the commissionof 1890togetherwith
difficulties in extending mines across
boundaries of surface ownership.4By
1925 the Samuel Report found that on
average each mine requiredfive leases
and reorganizationof the industry de-
pended upon nationalization of the
royalties.In the meantime,in a wave of
legislationin the early 1920sthatreduced
the rightsof privatelandowners,the po-
sition of the mineownershad been im-
provedby the possibilitiesof the granting
of compulsorypowers. This, as well as
the fear of royalty nationalizationas the
thin edge of the wedge of mine nationali-
zation, turned the mineowners against
royaltynationalization.
As a result,royaltynationalizationwas
delayed until 1938. We have argued
elsewherethat this impedednot only the
rational organizationof the industry in
mine layout but also the mechanization
of mining.5This is, however, not strictly
relevantto ourpurposehere. As we have
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Land Economics
seen for the MineralCommission,a sep-
arationwas made between the empirical
or institutionalconditions in which the
royalty system operatedand the theory
or royaltydetermination.This distinction
was universally maintained. Con-
sequently, the dispute over royalty
nationalizationin the interwarperiodwas
official and practical rather than aca-
demic: did the royalty system work to
impedeor promotethe rationalreorgani-
zation of the industry?For this, the dis-
tinction between royalty and rent is a
rarifiedluxury.
Now we can explainthe timingof the
debate over the distinctionbetween roy-
alty and rent. Towards the end of the
nineteenthcentury,the privatesystem of
royalty ownershipin Britainwas begin-
ning to produceproblemsof reorganiza-
tion for the coal industry,but they were
not severe enough to prevent taking a
complacentattitudetoward the system.
Consequently, debate over the royalty
system did not concern the practicalor-
ganizationof miningin relationto landed
property.Instead, controversycould be
elevated to a theoretical plane inde-
pendent of the system of landed prop-
erty, as we have seen for the Mineral
Commission.6Thus, while the debate
4 A majorsourceof lost coalwas thebarriersthatwere
erectedto the boundariesbetweenmines in conformity
withthe patternof surfaceleases. These wouldbe more
substantialformineswhoseboundariesdo notlie withina
stretchof landownedby a singleindividual,forwhichthe
removalof the barriersis less easilynegotiated.Thusthe
problemof lost barrierswouldtend to increasewith the
expansionof the industrythroughmine size acrossland
heldby differentlandlords.
5 See Fine (1978),and Evans and Fine (1980a)and
(1980b).
6 Thereis a
strikinganalogyhere, withMarx's(1969)
analysisof Ricardo'stheoryof rentfor agriculture.
Marx
suggeststhat the assumptionsbehindRicardo'stheory
correspondto the conditionsof Britishagricultureand
were correspondingly peculiarto Europeaneconomists
for whomthe systemof landedpropertycouldnot be ig-
norednor the free flow of capitalassumed:
Both of them(RicardoandAnderson),however,start
Fine: Royaltyand Rent
over royaltyand rent was producedby a
specific conjuncturein the development
of the British coal industry-when the
royalty system was producingproblems
that were not too severe-the debate it-
self had little or nothingto contributeto
solvingthe problemthat had producedit
when they later became more severe. It
had anotherpurposeand it is to this that
we turnin the next section.
II. THE THEORETICAL BACKGROUND
In the previoussectionwe have shown
that an interest in the economics of
royalties arose in conditions where the
practicalproblemsof the royalty system
were considered negligible. Con-
sequently, the debate over royalties
could pose its own theoreticalproblems
and turna blindeye to the system of roy-
alty ownership. Conversely, during the
interwarperiod when the system of roy-
alty ownership increasingly became a
burdenon the industry,the problemsbe-
came practicaland concerned with the
interventioninto the system of landown-
ershipfor which the theoreticalassump-
tions of the free flow of capitalwere irrel-
evant alongwith the royalty/rentdebate.
In short, the royalty/rent debate is lo-
cated aroundthe turnof the century,and
ratherthan being concernedwith mining
as such, it was used as an instrumentin
the debateover economictheory. Before
consideringthe debate itself in the fol-
lowing section, we must first discover
what the debate was really about by ex-
aminingthe economic theory of the time
in which it took place.
For those of us trainedwith the mod-
em concepts and techniques of mathe-
maticaleconomics, the passage from the
marginalistrevolutionof the 1870sto the
presentday mightbe seen as the uncon-
troversialevolutionof the perfectionsof
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343
general equilibriumtheory. This is not
what happened.While economists such
as Walrasand Jevons had an idea of the
simultaneityinvolved in generalequilib-
rium determination, the principles of
marginalismafterthe 1870swere initially
applied within a partial equilibrium
framework.This is most notable in the
work of Alfred Marshall. At the same
time, economic theory was informedby
the principles of general equilibrium
theory but in an uncertain way that
lacked the confidence of today's prac-
titioners.
The reason for this is not to be found
exclusively nor necessarily predomi-
nately in the newness or difficultyof the
mode of thinking-in the use of mathe-
matical techniques, for example.
Nevertheless, there was a conceptual
problem involved which made econ-
omists at the turn of the century
hesitate from embracinggeneralequilib-
riumtheoryeven thoughthe logic of their
analysis inevitably drove them into its
arms. One major result of general
equilibriumtheory is to eliminate the
causative significancebetween different
factor inputs as the source of revenues.
Revenuesare in fact derivedfrom factor
prices, and all of these prices are deter-
minedsimultaneouslyand by exactly the
same principles. Consequently,distinc-
tions made at the level of revenues such
as wages, profits, and rents can only be
maintainedby distinctions drawn over
the conditions of supply and demand
which are specific to labor, capital, and
land. Rent, for example, is then ex-
plainedin termsof landin fixed and inde-
structiblesupply. A royalty might then
outfromthe viewpointwhich,on the continent,seems
so strange: 1. that there is no landed propertyto
shackleany desiredinvestmentof capitalin land; 2.
that expansiontakes place from betterland to worse
... 3. thata sufficientamountof capitalis alwaysavail-
able for investmentin agriculture(p. 237).
344
be reserved as the term to characterize
the remunerationdue to a factorin fixed
but destructiblesupply. It becomes sim-
ply a question of names and not princi-
ples of determination,for these remain
the same whether rent, royalty, wages,
or profitsare underscrutiny.
Some economistswere unhappyabout
the conceptualloss involvedin movingto
general equilibrium.As this was itself
based on generalizing,through margin-
alism, the Ricardianprinciples of rent
determination to the economy as a
whole,7it is not surprisingthat the prob-
lem was most acutely felt in rent theory
itself. It gave rise to a debate over
whether rent was price-determinedor
not.8Now, for generalequilibriumtheory
the debate is ridiculoussince all prices,
including that of land, are determined
simultaneously.But it is this which pre-
cisely eliminatesthe specificityof landas
a source of revenue (apart from its
hypothesized fixed supply) as is made
clear by Jevons: "so far as costs of pro-
duction regulates the values of com-
modities,wages must enter into the cal-
culationon exactly the same footing as
rent."9Logically,those who shied away
from these implications of general
equilibriumtheorycould do so withinthe
marginalistframework only by using
partial equilibriumanalysis. In a one-
good world, rent would be price-
determinedaccordingto the differential
productivityof better over the marginal
(no rent)landin use, and a particularrole
could be assignedto land in causingdif-
ferentialproductivityandhence rentas in
Ricardiantheory.
Because the conceptual specificity of
rent requiredpartial equilibriumin the
marginalistschool, the debate over the
rent theorywas a debatebetween partial
and general equilibriumand to that ex-
tent a "dialogueof the deaf."10Each an-
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tagonistcould be rightabouttheirdiffer-
ent concepts of rent. The debate was,
however, complicated by the different
types of partial equilibriumthat were
utilized. One assumes a one-good world
while anotherdoes not do so but focuses
on a singlegood by takingpricesof other
goods to be fixed. For purposes of eco-
nomic models there is little to choose
between these partial analyses since
other prices will enter as exogenous
technical constraints but conceptually
the existence of other goods with a price
is closer to generalequilibriumthan is a
one-goodmodel.
We will drawthis section to a close by
bringingout its significancefor the debate
over the distinction between a royalty
and a rent. We can observe immediately
that the debatecould only concernthose
who wished to distinguish rent from
profitor wages. For those who wouldnot
draw the distinctions between rent,
profit,andwages wouldhave littleto add
by includingroyaltiesin theirlist of reve-
nues to be distinguishedor not. Because
7 Thus, we have Hobson's (1891)"The Law of the
ThreeRents"to explainwages,profits,and rents.
8
This debatewas surveyedby Buchanan(1929)who
attemptedto confineall schoolsof renttheorywithinthe
debateamongneoclassicaleconomists.See Fine (1980b)
for a criticismof Buchananon this scoreand a morede-
tailedconsiderationof the debateover renttheorythan
the one presentedhere.
9 The quote from Jevons is remarkablysuccinct. It
says thatwagesand rentsare equallycausativebut only
as far as cost of productionis concerned.
10Wessel(1967)implicitlyagreeswithourassessment
of the linkbetweena price-determined rentand a partial
equilibrium analysis;he also recognizesthatthe concept
of generalequilibrium was not an immediateanduniver-
sal resultof marginalism:
In reality,of course,economistshavelongknownthat
rentis neitherpricedetermining nor pricedetermined
sinceneitherrentnorpriceis a basicdeterminant of the
system.... We knowfromCassell's(1932)simplegen-
eralequilibrium modelthatthese forcesare the condi-
tionsof supplyof the agents,the technicalcoefficients,
and the preferencepatternsof consumers.
Fine: Royaltyand Rent
the debate does concern those who dis-
tinguishrent conceptually, but within a
marginalisttheory, it has to be conducted
at the level of partialequilibrium.Those
who distinguishrentfromotherfactorin-
comes throughthe use of partialequilib-
rium implicitlyrecognize, in contrast to
general equilibriumtheory, that the ac-
cess of capitalto land differsfrom its ac-
cess to industryin general.Pursuingthis
one stagefurther,those who distinguisha
royaltyfroma rent recognizethat access
of capitalto miningor extractiondiffers
from its access to land for agricultural
purposes. But it only makes sense to
have a debateover this with those who at
least accept thatrentis distinguishableas
a revenuefromwages andprofits,that is,
with those workingwithinpartialequilib-
rium in so far as we are confinedto the
neoclassicalschool.
Im. THEDEBATE
The debateover whetheror not a roy-
alty is a rentdid not concernwhatis to be
called a royalty; this was recognizedto
be the paymentfor the rightto remove a
mineralin fixed supply. The debate was
concernedwith whetheror not a royalty
is caused in the same way as a rent, and
this is why it is an irrelevantdebate for
the simultaneityof a generalequilibrium
theory, which is unable to assign a
unique causative significanceto factor
inputsand theirassociatedrevenues. We
begin our review of the debate with
Ricardosince in his theory, rent was de-
terminedin a mannerdistinctfromthatof
wages and profits,and he stumbledupon
the future debate in content if not in
name. Consequently,the embryo of the
later disputebetween those who did and
those who did not identifya royaltywith
a rentis to be foundin Ricardo(1971).He
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345
is concerned with the principlesof de-
terminationand not with the names of
various factor incomes. Ricardo's de-
sired solutionis to determinethe rent of
minesin exactly the sameway as the rent
of (farm)land (pp. 108-9). This is done
by reference to the differentialproduc-
tivities of the originaland indestructible
properties of the land. But because
Ricardo's theory depends upon inde-
structibility,it is inappropriatefor min-
eral extraction-a problemhe appearsto
have neglected. He does refer to timber
removalbut in the context of the timber
itself having a value determinedby its
costs of reproduction(pp. 91-2). Later
he also removes the conditionof original
powers but in order to allow improve-
ments, no matterwhat theirorigin,to be
incorporated into the indestructible
properties(p. 268). What is clear is that
Ricardo'srent theory raises the problem
of the value of destructibleconditions
(such as the presenceof minerals)only to
exclude it.
Nevertheless, Ricardo'sapproachcan
be judged to suggest two solutions to
the patternof the rents of mines, each
solution requiringa partial equilibrium
framework.Minesmay be treatedas land
in general,as if they satisfiedindestructi-
bilityand as if we have a one-goodworld
in which rents are price-determined
equaling the residual between cost on
better and on the worst mine in use. Al-
ternatively,when destructibilityis recog-
nized, the value of the mineralis prede-
terminedand enters into the price of the
extracted commodity as a royalty, dis-
tinct from rent that is price-determined
and reflectsthe differentialfertilityof the
first case. Ricardo himself, however,
only predeterminesthe value of the min-
eral (in this case timber)by allowingit to
be reproducedwith an associated value
so thatindestructibilityis restored.
346
The propertythese solutions share is
that they depend upon a partialequilib-
rium analysis. For the first solution, the
questionof whetherthere is a distinction
between the royalty of a mine and the
rent of land must be answered in the
negative for a one-good world. For
the second solution, there remains the
question of predeterminingthe value of
the mineral, a problem that ultimately
creates circularityin the simultaneityof
generalequilibriumsince it will affectthe
subsequentcosts of extractionas well as
dependingultimatelyupon finaldemand.
The debate over rent and royalty, for
which Ricardowas the precursor,led to
the adoptionby protagonistsof one or
the otherof the solutionsoutlinedabove.
The view of the Royal Commissionon
Minerals, which we presented earlier,
can now be seen in the followingterms.
A royalty is distinguishedfrom a rent
on the basis of the destructibility/
indestructibility distinction. Conse-
quently, a royalty is made up of two
parts, one reflectingdifferentialmining
conditions and corresponding to the
normalRicardianidea of rent determina-
tion, the other corresponding to a
minimumroyaltywhichreflectsthe value
of the mineralextracted. Sorley (1889),
Orchard(1922), Flux (1932), and Mar-
shall(1959)supportedthis positionthat a
royalty was distinct from a rent. For
Sorley, who appears to have been the
brainsbehindthe commission'stheory,a
minimumroyalty entered the price of
coal as the price of the mineral to be
extractedtogether with a compensation
for the loss of beauty to the land. Here
we see demandconsiderationsassociated
with utility entering quite openly as
causativefactors. Marshallarguesthat
A royalty is not a rent, though often so called. For,
except when mines, quarries, etc., are practically
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Land Economics
inexhaustible, the excess of their income over their
direct outgoings has to be regarded, in part at least,
as the price got by the sale of stored-up goods-
stored up by nature indeed, but now treated as pri-
vate property; and therefore, the marginal supply
price of minerals includes a royalty in addition to
the marginalexpenses of working the mine ... the
royalty itself on a ton of coal, when accurately ad-
justed, represents the diminutionin the value of the
mine, regarded as a source of wealth in the future,
which is caused by taking the ton out of nature's
storehouse (p. 364).
Thus, for Marshall, the royalty repre-
sented the price of the mineral in the
groundto whichthe expenses of working
the marginalmine had to be added to
determinethe price of the extractedmin-
eral.11
The preceding authors are relatively
close to generalequilibriumbecausethey
rely upon a partialequilibriumin which
there is another good, the unextracted
mineral, even if its price is predeter-
mined. Consequently,to use Marshall's
terminology, the remunerationto the
landownerincludes a producer surplus
for differencesin extractioncosts, plus a
royalty determinedexogenouslyby sup-
ply of and demandfor the extractedmin-
eral.12The royalty is itself not caused in
principleby anythingwhich distinguishes
it from any other price or revenue, it is
merely distinguishedby being fixed in
supplyand destructible.
In contrast to this distinction drawn
11Steele(1967)has arguedthatMarshallis hintingat a
mineralreplacementcost to restorethe destructiblepow-
ers of the soil (e.g., by exploration)in his referenceto the
excess of receiptsoverproductioncosts onlybeingdue to
royalties"inpart."Thisis clearlywrong(theotherpartof
the surplusreferredto is the differencein costs of extrac-
tion relativeto the margin)andreflectsthe impositionof
aninterpretation basedon themodempreoccupation with
the renewal of exhaustibleresourcesonto Marshall's
analysis.
12 It is significant that for generalequilibrium theory,
producersurplushas to be abandonedas a concept.See
Mishan(1968).
Fine: Royaltyand Rent
between royalty and rent, Gray (1914)
and Taussig (1939) argue that a royalty
and a rent are indistinguishable.Taussig
in his rent theoryadoptsa modelthat es-
sentially assumes a one-good world:
"rent forms no part of the expenses of
production;that is, it forms no part of
those expenses of productionwhich af-
fect price" (p. 96), and this thinkingis
carried over into the consideration of
mines for which the value of an unex-
tractedmineraland its cost of extraction
are indistinguishable.For him, the last
mine in use will pay neitherrent nor roy-
alty, at least in theory, since it is on the
marginof use and so the existence of an
independentroyalty distinctfrom a rent
is denied (p. 140). Gray essentiallyputs
forwardthe same argument,addingthat
only in accountingterms can the loss in
the value of a mine due to the extracted
mineralsbe attributedto a royalty.'3For
these authors, there can be no value of
the mineralindependentof the costs of
extraction, and so in a sense they rely
upon generalequilibriumconsiderations.
On the otherhand, they do so in a partial
equilibriumin which rent/royaltycan be
reducedto differencesin costs of extrac-
tion, essentially a one-good world, in
whichthe exhaustibilityof the resourceis
secondary to the costs of extraction.14
They allow producersurplusalone. Mar-
shall et al. rely more upon the physical
differentiationbetween minesandlandin
general on the basis of destructibility/
indestructibility,for the formerof which
a price or royaltymustbe paid.
What emerges from the debate in our
analysisis a paradox.Earlier,we argued
that the debate itself was conducted by
those who withdrewfromthe conceptual
implications of general equilibrium
theory, its inability to distinguish the
causativeroles of land, labor,and capital
in creatingthe revenues of rent, wages,
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347
and profits. Yet within the debate itself
those, such as Marshall,who were closer
to generalequilibrium,did distinguisha
royalty from rent since a royalty was
seen as a predetermined price and
therefore as a condition of access to
mining land. In contrast, those further
away from general equilibrium,such as
Taussig, arguedfor the identityof a roy-
alty with a rent since theirpartialequilib-
rium requireda single-goodworld. This
paradoxis then somewhatricher.For the
closer the partial approaches general
equilibrium,the richer the conceptual
content of the theory, even though the
destinationof general equilibriumitsell
contains the minimum of conceptual
wealthin this context, failingeven to dis-
tinguish rent, wages, and profits. Con-
ceptualconsistencyand conceptualrich-
ness are often uncomfortableand un-
familiarbedfellows.15
IV. CONCLUDINGREMARKS
For general equilibriumtheory, the
distinctionbetween royalty and rent is
purely semantic and much the same is
true for the distinctionsbetween wages,
profits, and rents since all are simulta-
neously determinedby the same princi-
ples accordingto the more or less free
flow of resources throughthe marketto
13
Grayalso introducesthe innovationof discounting
the mineralaccordingto date of extraction,a procedure
takenup by Hotelling(1931)and modemtheoriesof op-
timalexhaustibleresourceusage.
14
Taussig,for example,deniesthe differencebetween
royaltyandrenton the basisof sandandclaybeingavail-
able in abundantquantity.
15We have attemptedto show this for renttheoryin
Fine (1980b)and(1982)andfor differentschoolsof eco-
nomicthoughtin Fine (1980a).Note also that the con-
ceptualproblemsof partialequilibrium areto be foundin
otherareasas evidenced,forexample,by the needforthe
Cambridgecapitalcritique.
348
equatesupplyanddemand.Thosewhouse
partial equilibriumto specify a distinct
theoryof rent are able to debatewhether
a royaltyis a rent or not, and the debate
is not simply semantics. Those who
arguethata royaltyis not a rentare in es-
sence adopting a position that distin-
guishes the way in which capital flows
into mining from the way in which it
flows into agriculture(just as rent pay-
ments distinguish agriculturefrom in-
dustry). Those who identify a royalty
with a rent within the debate do so by
suggestingthat capitalflows into mining
in a way comparableto its flow into ag-
riculture.At least the debate raises the
questionof the role of landedpropertyin
the access of capitalinto the miningsec-
tor, even if an unsatisfactoryway, as we
shallarguebelow.
We are remindedthat it is the form of
landedpropertythat is importantby the
very term "royalty." As Nef (1932)ob-
serves:
In Great Britain,the meaningof the word has
undergone,in fact, a curiousinversion.An attri-
bute of sovereigntyin feudal times, when sover-
eigntywas decentralised,the regale has been ab-
sorbed, not by the sovereignstate, as in France
and most other continentalcountries,but by the
landowners.Thus a wordoriginallyappliedto the
rightsof the sovereignas againstthe subject, is
now appliedto the rightsof the subject,as against
the sovereign(p. 318).
Nef goes on to observe that it was the
concentrationof mineralrightsin private
hands in Britain that allowed the pri-
vately owned coal royalty system to
promote the development of mining,
whereas in France and elsewhere the
highly dispersed pattern of landown-
ershipnecessitatedstate-ownership.This
applies, however, only as far as the end
of the nineteenthcentury when the ex-
pandingsize of mines in Britainincreas-
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Land Economics
ingly brought the private system of
royalty ownership into disrepute until
royalties were finally nationalized in
1938.
Yet, since Ricardo,the effects of land-
ownershiphave played a negligiblerole
in economictheory. Rents (andthe same
is true of royalties)are determinedinde-
pendentlyof the system of landedprop-
erty which merely determineswho shall
be the recipients of the rental income
when it is distinguishedas such. As a re-
sult, rent theory has a tendency to be
neutral,and consequently,both unhelp-
ful and conservative over changes in
systems of landownershipssince it sees
them as having little if any effect other
thanthe destabilizingredistributionof in-
come thatcouldbest be obtainedthrough
other mechanisms.The impetus toward
changes in systems of landownerships
then tends to come from what are per-
ceived to be institutionaland practical
difficulties which can be empirically
ratherthantheoreticallycomprehended.
To some extent, these remarks are
borne out by considerationof Dasgupta
and Heal (1979).This book is exemplary
in setting out in formal mathematical
terms the propositions associated with
the economics of exhaustibleresources.
In doing so, it makes clear the extent to
whichtherehas been littleor no progress
in understandingthe role of landedprop-
erty in economicdevelopment.The same
confusionsover royalty and rent are re-
producedin so far as a royaltyis seen "as
the competitivevalue of a pool of oil or
a deposit of coal" (p. 159). But is this
an accountingidentity as for Gray or a
condition of access to the land, as for
Marshall; price-determined or price-
determining?An answercan be given in
terms of the partial equilibriummodel
employed-a one-good world in which
the costs of extractionare indistinguish-
Fine: Royaltyand Rent
ablefromthe value of the unextractedre-
source or a many-goodworld in which
the price of the unextractedresource is
given externally but implicitly through
the demandfunctionfor the extractedre-
source. But these models can tell us
nothing about the actual conditions of
landed property.Elsewhere, proxies for
the interventionof landed property are
introduced, and these are to be wel-
comed, but they have no specific con-
nection to landed propertyas they vary
fromthe marketfor externalities,through
the definitionand enforcementof prop-
erty rights, to the imperfections of
monopoly, forward markets, expecta-
tions, and information.It is time, how-
ever, that neoclassical economists
learnedthat it is not legitimateto explain
economic phenomenain terms of a di-
vergence from the conditionsof perfect
competition and that they begin to
examine those "imperfect" conditions
themselves since imperfectthey always
are. Whatare the conditionsof access of
capitalto the land and how do they differ
fromthose of capital'saccess to industry
in general?This involves economic and
noneconomicfactors and cannot be suc-
cessfully accommodatedby graftingthe
economics of divergence from perfect
competitiononto the economics of land
use and calling this rent theory or the
economic theory of exhaustible re-
sources.
Elsewherewe have triedto show how
a theory of rent can be constructed to
take account of the intervention of
landed property. For agriculture,it is
seen to have the effect of obstructingin-
tensive cultivationof the land.16For coal
mining we have tried to show that the
existence of private royaltiesobstructed
nationalizationand mechanizationof the
Britishindustryin the interwarperiod.17
Thus, a prerequisitefor the development
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349
of a theory of miningand the revenues
that it generatesis an examinationof the
empiricalform of landedpropertythat it
confronts.18 Thus, the question of
whether a royalty is a rent or not is a
misleading one except in so far as it
raises the questionsof the access of cap-
ital to miningas opposed to agriculture.
Both royalty and rent are derived from
something else, the particularinterven-
tion that landed propertymakes in rela-
tion to the economy and its develop-
ment.19
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