<h2>CHAPTER 10</h2>
<h3>THE THEORY OF RENT: THE MARKET VALUE OF THE USUFRUCT</h3>
<h4>§ I. DIFFERENTIAL ADVANTAGES IN CONSUMPTION GOODS</h4>
<div class="sidenote">Connection between gratification, rents, and value of wealth</div>
<p>1. <i>Both rent and the value of durable wealth are based on the value of
the fruits or products yielded by the wealth.</i> Gratification, afforded
directly or indirectly, is the basis of all values. The relation of most
kinds of wealth to wants is indirect; but gratification thus afforded
indirectly is none the less the basis on which the usufruct of wealth is
estimated. Men find the logical or causal connection between direct
goods, or final product, and indirect goods, or agents.</p>
<p>To explain the value of the durable wealth, or rent-bearer, a still
farther step in thought must be taken. The value of the rent-bearer is
based on the series of rents which it affords. To explain how these
rents are added to give the value of the indirect agents is the task of
a theory of capitalization. This being the relation, a change in the
value of the product changes the rent, and this in turn changes the
value of the rent-bearer. The theory of rent, therefore, has to begin
with a review of the valuation of enjoyable goods.</p>
<div class="sidenote">Effect of scarcity on utility of uniform goods</div>
<p>2. <i>In a group of consumption goods, all of the same quality, the
marginal utility declines as the quantity increases.</i> If the quantity of
an article capable of ministering to man's wants is very limited, its
value is high. If the supply of something of uniform quality, for which
there is no substitute, is scanty, the value is estimated without
reference to any other grade. If a fishing tribe caught very few fish,<span class="pagenum"><SPAN name="Page_74" id="Page_74">[Pg 74]</SPAN></span>
but these were all equally good, and if no other food were to be had,
fish would have a high ratio of exchange with every other kind of goods.</p>
<p>If the quantity increases, the value of each unit of the whole supply
falls, as the importance attributed to its parts declines. If an Indian
hunting-party met with unusual success, the value of buffalo meat
declined. If there is a remarkable potato crop, potatoes fall in value.</p>
<div class="sidenote">Relation of different grades of consumption goods</div>
<p>3. <i>In a series of consumption goods of different qualities, the lower
grades acquire value only as scarcity increases in the higher grades.</i>
If difference in quality between two grades of apples is marked and
there is a superabundant supply of the best grade, no importance is
attached to the poorer. But if the better grade becomes scarce, the
appetite for the poorer grade increases, and finally it, too, will be
consumed. In some years the small, knotty apples are allowed to rot on
the ground; in other years they are gathered and are sold at good
prices. But if there is an abrupt difference in quality, and hence in
the marginal utility of the two grades, the value of the better goods
may rise considerably before there is any recourse to the poorer. If the
differences in quality are very slight, the presence of the lower grades
has the effect of limiting the increase of value of the higher grades.
Practically in almost all kinds of goods there are gradations in
quality. Complete uniformity is of the rarest occurrence. When did one
ever see a basket of peaches that were all of the same size, ripeness,
color, flavor, and perfection? If the step from the higher to the lower
grade is very slight, resort is immediately made to the next lower
grade, some of which is substituted for the higher.</p>
<p>There is an independent reason for the value of each grade of goods;
each grade would have value if there were none of the other, but they
mutually affect each other's value when they exist, side by side, in the
same market. The marginal utility of each is lessened by the presence of
the other.<span class="pagenum"><SPAN name="Page_75" id="Page_75">[Pg 75]</SPAN></span> And thus, two or ten grades constitute for many purposes a
single supply as they shade into each other or are merged by
substitution.</p>
<div class="figcenter"> <ANTIMG src="images/i75.jpg" width-obs="550" height-obs="297" alt="" /> <span class="caption"><i>Grades of Consumption Goods by Quality</i></span></div>
<div class="sidenote">Free goods are on the margin of utilization</div>
<p>4. <i>Goods of the lowest grades, having no marginal utility, are free
goods.</i> This is a simple truth, but it has important bearings. There may
be said to be an "extensive margin of utilization" of many consumption
goods. The poorer grades of apples, rotting on the ground, the
multitudes of waste things not valued, are on the margin of utilization.
When a lower grade is used, the margin is extended. The value of goods
is measured upward from the margin of utilization, but this is simply to
say that their value is measured from zero upward.</p>
<p>Likewise, there is an intensive marginal utility in consumption goods.
As the better grade of apples becomes more scarce, they will be used
more sparingly and kept to satisfy only the intenser wants. The
superiority of some consumption goods, either in quantity or quality,
often is exactly analogous to the "differential advantage" spoken of by
economists in the case of productive agents. The differential advantage
of the highest grade over the grade of free goods, whose value is zero,
evidently is the whole value of the highest grade.</p>
<h4>§ II. DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS</h4>
<div class="sidenote">Differential advantage of agents in the quality of their
products</div>
<p>1. <i>Rent varies with the quality of the products yielded by agents,
other things being equal.</i> Let us take first a<span class="pagenum"><SPAN name="Page_76" id="Page_76">[Pg 76]</SPAN></span> simple case where the
agent is the sole condition of the product. If there is but one tree
bearing a certain luscious fruit, or but one spring yielding a mineral
water, the rent of the tree or spring being equal to the value of the
products must vary as the quality of the products varies. If two or more
trees are standing side by side, they will be compared with regard to
the difference in the quality of their fruits. If two fields differ in
quality, greater importance will be attached to the field capable of
producing the better grade or variety of fruit or product. A peculiar
mineral quality in the soil may impart to wine a choice flavor that can
at once be recognized by experts; while other fields, distant but a few
rods, cannot by any effort be made to produce wine of the same rare
quality. There is said to be a marked difference in the success of
vineyards lying only a short distance apart on the shores of the larger
lakes of New York. Nearness to the water moderates the temperature,
often prevents frosts, and hence insures the ripening and quality of the
fruit. In the Santa Clara valley, as in other parts of California, there
is a frostless belt, sharply marked off from the lands where it is
unsafe to attempt to cultivate the delicate orange-tree and other
semi-tropical plants. In manifold ways differences in geological
formation affect the use of land and the success of many industries. On
one side of a little creek is limestone land, on the other shale, the
limestone producing a crop larger and of better quality. When the
peculiar nature of the one field is found to be the cause of the
exceptional quality of its fruits, the difference in value is attributed
to it.</p>
<div class="sidenote">The lower grade limits the value of the higher grade</div>
<p>If there is but one grade of agent, it is, of course, valued without
reference to any lower grade. The effect of the presence of lower grades
of agents is to lower the value of the higher, inasmuch as the lower
grades are substituted for the higher. There may be at first enough of
the higher grade of agents to produce all the fruit wanted of the better
quality. If, then, there is an increasing demand, and the additional<span class="pagenum"><SPAN name="Page_77" id="Page_77">[Pg 77]</SPAN></span>
yield can be secured only with greater effort, the value of the product
will rise. The presence of poorer grades, however, checks that rise,
because use can be shifted to them. The value of grade one is not high
because grades two, three, and four, which are worse than it, are
available, but because they are not of better quality than they are.
Poor as they are, their presence reduces somewhat the intensity of
demand for the best grade. Indirect agents, therefore, are seen to be
subject to just the same comparisons, substitutions, and estimates, when
their value is considered, as are direct consumption goods.</p>
<div class="sidenote">Differential advantage of agents in the amount of their
products</div>
<p>2. <i>The rents of two agents differ as do the quantities of goods yielded
by them, other things being equal.</i> In the case just considered, the
quantity remained the same while the quality differed; now is to be
considered the case where the quantity differs while the quality remains
the same. It is possible that one grade of agents is "poorer" because it
produces less fruit, not fruit of poorer quality. Consider first the
static problem. If both agents yield fruits exactly alike, the value of
equal units at the same place and time must be equal, and the usufructs
would vary in just proportion with the quantity of product. Now consider
the dynamic problem. If the desire for that fruit increases, rent would
grow as scarcity became more felt. The agents yielding, under the
prevailing conditions, the largest product, would first be used; later,
the poorer agents. The possibility of resorting to the poorer agents
would keep the better from rising so high.</p>
<div class="figcenter"> <ANTIMG src="images/i77.jpg" width-obs="600" height-obs="188" alt="" /> <span class="caption"><i>Grades of Agents by amount of Product of Uniform
Quality</i></span></div>
<p><span class="pagenum"><SPAN name="Page_78" id="Page_78">[Pg 78]</SPAN></span></p>
<div class="sidenote">Complementary agents unite to form a product</div>
<p>3. <i>When two agents are necessary to secure a product, the value
attributed to each is influenced by competing uses.</i> The thought of one
agent independently producing a certain product is far too simple to
correspond with reality. Two or more agents unite to produce a single
product, and each agent at the same time can be used for acquiring other
products. Complex as the problem appears, it is solved according to the
principle of marginal utility at every moment in every market. The
different uses, figuratively speaking, bid for an agent, and thus its
marginal utility is determined just as is the price of a good by the
bidding of buyers. Indeed, it is the bidding of buyers, indirectly. The
more urgent the use, the higher the bid. The felt importance is
reflected from the consumption goods that are sought, to the agent that
will aid to get them. Two or more agents that are mutually needed for
the acquiring of a product are complementary goods. A complementary
agent may be either other material agents or labor.</p>
<div class="sidenote">Complementary agents used intensively show diminishing
returns</div>
<p>When labor is applied to an agent, either to improve the Quality or to
increase the quantity, it is subject to the law of diminishing returns.
In the effort to increase the quantity of products, labor is applied
first more intensively to the better agents. If it meets with
resistance, if returns diminish, it is transferred to any of the poorer
agents that have in them uses of as high grade as those still in the
better agent. The superior effectiveness of the earlier over the later
units of the added agent is called the "differential advantage" of the
two fixed agents. The result of a day's labor applied to a field may be
represented by 100, a second day's labor by 90 (it being only ninety per
cent, as effectual), a third day's labor by 75; but it is more usual to
say that the first field produces 10 more than the second and 25 more
than the third, the second 15 more than the third. To the agent fixed in
supply is attributed the difference in the effectiveness of the agent
that is applied.</p>
<div class="sidenote">The relentless extensive margin of agents</div>
<p>4. <i>The marginal uses of indirect goods are free uses.</i><span class="pagenum"><SPAN name="Page_79" id="Page_79">[Pg 79]</SPAN></span> Here again is
noted the close parallelism in the process of evaluating direct and
indirect goods. There is an extensive margin in the use of an indirect
agent, a point in the gradation from the better to the poorer agents
where the materials and forces are left unused and have no value. Land
beyond that point is free. Outworn goods in manifold forms, old
pictures, old machines, having no longer charms even for a rummage sale,
form a no-rent margin of wealth. On every hand a great multitude of
things unused and worthless differ by only a shade from things that
still are used and valued. Every rubbish-heap, rag-bag, junk-shop, and
garret contains things once prized, now lingering on the margin of
utilization.</p>
<p>There is also in agents an intensive margin, beyond which are certain
unexploited uses in the things that we already have. This is a more
subtle thought, but it has been already discussed in connection with
diminishing returns. These potential uses in agents, uses which in the
existing conditions lie outside the margin of utilization, of course
have no value. We have noted that there is an equilibrium between these
two margins. Rent is measured from a zero point of utility either in a
good, or in other poorer grades of goods.</p>
<p>A corollary of this proposition is that there is a limit to the rental
that anything can yield under any given condition. Below the present
margin of utility of any goods there exist great quantities of free
goods, unused goods, or unexploited uses. It is only uses above this
margin that yield rent. Rent is the difference between the value of the
better grades and the value of the free goods. It is therefore due to
the limitation in the supply of indirect agents of the better quality,
or to the scarcity of the more effective uses in those agents.</p>
<div class="sidenote">Restatement of rent, economic and contract</div>
<div class="sidenote">Economic rent is primary</div>
<p>5. <i>Rent may be redefined as the value of the scarce uses of wealth
within a given period.</i> Rent is the felt importance of the usufructs of
agents in securing gratification. It is measured by the marginal utility
of any particular grade<span class="pagenum"><SPAN name="Page_80" id="Page_80">[Pg 80]</SPAN></span> of agents in securing products. These
definitions and the discussion throughout this chapter applies to
economic rather than to contract rent. In fixing and agreeing on
contract rent, men are seeking to estimate the importance of indirect
goods, the importance that an agent will have in getting a product. They
are bidding for the use of things, and what they bid is contract rent.
Contract rent is based on the existence of economic rent. Economic rent
does not depend on contract rent, but on the differences in the
effectiveness of agents to secure a given product. If there were not
differences in the product, and no limits to the supply of indirect
agents, rent could not exist; it would be inconceivable. But these
differences existing, economic rent inevitably arises, for men cannot
keep from attaching value to the things that affect their desires.
Contract rent in turn appears wherever the use of wealth becomes an
object of exchange and agreement between men in a free society.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_81" id="Page_81">[Pg 81]</SPAN></span></p>
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