What Is the Law of Rent?
The law of rent is an economic theory about measuring the value of land, developed by English economist David Ricardo in 1808. The theory is sometimes referred to as Ricardian rent. Its premise is that the rent or value of a piece of land is equal to the amount gained by putting it to its most productive use over that gained by using the most productive free land for the same purpose.
As an economist, Ricardo was revered among his peers and admired by students of economics for his ability to express his ideas clearly without the use of complex mathematical formulas or examples. If land is intended to be used for timbering, the portion within it that has trees is superior to any plot that has fewer or no trees. The plot with no trees is the least valuable land, as no timbering rents can be gained from it. The plot with the most trees is valued in relation to another plot with as many trees but that is rent free.
Ricardian rent is not the contractual rent that a tenant pays the owner under a lease. It instead refers to the value that land gains by being put to a particular productive use. This value, however, can affect the amount of rent that an owner could charge for the particular use of the land.
The law of rent is also distinguished from the “iron law of rent,” which was formulated by one of Ricardo’s contemporaries, Thomas Malthus. Malthus believed that real wages always tended toward the minimum necessary to sustain the life of the worker. Population increases over time would always keep wages low because of the availability of cheap labor.
Ricardian rent does not deal with wages except as a related issue. However, he did disagree with Malthus’ theory about population and wages. Ricardo noted that technological advances and other factors could cause the demand for labor to increase more rapidly than population growth. This would result in wages steadily increasing over time. Modern economists note that Ricardo’s observation proved to be correct.
The law of rent is in some ways reflected in the rental price of the use of land, whether it is commercial or residential. The amount paid is relative to the value of land used for the same purposes. Value is measured by economic gain obtained by choosing one location over another. For warehousing or shipping commercial goods, a site located on a harbor or near railways and interstate highways would be superior to one that is not.
Rental locations for individuals that offer access to better employment, educational opportunities, or cultural activities may be superior to locations lacking these things. Rents represent the cost to the owner of the land and the buildings on them. The rental of a dwelling is a large expenditure of personal income. It is usually calculated as the income that can be obtained in a particular location less the amount it actually takes a person to live on.
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