Law of rent

The Law of Rent was formulated by David Ricardo around 1809. It was the first clear exposition of the source and magnitude of land rents, and is among the most important and firmly established principles of economics. The Law of Rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the purpose, given the same inputs of labor and capital.

This law has a number of important implications, perhaps the most important being its implication for wages. The Law of Rent implies that wages bear no systematic relationship to the productivity of labor, and are instead determined solely by the productivity of marginal land, as all production in excess of that amount will be appropriated by landowners in rent. This is not the notorious iron law of wages, which predated Ricardo and is most commonly associated with the writings of Thomas Malthus. Indeed, the Law of Rent explains why the Iron Law of Wages consistently fails to predict actual wages: if there are highly productive land sites available for free, wages will tend to be high, cet.par.; if the only available free land yields little, wages will tend to be lower.

The Law of Rent makes it clear that the landowner has no role in setting land rents: he simply appropriates the additional production his more advantageous site makes possible, compared to marginal sites. The Law also implies that the landowner cannot pass on the burden of any cost such as land taxes to his tenants, as long as such costs do not affect the relative productivity of his land and marginal land.

Law of rent

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Further reading