CHAPTER IX.

DEMAND AND SUPPLY IN RELATION TO LAND.

PRODUCER'S SURPLUS.

Résumé and

application of

the discussion

$ 1. We have next to consider Demand and Supply in relation to land. This subject is closely connected with the problem of land tenure. But in order to avoid for the present the difficulties that arise from the varying conditions of tenure in different places, in Book iv. as we will follow the plan adopted in our study of to the action of the Law of Diminishing Return in agriculture minishing Rein the fourth Book and still suppose that the owner of the land undertakes its cultivation.

the Law of Di

turn.

We saw how the return to successive doses of capital and labour, though it may increase for the first few doses, will begin to diminish, when the land is already well cultivated. The cultivator continues to apply additional capital and labour, till he reaches a point at which the return to a dose is only just sufficient to repay his outlay and reward him for his own work. That dose will be on the margin of cultivation, whether it happens to be applied to rich or to poor land; an amount equal to the return to it will be required, and will be sufficient to repay him for each of his previous doses. The excess of the gross produce over this amount is his Producer's Surplus.

He looks forward as far as he can: but it is seldom possible to look forward very far. And at any given time he takes for granted all that richness of the soil which results from permanent improvements; and the income (or Quasi

rent), derived from those improvements, together with that due to the original qualities of the soil, constitutes his Producer's Surplus or Rent. Henceforth it is only the income derived from new investments that appears as earnings and profits: he carries these new investments up to the margin of profitableness; and his Producer's Surplus or Rent is the excess of the gross income from the improved land over what is required to remunerate him for the fresh doses of capital and labour he annually applies.

This Surplus depends on, firstly, the richness of the land, and secondly, the relative values of those things which he has to sell and of those things which he needs to buy. The richness or fertility of the land, we have seen, cannot be measured absolutely, for it varies with the nature of the crops raised, and with the methods and intensity of cultivation'. Two pieces of land cultivated always by the same man with equal expenditures of capital and labour, are likely, if they yield equal crops of barley, to give unequal crops of wheat; if they return equal crops of wheat when cultivated slightly or in a primitive fashion, they are likely to yield unequal crops when cultivated intensively, or on modern methods. Further, the prices at which the various requisites of the farm can be bought, and its various products sold, depend on the Industrial Environment; and changes in that are continually changing the relative values of different crops and therefore the relative values of land in different situations.

The cultiva

of normal a

Lastly, we suppose the cultivator to be of normal ability relatively to the task he has undertaken, and the tors must be circumstances of time and place. If he is of less supposed to be ability his actual gross produce will be less than bility and en- that which normally should come from the land : it will be yielding to him less than its true Producer's Surplus. If, on the contrary, he is of more than normal ability, he will be getting in addition to the Producer's

terprise.

1 See Book IV. ch. 1. §§ 3-6.

Surplus due to the land, some Producer's Surplus due to rare ability'.

land tenure.

§ 2. The argument of this chapter so far is applicable to all systems of land tenure, which recognize private The argument ownership of land in any form; for it is con- so far applicable to nearly cerned with that Producer's Surplus, which accrues all systems of to the owner if he cultivates his land himself; or, if he does not, then accrues to him and his tenants, regarded as a firm engaged in the business of cultivation. Thus it holds true, whatever be the division which custom or law or contract may have arranged between them with regard to their several shares of the cost of cultivation on the one hand, and the fruits of the cultivation on the other.

At the present day, in those parts of England in which custom and sentiment count for least in the bargaining for the use of land, and free competition and enterprise for most, it is commonly understood that the landlord supplies, and in some measure maintains, those improvements which are slowly made and slowly worn out. That being done, he requires of his tenant the whole Producer's Surplus which the land thus equipped is estimated to afford in a year of normal harvests and normal prices, after deducting enough to replace the

1 It is argued in Principles IV. Ix. 3, that a rise in the real value of produce generally raises the produce-value of the Surplus, and raises its real value even more, and in the following Section of that Chapter, and a Note at the end of it, some explanation is given of Ricardo's doctrines as to the influence of improvements and the incidence of taxes in agriculture. He delighted to argue that no Surplus can be reaped from the ownership of those of nature's gifts the supply of which is everywhere practically unlimited: and in particular that there would be no Surplus from land if there were an unlimited supply of it all equally fertile and all equally accessible. He further showed that an improvement in the arts of cultivation, equally applicable to all soils, (which is equivalent to a general increase in the natural fertility of land), will be nearly sure to lower the aggregate Corn Surplus, and quite sure to lower the aggregate Real Surplus derived from the land that supplies a given population with raw produce. He also pointed out that, if the improvements affected chiefly those lands that were already the richest, it might raise the aggregate Surplus; but that, if it affected chiefly the poorer class of lands, it would lower that aggregate very much.

farmer's capital with normal profits, the farmer standing to lose in bad years and gain in good years. In this estimate it

is implicitly assumed that the farmer is a man of normal ability and enterprise for that class of holding; and therefore, if he rises above that, standard, he will himself reap the benefit; and, if he falls below it, will himself bear the loss, and perhaps ultimately leave the farm'.

The so-called English system has great disadvantages, and it may not be found the best in a future stage of civilization. But when we come to compare it with other systems, we shall see that it afforded great advantages to a country, which pioneered the way for the world in the development of free enterprise; and which therefore was impelled early to adopt all such changes as give freedom and vigour, elasticity and strengths.

1 In other words, that part of the income derived from the land which has to be regarded as a Rent or a Quasi-rent, that is, as Producer's Surplus for all periods of moderate length, goes to the landlord; while that part which is to be regarded, even for short periods, as profits entering directly into the normal price of the produce, is the tenant's share. The more fully therefore the distinctively English features of land tenure are developed, the more nearly is it true that the line of division between the tenant's and the landlord's share coincides with the deepest and most important line of cleavage in economic theory; viz., that between the Quasi-rents which do not, and the profits which do, directly enter into the normal supply prices of produce for periods of moderate length.

2 Principles VI. IX. 6-8 continue that analysis of rent, with special reference to urban land, which is given in Principles V. VIII. IX. X., but is not included in this volume (see however the footnotes on 215-6 and 234—5, above). It is there argued that land, whether agricultural or urban, is merely a form of capital when regarded from the point of view of its individual owner or purchaser and that when examining the causes that determine normal value, we must not regard the ground rent of the trader as entering into the marginal price of his services in any sense in which rent does not enter into those of the farmer or manufacturer.

Finally, in Principles VI. 1x. 9 reference is made to the causes which govern the capitalized value of land, and it is argued that the present value of a very distant rise in the value of land is less than is commonly supposed.

CHAPTER X.

DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. LAND TENURE.

§ 1. IN early times, and in some backward countries even in our own age, all rights to property depend on Early forms of general understandings rather than on precise Land-tenure have generally laws and documents. In so far as these under- been based on standings can be reduced to definite terms and partnerships. expressed in the language of modern business, they are generally to the following effect:-The ownership of land is vested, not in an individual, but in a firm of which one member or group of members is the sleeping partner, while another member or group of members (it may be a whole family) is the working partner.

The sleeping partner is sometimes the ruler of the State, sometimes he is an individual who inherits what was once the duty of collecting the payments due to this ruler from the cultivators of a certain part of the soil; but what, in the course of silent time, has become a right of ownership, more or less definite, more or less absolute. The sleeping partner, or one of them, is generally called the proprietor, or landholder or landlord, or even the landowner; though this is an incorrect way of speaking, when he is restrained by law or custom from turning the cultivator out of his holding, either by an arbitrary increase of the payments exacted from him or by any other means'.

1 Custom is however really more elastic than at first sight appears, as is shown even by recent English history. Caution is therefore needed in applying Ricardian analysis to modern English land problems as well as to those arising out of more primitive systems of land tenure. See Principles VI. x. 2, 3.