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the various lines of production in such a manner as to correspond to the progressing needs of the country is a most important problem of the future. The automatic and unguided laws of supply and demand have proved inadequate to the task of maintaining a balance of capital equipment. Suggested methods suited for such guidance are presented in the chapter dealing with business cycles.

Conclusion.—The central point of view in our analysis of capital and interest has been the relationship between money, credit, price, value, and property rights on the one hand; and goods, production, progress, and material welfare on the other hand. We have traced the connection between capital as physical goods productive of further goods for human use, and capital as property rights and values productive of dollars of profit. It should be clear that capital is not money and credit, but that money and credit must be rightly organized before capital can function rightly. Interest is a price paid for use of capital, and the fluctuations of this price influence, and are influenced by, the fluctuations of all other prices. The pecuniary volume of capital values may rise and fall without corresponding changes in the volume of capital goods. The function of physical capital is to produce goods, but the function of pecuniary capital is to produce money profits. Interest rates are not superficial and inert forms of income, but are forces which literally move or check the whole process of production and consumption. They accelerate or retard both the making of goods and the making of money. They are not mere after-effects, but are themselves dynamic, regulating, controlling forces of fundamental movements. By studying capital from the standpoint of values, property rights, and money control, and interest from the standpoint of price movements, maladjustments, and coördinations, we succeed in achieving a broad view of the governing influences of capital and interest over the central currents of economic life.

BIBLIOGRAPHY

Bye, R. T., Principles of Economics, Chapter VI, XXII.
CASSEL, Gustav, A Theory of Social Economy, pp. 473-485.
CLARK, J. M., The Economics of Overhead Costs.
FEDERATED AMERICAN ENGINEERING SOCIETIES, Waste in Industry, p. 17 ff.
FOSTER, W. T., and CATCHINGS, W., Money, Chapter VIII.
HOBSON, C. K., Economic Effects of the Export of Capital, in Is Unemploy-

ment Inevitable? KEYNES, J. M., Economic Consequences of the Peace, p. 18 ff. Souls, GEORGE, American Economic Review Supplement, Volume XIII, p.

132 ff.

CHAPTER XVII

PRINCIPLES OF LAND RETURNS

Fundamental Definitions and Concepts.-In economic terminology, land includes all natural resources. Minerals, forests, water, farm soil, urban sites, and air are parts of the supply of natural resources. The land includes not only the surface of the soil, but all resources that are beneath the surface, and the air and space that are above the surface. The industries which derive the basic materials of production from the soil by farming, mining, lumbering, and the like are called the extractive industries. Their function is to extract from the land the resources necessary for economic activity. The industries which promote and guide the ownership of the soil by specializing in the buying and selling of land are the real estate industries. Their function is primarily the organization of a pecuniary market for the land and the furtherance of improvements on the land. The real estate and the extractive industries develop the resources of the land and adjust the uses of the land to the demand for those uses.

Land viewed in this broad sense exhibits certain likenesses to capital and certain unlikenesses. One likeness is that both land and capital are used for the production of further wealth. Both compose the productive equipment of the community. Both are means and instruments of further production. Judged by the productive uses to which land and capital are put, both serve the primary end of contributing to the creation of further wealth. A second likeness is that both land and capital are bought and sold in the investment markets. A person investing in the securities of a corporation is purchasing indiscriminately land and buildings. Savings may be used to buy a farm or a building site as well as to buy raw materials or machinery. Mortgage bonds on land absorb a large portion of the savings of the nation. Saving and investment represent productive wealth, and if these may be applied either to land or to capital, then land and capital are alike in that respect.

But one distinct unlikeness appears between land and capital. Capital has been defined as a produced good used in further production of wealth. Buildings, machinery, equipment, all have been produced by human effort. But land is not produced in any such fashion. Land is provided by nature. It is there, and cannot be produced by human effort. The land is given to start with, and man must make such use of it as he can. Land is non-producible. In applying this comparison, distinction must be made between land in its original physical form, and the improvements on land. The improvements resemble capital, in that the improvements are produced by human effort. Only land in its original physical form is non-producible. Producible improvements differ from non-producible qualities of the soil. The original qualities of the soil alone belong in the category of non-producible factors.

Much economic discussion has centered around the question: Should land be considered as a distinct and separate factor in production, radically different from capital; or should it be considered simply as one form of capital, a special and peculiar form, but capital nevertheless? It seems to the present writer that so far as logical consistency is concerned, it makes little difference which answer is given to this question. So long as the likenesses and unlikenesses between land and capital are understood, and borne clearly in mind, the logic of economic analysis does not suffer. Whether we identify land as one form of capital or isolate it as a wholly independent species, the odds are negligible so far as the logic of the case is concerned.

There is, however, one practical advantage in merging land with capital in our thinking. That advantage arises from the peculiarities of the money economy. In the money economy, pecuniary investment is the primary thing. From this pecuniary standpoint, the investor puts his money into land or into buildings, and the process is the same so far as he is concerned. His savings are in a money form, and with this money, he can buy an interest income by investing either in land or corporate property. To the investor, in the modern money economy, it seems illogical to exclude land from the category of capital. Likewise, to the business man, the distinction seems unnecessary. The business man ties up money in land, buildings, and machinery, and figures them one and all as a common expense in the business. The fact that land as such is non-producible is a fine point of logic which has little significance for him. The great point in his calculation is that if he needs land, he must purchase it at a price and figure on a more or less permanent investment, and that if he needs capital, he must do the same. Both cost money, both tie up capital, both are an investment, both absorb savings, both are an overhead expense to the business. In the money economy, in pecuniary transactions, in the business viewpoint, land is simply one form and illustration of capital.

Where this inclusion is assumed, the fact must still be borne in mind that land is non-producible capital. This fact has large social significance. If a greater demand for land arises, the demand cannot be met by adding to the physical supply of land. The physical supply is fixed. New supply is non-producible. Increased demand must therefore lead to an increased value of land. The owners of land will see the value of their holdings mount upward, without effort or sacrifice on their part. As idle landlords, they will profit from the appreciation in value, without having rendered any service or performed any material labor. Such gain has commonly been termed, the “unearned increment" of land. Many have advocated that the unearned increment be wrested from landlords by taxation, and applied to social ends. Further discussion of the

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unearned increment is reserved for later paragraphs, but it is essential to state the problem at this point. The social significance of the nonproducible quality of land must be held clearly in mind.

Having noted the salient features of a definition of land, we may proceed to a definition of rent.

The principles of land returns have been much confused in economic theory by the meanings read into the term, "economic rent." More than a century ago, a successful stockbroker of London, David Ricardo, after having made a fortune on the Stock Exchange, became interested in economic science, and was especially concerned with landlordism and the food problem in England. Possessed of great analytical powers of mind, he refined the principles of land returns beyond any point previously attained by economists. He defined rent as "that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” This definition, and the laws of rent built up around it, bear the scars of many brilliant battles of logic among later economists. The assumption that the powers of the soil are original, or non-produced by man, in the economic sense of produced, has been assailed. The assumption that the powers of the soil are indestructible has been attacked. And the assumption that rent is a species of income wholly different from interest on capital has been vigorously denied. Meanwhile the business use of the word rent has come to mean one thing and the economic use of the word quite another thing. Ricardian rent theory proved to be a masterful'attack upon early nineteenth century landlordism and was instrumental in the repeal of the corn laws and the introduction of free trade in English commercial policy. And many of its tenets are still indispensable corner stones of economic science.

The traditional use of terms among economists has resulted in a differentiation between economic rent of land and commercial rent. Economic rent refers to the net returns yielded by a given piece of land. The phrase refers to income, net gain, profit on the land. This use of terms contrasts with the popular use. In the popular use, rent is an expense, or a return on invested capital, depending on the point of view. But in the strict economic sense, rent is earning capacity. It is the amount of net gain which the land is capable of yielding.

Commercial rent corresponds more nearly with the popular use of terms. Such rent is the price paid for the temporary use of durable capital, whether in the form of land, buildings, machinery, or other property and equipment. In the commercial world, a person may rent an automobile, a machine, a house, a factory, a farm, or a building site. His rent is the price which he pays the owner of the materials for the right to use them over a given period of time. At the end of that period their use is turned back to the owner. The reason why the user is willing to pay the rent is the fact that he expects the capital to yield him an income. The amount of rent which he is willing to pay is in proportion to the amount of income which he expects the capital to yield him. The size of the rent corresponds with the size of the prospective income from use of the capital. The rent of the capital tends therefore to equal the net income of the capital. Hence, in defining commercial rent, we may say that it is the price paid for the use of capital and that it corresponds with the net income yielded by the use of the capital.

If the land owner farms his own soil, he makes a net return, which is economic rent. His profit from cultivating the land which he owns is his economic rent. It is obvious, therefore, that economic rent accrues even though no tenant is involved. The land is not hired, the farm is tilled by the owner himself, yet economic rent accrues, since by definition of the term, economic rent is net gain or income. The situation is different when the land is leased to a tenant, and tilled by the tenant. The tenant pays to the land owner a commercial rent. But he contracts to do so, only because he expects the economic rent from the land to be high enough to cover the landlord's claim. If economic rent is correctly gauged by the landlord, he will demand that commercial rent be equal to economic rent. However, rarely is economic rent gauged so accurately as to be exactly equal to commercial rent. A discrepancy between the two will yield either gain or loss, as the case may be, to the tenant.

In addition to this possible source of income, the tenant has three other sources; namely, wages for his labor, interest on his invested capital, and profit for his services as entrepreneur. These shares are not due to land as such. They are due to labor, capital and risk taking. The only return due to the land alone is the pure economic rent. In the long run, this will tend to be absorbed altogether by the landlord, although, over short periods, it may be either more or less than the commercial rent.

When hard times strike the farming areas, the reason is not that economic rent is too high, but that it is too low. Agricultural depression is due to low economic rent, i.e., low net returns. But where tenant farmers are involved, low economic rent is a relative term. It is relative to the overhead burden of commercial rent which the tenants must pay, before they have any share of economic rent for themselves. Tenant prosperity rests upon the relationship between economic rent and commercial rent. When commercial rent is high in proportion to economic rent, the commercial share eats up virtually all of the economic rent, leaving nothing as a net gain for the tenant. The actual cultivators of the soil enjoy prosperity in proportion as their economic rent is high and their commercial rent is low.

Economic rent is often designated as ground rent, in contrast to the rent of buildings or of other producible capital. If a person rents a residence, his commercial rent represents both building rent and ground rent. Rent of land is restricted to ground rent.

Rent bears certain likenesses to interest and certain unlikenesses. When a person pays rent, he borrows the capital but lets some one else own it. Renting does not give title of ownership to the tenant. Ownership still vests in the party who leases out the property. But when a

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