The Rent Is Too Damn High: What to Do About It, and Why It Matters More Than You Think by Matthew Yglesias

Author:Matthew Yglesias [Yglesias, Matthew]
Language: eng
Format: epub
Tags: General, Political Science, Business & Economics, Essays, Real Estate
ISBN: 9781451663297
Publisher: Simon and Schuster
Published: 2012-03-06T07:13:48+00:00

The New Rentiers

The classical economists, focused as they were on a primarily agricultural economy, would not be surprised to hear about people moving toward lower incomes. That’s because for these thinkers the story of economics was a tragedy nicknamed “the dismal science.” To David Ricardo, the key to the economy was diminishing returns. As the population of a country grows, the new people will find that the best farmland is already occupied. Rather than moving to the places where their income would be highest, they move to the places where the land is cheapest. That cheap land will be inferior in quality (whether in terms of its inherent qualities or its ability to transport goods to market) to the already occupied land. Thus, the newest farmer will be poorer or harder working than the established ones. As a country’s population grows, its overall income should rise because more land is being cultivated. But its average living standards will fall, thanks to diminishing returns.

One can partially rescue the situation through improvements. Irrigation can improve the fertility of the land. Better roads or harbors can improve market access. But diminishing returns strike again: The most cost-effective improvements will be built first. Over time, new investments will have increasingly low rates of return. This economic truth is why population-dense societies like China’s had lower average living standards than those in western Europe, where poor sanitary practices and norms about the appropriate age for marriage restrained population growth.

Ironically, classical economists figured out the fundamental operations of an agricultural economy at about the same time that these insights were becoming obsolete thanks to the dawn of the Industrial Revolution. Natural resources matter in the industrial economy, but the whole point of a factory is that it’s an efficient way of turning a natural resource into something much more valuable than its original ingredients. Consequently, under industrial capitalism, what matters most is owning factories, not owning resources. This arrangement leads to inequities between owners and managers and workers. But the total quantity of factories and other capital goods isn’t limited. If people are getting rich building car factories or steel mills, even more car factories and steel mills will get built. Some people get richer at a much faster pace than others, but overall society’s stock of cars (and refrigerators and televisions) per capita will go up rather than down over time.

Classical economists developed the concept of economic rent. This isn’t the same as the conventional rent a person pays, which lumps together a price for the use of land and a price for the use of structures. To Ricardo, true rent was the price that a farmer has to pay to a landlord for the privilege of working the land. This is the origin of the economist’s jargon use of “rents” to refer to income generated by privilege rather than work or investment. The landlord didn’t make the land. For this reason, taxation of rent income was deemed to be an especially efficient form of

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