What is Modern Theory of Rent?


The modern economists like Pareto, Mrs. Joan Robinson, Boulding, Singer, and Shepherd have tried to simplify and generalize the Ricardian Theory of Rent. According to them the Ricardian theory of rent is too closely related to land. This creates an impression that rent is a peculiar earning a land only. The fact however is that other factors of production i.e. labour, capital and entrepreneurship may also be earning economic rent. The determination of economic rent, the modern economists say, can be explained in the same manner as the reward of other factors, which is by demand and supply factor.

Demand and Supply Analysis

A) Demand for a factor: The demand for a factor which may be land labour or capital is a derived demand. Land say for instance is demanded for its produce. The higher the produce, the greatest is the demand for land. A firm will pay rent equal to the marginal revenue productivity of land. The rent diminishes as more land is used due to the operation of law of diminishing returns. The demand curve of a factor is therefore negatively sloped which means more land will be used only at lower rents, other things of course remaining the same.

B) Supply of a factor: The supply of land to a particular use, say industry is quite elastic. It can be shifted to other uses by offering higher than that being earned by it now. The supply of a factor to an industry is therefore rent elastic. If higher rent is paid, the supply of a factor can be increased by withdrawing it from other uses. The supply curve of factor (industry) sloped upward to the right.

Determination of Rent

The economic rent is determined by the representation of demand and supply curves for a factor.
In the above figure, the demand curve for factor says labour in a particular is D D' and the supply curve of workers is S S'. The wage rate of factor price of labour as determined by the market forces is OW. The total workers employed in a particular industry at OW wages rate is OL. The total earning of the workers employed is equal to the area OWEL. At wage rate OW there are workers who would work at lower pay but they are also paid at OW wage rate. Those workers whose transfer earnings are less than this wage rate will be getting economic rent. The total economic rent earned by all the intra marginal workers is equal in the area WES. The marginal worker i.e. Lth worker is not obtaining any rent or surplus.

C) Rent is a Surplus Return: The modern economists are also of the view that rent as a surplus can be earned by other factors also. It is not peculiar to land alone as explained by Ricardo. The modern theory of rent is that it is the difference between the actual earning of a factor until over its transfer earnings. The transfer earnings of a factor of production are the minimum payment required for preventing that factor for transferring it to some other use. It is called the factor supply price in it present occupation. For example a worker earns Rs. 6000 per month in a factory in the next best employment, he can excess of Rs. 1000 which a worker is earning over and above the minimum payment necessary for inducing him to work in present occupation is the economic rent.

Economic rent depends on the elasticity of supply of the factor of production.

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