David Ricardo is the chief proponent of classical theory of rent. He stated that rent is that portion of the produce of the earth paid to the landlord for the use of original and indestructible powers of the soil. His theory of rent comprises the following elements. They are
- Rent arises due to the differences in the fertility of a land,
- Rent is a differential surplus,
- Rent arises on land only,
- Rent does not enter into price.
Ricardo firmly believed that rent is price determined and not price determining. He stated that corn is high not because rent is high, but rent is high because corn is high. In other words, it is the corn that influences the rent of land. If the corn is high, rent will be high. The rent paid to the land increases whenever the price of corn increases. When price of corn increases, superior lands will get more rent. Hence Ricardo stated that rent is price determined and not price determining.
The modern economists criticized Ricardian theory of rent. They considered that rent enters into the price. They further considered that rent is a component of cost of production of corn. They put forwarded the following arguments:
1. Rent and price from an individual’s view: If we consider rent from an individual’s view rent forms an ingredient of price. Accordingly rent is included in cost of production and is added to price. The land user while determining the rent of his land, includes rent in cost of production. Hence rent enters into price from the point of view of individual.
2. Transfer earnings : The argument that rent enters into price can also be explained in another way. We have to pay more rent if we want to utilize land for other purposes instead of the present cultivation. Such earnings arising out of transfer of land to other cultivation purposes is known as transfer earnings.
Transfer earnings are also known as transfer expenses. Suppose the earnings from land utilized for paddy cultivation is $40/- Let us also suppose $59/- have to be paid for utilizing the same piece of land for the cultivation of wheat. The landlord has to get an income of at least $40/- from the cultivation of wheat. Otherwise the landlord shows no interest for giving his land for cultivating wheat. So the transfer earnings of $40/- is equal to the cost of production and price.
3. Scarcity rent —price : Modern economists pointed out that rent arises due to the scarcity of land. Let us suppose that demand for marginal lands increased due to the increase in the demand for land. Then the land users pay rent. Such rent is included in the price.
Rent influences the relative prices of corn and other food stuffs. When rent is high, the demand for land for a particular purpose is less. As a result the supply of land for other purposes will increase. This leads to the increase in output of other products. Due to this the price of these products will fall. Thus rent influences the relative prices of several products.
The relationship between rent and price is of two types. In one way rent determines the price. In another way it has no influence on price. To conclude in the words of Davenport both rent and price arise due to the relative scarcity of goods and services.