Political Economy of Land Economics
The Ghosts of Natural Resource
Economics Past
Wednesday, January 18
Thomas Hobbes (1588-1679)
Thomas Hobbes
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Each of us is motivated to act in such ways as we
believe will relieve our discomfort, preserve and promote
our own well-being.
The natural state of human beings is in perpetual
struggle against each other.
To escape this fate, we form the commonwealth,
surrendering individual powers to the authority of an
absolute sovereign.
The will of the sovereign for its subjects will be
expressed in the form of civil laws that are decreed or
tacitly accepted.
If individuals make private judgments of right and wrong
based on conscience, succumb to religious enthusiasm,
or acquire excessive private property, the state will
suffer.
John Locke (1632-1704)
John Locke
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“Natural Law” – men have “natural rights”
not given to them by any ruler
Rights in property are the basis of human
freedom
Government exists to protect these rights
and to preserve order
Men organize under a “social contract” to
gain advantages not available individually
Locke
This Contract of Society was the foundation of the
Contract of Government, under which all political power
is a trust for the benefit of the people, and the people
themselves are at once the creators and beneficiaries of
that trust. The State is based on a contract between
ruler and subjects, who give him power only so that their
own welfare is increased and their property protected in
a way not possible in the State of Nature, where it may
be taken away by unprincipled forces.
Political Economists
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Study of land gave emphasis to role of
governments in defining and protecting
property rights
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Adam Smith
David Ricardo
Thomas Malthus
Karl Marx
John Stuart Mill
1808-1873
Mill
Mill
1818-1883
Marx
Marx
1766-1834
Malthus
Malthus
1772-1823
Ricardo
Ricardo
1723-1790
Smith
Smith
1632-1704
Locke
Locke
1588-1679
Hobbes
1600
Hobbes
1650
1700
1750
1800
1850
1900
Adam Smith (1723-1790)
Adam Smith
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Ownership of land is
essentially
nonproductive
Returns to land
ownership are
unearned
Secure, individual
ownership might lead
to improvements
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Q = f( L, K)
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L = labor
K = capital
Wages – returns to
labor
Profit – returns to
capital
Rent – returns to land
(natural capital)
David Ricardo (1772-1823)
David Ricardo
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Owners of land may earn rent.
Scarcity rent
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When land is homogeneous in quality but
scarce
Differential rent
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When land is of different qualities; more fertile
land produces more/earns more.
Understanding Rent
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Farmer Smith
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Farmer Jones
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Poor land – max 10 bushels per acre of corn
Fertile land – 100 bushels per acre of corn
Capital costs – $10/acre
Labor costs – $40/acre
Summary – Understanding Rent
Corn
Price
Jones 100 bu/ac
Jones Rent Smith 10 bu/ac
Smith
Rent
$.50/bu TR = $50
TC = $50 None
TR = $5
TC = $50
$3/bu
TR = $300
TC = $50 $250
TR = $30 TC = $50
$5/bu
TR = $500
TC = $50 $450
TR = $50 TC = $50 None
$8/bu
TR = $800
TC = $50 $750
TR =$80
TC = $50 $30
Ricardo
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Is rent unearned income? Or is rent a
legitimate cost of production that gets
included in the price of the good
produced?
Conclusion: rent arises because of price of
product, is a residual and is unearned
Thomas Malthus (1766-1834)
Thomas Malthus
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Population increases at geometric
(exponential) rate
Food supply increases at an arithmetic
(linear) rate
Food supply (and hence, population)
constrained by natural productivity of
limited land supply
Labor Theory of Value
The value of a product is determined
by the amount of labor used to
produce it.
Karl Marx (1818-1883)
Karl Marx
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Capital and land are essentially
unproductive without labor
Capital is the product of labor exerted
previously
Private ownership of land allows owner to
extract unearned rent
Improvements to land exploit labor, taking
away resources that should go to workers
John Stuart Mill (1806-1873)
John Stuart Mill
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Inherent fallacy in labor theory of value
Theory of Demand
Landowner can use land to produce good
in highest demand and increase his
income
Opportunity costs
Private ownership would result in land
being used in highest valued use
Mill
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Private persons should be allowed to hold title to
land, not because there is any moral or natural
right for them to do so, but because society as a
whole is likely to benefit from the incentives
which private land ownership hold out
Land owners hold their land at the sufferance of
society and in trust for society
Landowners should be legally compelled to
manage land in a way consistent with the public
good
For further information:
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http://www.utm.edu/research/iep/m/milljs.htm
http://csf.colorado.edu/psn/marx/Bio/MarxKarl/km1869a.htm
http://www.ucmp.berkeley.edu/history/malthus.html
http://www.bized.ac.uk/virtual/economy/library/economist
s/ricardo.htm
http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/smi
th/farrer.html
http://www.johnlocke.org/whowasjl.html
http://www.philosophypages.com/ph/hobb.htm
Assignment for Monday Jan. 24 –
Read Field Chapter 2, “Natural Resources
and the Economy”