When Britain’s House of Commons finally legislated a land tax in 1909-10, the House of Lords created a constitutional crisis by nullifying it. The procedural rules were changed to prevent the Lords from ever again rejecting a Parliamentary revenue bill, but the momentum was lost as World War I loomed and changed everything.
Ricardo throws the banking sector’s support behind commerce and industry
Every economic class seeks to justify its own self-interest. Even rent-extracting sectors claim to contribute to the host economy’s wellbeing. Nowhere is this clearer than in the debate between David Ricardo, the leading spokesmen for Britain’s banking interests, and Reverend Thomas Robert Malthus defending the landlord class and its protectionist Corn Law tariffs that raised food prices (and hence the rental value of farmland).
Hoping to strengthen Britain’s position as workshop of the world, Ricardo pointed out that its competitive power required keeping down food prices and hence the subsistence wage. Urging the nation to buy its grain in the cheapest markets rather than remaining self-sufficient in grain and other food production, he developed what remains orthodox trade theory explaining the (supposed) virtues of global specialization of labor. Ricardo’s logic reflected the self-interest of his banking class: Globalization promoted commerce, which was still the major market for bank lending in the early 19th century.
The crux of his argument was that labor’s cost of living, headed by food, represented the main production expense for industrial employers. Ricardo’s solution was to replace the Corn Laws with free trade so as to buy crops and other raw materials more cheaply abroad, from regions with more fertile land and other natural resources. This meant convincing Britain not to abandon the self-sufficiency in food production achieved during the Napoleonic Wars that ended in 1815
In Ricardo’s hands, the labor theory of value served to isolate the land rent obtained by owners of allegedly more fertile soils, who were able to sell their crops at prices set at the high-cost margin of cultivation. (He applied the same concept of differential rent to mines and natural resources.) Attributing fertility to “the original and indestructible powers of the soil,” he claimed (unscientifically) that no amount of capital investment, fertilizer or other action could alter the relative fertility of lands. The landlord’s capital investment thus could not avert the steady rise in differential land rent — the cost advantage obtained by farmers on the richest and most fertile lands.
Even further, Ricardo claimed, diminishing returns were inevitable as population growth forced cultivators onto inherently poorer soils. Rising food prices set by these “last,” presumably poorer soils taken into cultivation would provide a widening margin of rental income over and above costs, a windfall price umbrella for owners of more fertile lands. It followed that these sites did not require more capital investment by the landlord to obtain a rising share of national income. They did not need to do anything.
Ricardo’s pessimistic agricultural assumptions failed to take into account the revolution in agricultural chemistry that was vastly increasing farm productivity. He insisted that even if fertilizer and capital improvements did increase yields, fertility proportions among soils of varying grades would remain unchanged. The best land thus would retain its edge even after capital was applied — and diminishing returns would still occur, forcing up food prices as more capital was applied to the land.
The logic Ricardo outlined for why land rents would rise as populations grow applies much better to the rent of location for urban sites. The desirability of sites in good neighborhoods is enhanced by public infrastructure investment in transportation and other improvements, combined with the general level of prosperity — and most of all in recent times, by bank credit on easier (that is, more debt-leveraged) lending terms. Owners enjoy a price rise without having to invest more of their own money — the situation Ricardo described with regard to agricultural landowners.
Malthus’s focus on how landlords invest their gains and spend on consumption
At issue was whether landlords used the rents they received in ways that helped the economy, or whether high rents were an unjustified burden. Malthus put forth two arguments to defend highly protected land rents. First of all, if landlords earned more, they would act like industrial capitalists and plow their gains back into their farms to earn still more revenue by producing more. Instead of being the unearned passive income that Smith had described, high rents enabled more investment to raise yields.
Malthus credited the high crop prices protected by Britain’s Corn Laws for enabling landlords to invest more in the land to raise output per acre. He pointed out that when trade in food was suspended during the war with France (1798–1815), landlords had responded to higher prices by raising farm productivity enough meet domestic demand. The technology of artificial fertilizers and mechanization promised to further spur farm productivity.
Assuming that protected income would be invested productively, Malthus chided Ricardo for treating the landlord’s rent as the economy’s deadweight loss when buyers of bread had to pay more. Contrary to Ricardo’s description of rent as “a transfer of wealth, advantageous to the landlords and proportionally injurious to the consumers,” Malthus countered that new capital investment in the land could not be afforded without high crop prices: “rent, and the increase of rent, [as] the necessary and unavoidable condition of an increased supply of corn for an increasing population.” This assumption that higher prices would mean more capital investment to increase productivity has been the argument for tariff protection for many centuries, including by American industrialists urging tariffs to support “infant industry” investment.
Malthus’s second point concerned consumer spending by landlords. Far from draining the economy, he argued, such spending was needed to save it from unemployment. Landlords were what today’s One Percent call themselves: “job creators” who hired coachmen, tailors and seamstresses, butlers and other servants, and bought coaches, fine clothes and furnishings. So even when rent recipients spent their revenue on luxuries, they augmented the demand for labor.
This argument failed to recognize that if workers did not have to pay such high food prices, they could spend more on the products of industry — or, if they still earned only the subsistence wage (as Ricardo assumed), industrial profits would be higher at the expense of land rent. The real choice thus was between luxury consumption by the landed aristocracy or higher living standards for the rest of the population and more industrial investment.
John Maynard Keynes applauded Malthus’s emphasis on spending by landlords (or by government, financiers or any other class) as showing the importance of consumer demand. But what Malthus described is best characterized as rentier demand by the One Percent. He was justifying what the late 19th -century cartoonist Thomas Nast depicted: Wall Street plutocrats dressed in finery and so fat from gluttonous over-eating that the buttons on their jackets nearly burst.
The threat of rising land rent to impose austerity
Ricardo won the day. Despite the fact that his theory of differential soil fertility and his belief in diminishing agricultural returns were diametrically at odds with the empirical experience of his time, his logic defining economic rent as the excess of price over costs of production shaped subsequent conceptualization of rent theory.
Free trade ideology also involved persuading foreign countries not to protect their industry with tariffs and subsidies. The principle of buying in the cheapest market meant that they would rely on Britain for their manufactures — and for their bank credit as well. After Parliament repealed the Corn Laws in 1846, Britain negotiated free trade pacts with foreign countries to refrain from protecting their own manufacturing in exchange for free entry into the British market for their food and raw materials. Ricardo’s trade theory depicted this as a mutual gain. The problem, of course, is that buying in the cheapest market leaves the economy dependent on foreign producers. The long-term risk of dependency on imported food and basic consumer goods escaped Ricardo’s attention, as did the problem of financing trade deficits by foreign debt.