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The law of rent, also known as Ricardian rent, is an economic theory developed by David Ricardo in 1808. It states that the value of land is equal to the amount earned by using it for its most productive purpose compared to the most productive vacant land. Ricardian rent affects the rental price of land use, but differs from contractual rent. It also differs from the “iron law of rent” by Thomas Malthus, as Ricardo believed advances in technology could increase wages faster than population growth.
The law of rent is an economic theory of measuring the value of land, developed by the English economist David Ricardo in 1808. The theory is sometimes called Ricardian rent. His premise is that the rent or value of a piece of land is equal to the amount earned by putting it to its most productive use versus that earned by using the most productive vacant land for the same purpose.
As an economist, Ricardo was revered among his peers and admired by business students for his ability to express his ideas clearly without the use of complex mathematical formulas or examples. If the land is intended to be used for lumber, the portion of it that has trees is superior to any plot that has fewer or no trees. Land without trees is the least valuable land, since no rents for timber can be obtained from it. The parcel with the most trees is valued in relation to another parcel with as many trees but which is rented for free.
The Ricardian rent is not the contractual rent that a tenant pays the landlord under a lease agreement. Instead, it refers to the value that land acquires by being put to a particular productive use. This value, however, can affect how much rent a landlord might charge for the particular use of the land.
The law of rent also differs from the “iron law of rent”, which was formulated by a contemporary of Ricardo, Thomas Malthus. Malthus believed that real wages always tend to the minimum necessary to sustain the worker’s life. Increasing population over time would always keep wages low due to the availability of cheap labour.
Ricardian rent does not affect wages except as a related issue. However, he did not agree with Malthus’ theory of population and wages. Ricardo noted that advances in technology and other factors could cause the demand for labor to increase faster than population growth. This would result in a steady increase in wages over time. Modern economists note that Ricardo’s observation has turned out to be correct.
The rent law is reflected in some way in the rental price of land use, whether commercial or residential. The amount paid relates to the value of the land used for the same purposes. Value is measured by the economic gain gained by choosing one position over another. For the storage or shipping of commercial goods, a site located in a port or near railroads and interstate highways would be superior to one that is not.
Rental places for individuals that offer access to better employment, educational opportunities, or cultural activities may be superior to places without these things. Rents represent the cost to the owner of the land and the buildings on it. Renting a house is a large personal income expense. It is usually calculated as the income that can be obtained in a particular place minus the amount actually needed for a person to live.
