What few Ricardians were left standing found themselves unable to muster an effective response. It should have been immediately obvious that if land is of a uniform quality rents would still emerge once population growth had eliminated all free land. Moreover, a little thought should have told Ricardo that there are circumstances where marginal land could start yielding rents before more productive land is brought into use. (It's a question of location). In addition, all marginal land yields rent, no matter how small. If it did not it would not be cultivated. In the same year Robert Torrens — who had completely dropped the rent concept — launched an even more devastating assault of his own that included the above points. He stressed the fact:

Neither the gradations of soil, nor the successive applications of capital to land, with decreasing returns, are in any way essential either to the appearance or to the rise of rents…. Upon a careful examination of the facts, we shall discover, that resorting to inferior soils, and applying additional capital to land with a decreasing return, instead of being the causes which create and elevate rents, are the limiting circumstances which prevent rent from rising so high as it otherwise would rise. (Robert Torrens, An Essay on the External Corn Trade, Longman, Rees, Orme, Brown, and Green, 1826, p. 138.)

[Ricardo's] doctrine is erroneous. Rent is not the difference in the quantities of produce obtained by equal capitals from lands of different degrees of fertility…. instead of paying no rent at all, [the marginal land] may pay a higher rent than the first quality which yields 100 quarters[!] (p. 144.)

Then in 1831 the Rev. Richard Jones highly detailed historical study of land and rents delivered the coup de grâce to the fatally wounded Ricardian doctrine. He noted that rent is due to the productivity of land and not to any differential. Hence

the difference between the relative fertility of soils were the sole cause of rents, it would not follow, that nothing could raise rents but some cause which altered the relative fertility of the lands cultivated, since any cause would raise rents, which increased the amount of produce of all, while it left their relative fertility untouched. (Rev. Richard Jones, An Essay on the Distribution of Wealth and on the Sources of Taxation, p. 207.)

Nevertheless, some economists have tried to dismiss these attacks on the grounds that Ricardo — at least in the instance of rent — was using a purely historical argument to make a point. This is the line that Wesley C. Mitchell seemed to support when he presented the argument

that Ricardo was not taking into account actual historical circumstances; that his was a schematic, theoretical view of the subject; that… none the less the Ricardian theory of rent remained true... (Wesley C. Mitchell, Types of Economic Theory: From Mercantilism to Institutionalism, Vol. 2, Augustus M. Kelley, 1969, p. 226.)

This is unbelievable. Ricardo emphatically stated that the best land is always farmed first and that the pressure of population growth would bring marginal lands into cultivation thus creating the differential he called rent. There were no buts or equivocations. He understood that the theory rested entirely on this statement. Once it could be shown that the sequence of events were not as he described them then the theory would collapse. But it should not be forgotten that for his critics the key point was not the existence on non-existence of marginal land but the fact that what mattered was the land's productivity. This is why Ludwig von Mises said:

As far as Ricardo's theory refers to the graduation in the valuation and appraisement of pieces of land, it is completely comprehended in the modern theory of the prices of factors of production. (Ludwig von Mises, Human Action, Henry Regenery Company, 1963, p. 631.)

Colonel Torrens delivered the theory's obituary in an address to the Political Economy Club in 1831 when he declared Ricardianism to be dead, including the concept of rent. So what happened? John Stuart Mill used his enormous prestige to turn the tide. Mill's father had remained largely faithful to Ricardo and Mill was clearly determined to uphold that tradition. In his Principles of Political Economy (first published in 1848) he staked out his position in uncompromising language: The rent of land consists of the excess of its return above the return to the worst land in cultivation. (Original italics). After this it just got worse.

It is one of the cardinal doctrines of political economy; and until it was understood, no consistent explanation could be given of many of the more complicated industrial phenomena. The evidence of its truth will be manifested with a great increase of clearness, when we come to trace the laws of the phenomena of Value and Price. (John Stuart Mill, Principles of Political Economy, University of Toronto Press, Routledge & Kegan Paul, 1965, p. 419.)*

Unfortunately Mill's book remained the major economics text until Alfred Marshall published his own Principles of Economics in 1890. However, Marshall was not much better in this respect. Whether out of a misguided sense of national pride or some peculiar attachment to Ricardo he strove to rehabilitate the Ricardian paradigm. So instead of abandoning the untenable rent theory he gave it new life, arguing that

Ricardo was technically right (or at all events not definitely wrong) when he said that rent does not enter into the marginal cost of production of mineral produce. (Alfred Marshall, Principles of Economics, Eighth Edition, Macmillan and Co., LTD, 1920, p 439.) In a sense all rents… are differential rents. (Ibid p. 422.)

And this was said despite the fact that in 1871 Jevons had written:

When at length a true system of Economics comes to be established, it will be seen that that able but wrong-headed man, David Ricardo, shunted the car of Economic science on to a wrong line — a line, however, on which it was further urged towards confusion by his equally able and wrong-headed admirer, John Stuart Mill. There were Economists, such as Malthus and Senior, who had a far better comprehension of the true doctrines (though not free from the Ricardian errors), but they were driven out of the field by the unity and influence of the Ricardo-Mill school. (W. Stanley Jevons, Theory of Political Economy, Augustus M. Kelley, 1965, p. li.)

The attacks on the fallacy of economic rent did not cease with the publication of Marshall's Principles. In fact, Marshall muddied the situation further when he argued that durable capital goods temporarily earn "quasi-rents" while permanent land earns full rents. In his crushing 1901 review Frank A. Fetter concluded:

The use of the term "rent" for any surplus above "real" cost is out of harmony with the conception of rents a regularly accruing income, and with the practical needs of a money economy in which the concept must be employed.

The doctrine of quasi-rents, involving the idea that no income, of share, enters into market prices in short periods, cannot stand. (Frank A. Fetter, Capital, Interest, and Rent, Sheed Andrews and McMeel, Inc., 1977, p. 352.)

Moreover, Fetter pointed out that Ricardian rent was "a garbled marginality theory." Marshall's response was extremely weak. (Principles of Economics, p. 422.) To Fetter rent is the hire price of any unit or service, including wages. In the case of the purchase of a house the rent is capitalized. A careful comparison of Marshall's defence with Fetter's analysis should leave no doubt in the reader's mind that Fetter's view is the correct one. (See Fetter's The Principles of Economics, New York Century Co., 1910, chapter 8.) Fetter's was not a lone voice. The venerable John Bates Clark correctly observed that the application of marginal productivity theory

removes the danger that comes from supposing that the extension of the margin of utilization is the cause of an increase of rent. The truth is, that it is the increase of rent which extends the margin. (John Bates Clark, The Distribution of Wealth, Macmillan Company, 1908, p. 350.)

Nevertheless, the Ricardo-Mill-Marshall doctrine triumphed. If Fetter and Clark had been fully aware of the devastating criticisms of Ricardo's contemporaries things might very well have been different. Instead, we have to put up with the likes of Ken Henry using a long-discredited theory to argue for an additional burden to be levied on the mining industry so that the government can use the extra revenue to buy votes.

Henry excuses his tax grab on the grounds that it could be used to cut other taxes because of China's sustainable boom. Really? Booms are never sustainable. Certain features of the current boom suggest that resource companies could be in for a very nasty surprise in the not too distant further. Should this happen tax revenue from resources will dive leaving the government with an almighty shortfall. To close the gap the government can borrow, it can raise taxes or it can inflate. (It certainly won't cut spending.) It's my bet it would do all three.

Instead of an informed debate on this subject we get sanctimonious nonsense about ensuring that "the community gets the right price for those resources". And how does Henry know what the right price is? By what mysterious means does he intend to arrive at this "price". He doesn't say. And should mining suffer a sudden reversal will he insist that the community share the losses? Some how I doubt it.

Anyone who believe in the fallacious rent concept should not be allowed within a mile of any tax proposals — especially Dr Henry.

Any tax proposal based on the fallacy of economic rent is dangerous. In principle there is no difference between a mining company and a shipping company, for example. If a huge demand for shipping suddenly emerges then prices will surge and shipping companies will enjoy a steep rise in revenues which will encourage them to expand their services to earn even more. If the ships are rented out then when the contracts expire they will be renegotiated on the basis of expected revenues. The same goes for any kind of production, regardless of its nature. If the government steps in and taxes away the shipping company's so-called economic rent on the basis that it is an unearned surplus then any expansion will be aborted. Mining companies are no different.

What is bothersome is the failure of mining companies to grasp the fact that they are being clubbed with an economic fallacy.

*Mill contradicted himself on rent in the following statement where he inadvertently admits that productivity determines rent and that it has nothing to do with the fictitious existence of “zero-rent” land. Hence a

...large rent which is paid for shops in certain situations, near a great thoroughfare for example, which have no advantage except that the occupier may expect a larger body of customers, and be enabled to turn over his capital more quickly. (John Stuart Mill, Essays on Economics and Society, Vol. IV, University of Toronto Press, 1967 p. 268.)

In other words, supply and demand determine the rent. Therefore differences in rents have absolutely nothing to do with it. The is a direct contradiction of the Ricardian concept.

Gerard Jackson is Brookesnews' economics editor

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