One may hire many things besides land and pay what is commonly called rent for them. No one would think of calling by any other term the amount paid for the use of a building, a room in a building, or the furniture in the room. All these things yield rent to their owners; and if the intuitions which govern the common use of terms are to be trusted, the income derived from such things and that derived from land have some essential qualities in common. Every such income is paid for the use of some concrete instrument, and is measured, not by a percentage on the value of the instrument, but by a lump sum—a certain number of dollars per month or per year.

The Mode of Calculating the Rent of Concrete Instruments.—Now the rent of such instruments of production, whether artificial or not, can be measured in exactly the same way in which the rent of land is measured. We saw that there are two margins of utilization of land, an extensive and an intensive one, and that the product of labor and capital at either of these margins may be used as a basis for computing the surpluses which constitute the rent of the land. The landlord gets from a good field what it produces minus what the labor and capital that are used on this field would produce if they were used on the poorest land in cultivation; or, what is the same thing, he gets from the field what it produces minus what this labor and capital would produce if they were set working somewhere on the intensive margin of cultivation. Take the men out of this field, add them in small detachments to the men who are already cultivating other fields, in order that such fields may be tilled a little more intensively, and measure the product which the laborers create when they are so placed. Withdraw also the capital from the field, add it, in small amounts, to the capital that is working elsewhere, and measure its specific product. The sum of these two specific products is the same amount that is arrived at by using the former standard. This labor and capital, formerly used on the good field, scattered as they now are among the users of other good land, will create the same amount that they would have created if they had been employed on the poorest land in cultivation. This amount is, as it were, what they produce by their own unaided power; and whatever is produced in excess of this amount when a good field comes to their assistance is the rent of that field, for it is the contribution which the field makes to the joint production. Total product of land, labor and auxiliary capital minus the product created by the labor and auxiliary capital when these agents are put in marginal positions equals the rent of the land.

The Rent of an Instrument measured from the Intensive Margin.—We can measure the product of any instrument in this way. If it is a ship, it takes labor to sail it and requires a considerable amount of auxiliary capital. We must fill the bunkers with coal, stock the steward's department with provisions, furnish and light the staterooms and the saloons, and provide cordage and a wide variety of other ship stores. All this labor and all this capital we could take out of the ship and use elsewhere. We could convert them into marginal labor and capital. We could divide them among the owners of other ships where they would be used in a way that would make these other ships somewhat more efficient and cause each of them to earn a little more than it now earns. Whatever the labor and capital could, in this way, produce furnishes the basis for computing the rent of the ship. Subtract it from the total joint product of labor, capital, and ship, and you have what the vessel separately earns.

The Mode of Testing the Productive Power of a Ship.—Put the labor and capital into the ship and set it doing its proper work of carrying freight and passengers, and you cause a certain product to be created. The steamship company gets an aggregate amount for the service it renders by means of the labor, the auxiliary capital, and the ship. A certain smaller amount would be realized if the labor and the auxiliary capital were taken out of the ship, distributed, and used in the way we have just described. The difference between the two amounts is the rent of the ship, or its particular contribution to the general product. This gives us a formula for computing the rent, not only of land, but of buildings, tools, machines, vehicles, and every other concrete instrument of production. The formula, indeed, is so general that it enables us to compute the earnings of any agent whatsoever. The rent of any such agent is what it adds to the marginal product of labor and capital used in connection with it.

No-rent Instruments.—The majority of instruments that are in use add something to the marginal product of the labor and capital used in connection with them. Some add more and some add less, according to their several qualities. As a rule, any tool of trade produces most when it is new and less and less as it grows older. In the end it is discarded because it has so deteriorated that it no longer adds anything to the marginal product of the labor and capital that are used in connection with it. A wagon has become so rickety that it no longer pays to furnish a horse, a harness, and a driver for it. The capital and labor that these represent would earn as much if they were detached from the old vehicle and added to the equipment of some person who has a stock of good ones. The rent of this old wagon is nothing. As in the case of the poorest land in cultivation, it is a matter of indifference whether certain amounts of labor and capital are used in connection with it, or whether they are withdrawn and employed elsewhere. This poor vehicle, like the poor land, may be used without positive loss; but if it is so used, nobody gets any income from it. It has no power to enter in a really productive way into combination with labor and capital, for it cannot so combine with them as to add anything to those marginal products which the labor and capital could create if they remained detached from it.

The Universality of the Test of Rent.—This test, whether an instrument can or cannot add something to the marginal product of labor and capital, may be universally used. It may be applied to everything that is made as an aid to labor. There are no-rent buildings, locomotives, cars, tracks, ships, wagons, furnaces, engines, boilers, and, in short, instruments of every description that figure in production. Combine any one of them with labor and capital and see what you get out of the combination; then take the labor and capital away and see what they will produce as marginal labor and capital; and the difference between the two amounts, whatever it is, is the rent of the instrument. If the difference is nil, the instrument is at the point of being abandoned.[1]

True Capital rather than Capital Goods moved in Making such Tests of Productivity.—In applying these tests with scientific accuracy we should take away the true capital used in connection with a rent-paying instrument and use it as marginal capital elsewhere, rather than take away the particular concrete thing in which that capital is now embodied. In the case of the ship the accurate test is made, not by taking stores, etc., bodily out of it and putting them into other ships, but by letting the stores first earn what they can where they are, converting the earnings into money, and, when the stores are completely used up, spending the money to procure marginal additions to the outfit provided for the other ships.

One Difference between Land and Artificial Capital Goods.—In the case of land a particular area is marginal or no-rent land, and, in a static state, it remains so. Any particular ship, wagon, engine, or other made tool begins its career as a rent payer and ends it as a no-rent instrument. If we watch the whole social stock of instruments of production, we shall see the no-rent points not fixed in location, but shifting from place to place. Now this machine, now another, and now still another reaches the unproductive state and is supplanted by instruments of similar kind that are new and efficient.

Original Elements in the Soil.—The real difference between the rent of a piece of land and that of a building, machine, vehicle, or any similar instrument arises from the fact that the land is not going to destruction and the artificial instrument is. There are elements in what is commonly called land that wear out as do the tools that are used in tilling it, but these elements are not land in the economic sense. Land, as Ricardo long ago said, consists in the "original and indestructible powers of the soil." He singles out certain constituent elements of every farm, forest, building site, or other piece of what is called land in ordinary usage, and gives to this new concept the name land in an economic sense. These so-called "powers" are original elements because man does not make them; they are provided altogether by nature, and the only way in which man may be said to impart any productive power to them is by putting them into combinations in which they can produce. When men settle upon what has been vacant land, they bring the land into combination with labor, and when they break up the land for tillage and put buildings on it, they combine it with artificial capital. By means of these combinations land acquires productive power; but physically considered, it is altogether a natural product.

Indestructible Elements in the Soil.—Land in the economic sense is indestructible because the natural effect of use is not to destroy it. This does not mean that it is not physically possible to destroy land to the extent of making it forever impracticable to use it in the ways in which land is commonly utilized. Nature may do this by sinking it beneath the ocean, and man can, if he will, do something akin to this; but he does not naturally destroy what is truly land in the using. It is impossible to use a plow, a spade, or a reaping machine without injuring it and, in the end, wearing it out. It is also impossible to draw the nutritive constituents out of the superficial loam and convert them into crops without exhausting the supply of these sources of fertility and so spoiling that which is commonly called the land, though it is not so in the economic sense. What is really land in this sense is not affected. Nitrates and phosphoric acid that lie in the topmost stratum of the soil are among the destructible instruments of agriculture. The supply of them has to be renewed, if cultivation is continued, and they are therefore in the class with the plows, spades, and reaping machines which also wear out. But whatever there is in the soil that suffers no deterioration from any amount of use is the land with which political economy has to deal.

The Gross and the Net Rent of Land Identical.—As land does not wear out and require renewal, all that it adds to the products of the labor and capital that are used in connection with it may be taken by the landlord as an income without reducing the amount of his property. Whatever land produces at all is a net addition to the general income of society. Net Rent of Artificial Instruments Smaller than Gross Rent.—It is not safe, on the other hand, for the owner of buildings, tools, or live stock to take for his own consumption all that these produce. If he were to use up their gross produce as he gets it, he would find, in due time, that a considerable part of his property had vanished. Such instruments wear out and become worthless, and if no part of what they produce is set aside as a sinking fund with which to purchase other instruments to take their places, one whole genus of capital must go altogether out of existence.

Artificial Instruments Self-replacing.—What actually happens is that these instruments create enough wealth to pay for their own successors, and that, too, besides paying a net return, which, regarded in one way, is interest. If you compute the whole product of one of these instruments by the Ricardian formula which we have examined, the amount of it will be whatever the instrument, during its entire career, adds to the product of the labor and of the capital that are used in connection with it; and that includes the fund for renewal that has just been described, the amount, namely, which the owners must set aside for repairing the instrument and finally purchasing another. As the instrument itself provides this sinking fund, it may be said to create, in an indirect way, its own successor. The ship earns, over and above the net income which is interest on its cost, enough to keep itself seaworthy so long as it sails and, in the end, to build another ship. The locomotive, the furnace, the loom, the sewing machine, the printing press, etc., all pay for and thus indirectly produce their own successors.

The Net Rent of a Permanent Series of Similar Instruments.—The first charge on the product of any instrument of this kind is the amount necessary for replenishing the waste of it and for providing a successor when this original instrument shall have been wholly worn out. In like manner, the first charge on the successor is providing a similar fund, and so on indefinitely. A part of the productive power of every one in an endless series of similar instruments is devoted to this type of reproduction. The series maintains itself and yields an income besides; and that remainder of its gross rent which is left after waste of tissue is repaired is available as a net income for the owner. This net remainder constitutes an interest on the owner's capital. He possesses a permanent fund of productive wealth embodied in the endless series of these perishable instruments, and the series taken as a self-perpetuating whole yields nothing but this interest. Each instrument, separately considered, yields interest and a sinking fund; but the sinking fund is not available as an income, since it must take shape as another instrument which serves to keep the series intact. What the first instrument creates in addition to the sinking fund is its contribution to interest, and what each instrument creates above what is required for virtual self-perpetuation is also interest.

Interest and Net Rent Identical.—We may therefore reduce interest to the form of a net rent by calculating the gross rent afforded by each instrument in such a series and by ascertaining how much of this merely repairs waste and how much is true income. As interest is usually expressed in the form of a percentage, we may reduce the net rent to this form by comparing it with the cost of the first instrument, which is the amount originally invested. The series of instruments will yield a net return every year. We can compute the gross return of each instrument according to the Ricardian formula for measuring the product of the land. It will diminish from year to year and will ultimately vanish. We can add the several annual gross earnings of the instrument during its economic lifetime in the form of an absolute sum, which is the total rent of the instrument. From this we can deduct the cost of replacing this worn-out capital good, and the remainder will be the net rent of the instrument. We can, in a like way, get the net rent of all the following instruments in the series for a long period, add these net rents together, and get the true net earnings of the series for the time covered by the calculation. If this chances to be ten years we may compare a tenth of this total, or the earnings of the series for one average year, with the cost of the first instrument,—which is the capitalist's original investment,—and we shall thus get the fraction which represents the annual rate of interest on that investment. Perhaps in an average year the series has earned, above what is required to repair waste, five hundredths of what the first instrument cost. That is, then, the rate of interest that the series as a whole, or the permanent capital, is yielding. The whole procession of instruments in which permanent capital is invested creates every year this fraction of its own value, over and above the sum that is needed to offset the wear and tear of an average year's use.[2] General Interest as Rent.—If you compute the net income of all tools, machines, and other like things in the world, add the amounts, and get the grand total of them all, you have the entire income from this part of the capital of the world in the form of net rent. If then you compute the value of all this class of instruments and see how large a part of this value the net rent is, you translate this total rent into the form of interest, and therefore net rent and interest are the same income regarded in two different ways.[3]

Stocks of Made Instruments graded in Quality as is Land.—It is necessary to notice the fact that the permanent series of tools, buildings, and other active capital goods shows forever the same gradations of quality that are found in the case of land. There are always to be found some instruments which are producing a large amount—that is, they are adding a large amount to the product of the labor and the further capital that are combined with them in production. A given amount of labor and capital creates much more wealth when working with a machine of the highest class than it would if distributed in marginal positions; and this is equivalent to saying that such an instrument is itself highly productive. Other instruments are to be found which are creating less, and there is never wanting a grade of no-rent instruments which are adding nothing to the marginal product of the other agents. It would be as well for the labor that used them if it should drop them and add itself to the force which is working with good instruments. Any one manufactured instrument begins its career as a maximum-rent instrument and ends it as a no-rent one. The ship is at its best when it starts on its first voyage, and the mill is at its best in the first year of its running. Each instrument goes gradually downward in the scale till it reaches a stage in which it really produces nothing, since it adds nothing to what would be produced without it. The permanent series of instruments never thus deteriorates. All the depreciation of particular things is made good by the repairing and the replenishing which go on. In the series as a whole there are forever present grade number one, grade number two, grade number three, etc., exactly as in the case of land. If we wish, we can reckon the income that is to be gotten from each part of the series according to the old-time formula that is familiarly used in the case of land, "What labor and capital create by the use of this piece of ground in excess of what they would create if they were applied to the poorest land in use." For a grade of land read a grade of the self-perpetuating series of artificial instruments, and it will appear that each grade above the poorest yields, with the labor and capital that are combined with it, a surplus above what this labor and this capital could create if they were combined with the poorest grade in the permanent series.

Different Modes of Destroying and Replenishing Stocks of Capital Goods of the Two General Classes.—The process of keeping up a stock of tools of trade is unlike the process of keeping intact a stock of materials and unfinished goods, because the modes in which the two kinds of capital goods deteriorate and perish are unlike.

In the case of the raw materials that gradually ripen into articles for consumption and which we have called passive capital goods, the waste of tissues that takes place is quite unlike that which takes place in the case of active capital goods, the tools and implements that are used in the process. The raw material acquires value through the whole process, and in the end it gives itself, with all its acquired value, into the hands of the consumer. In a static state such goods embody the whole income of society, including the products of all labor and of all capital.

The series of A's represents the process of creating consumers' goods from the rawest material. The A´´´ as taken away for consumption represents, as it were, the wasting tissue of passive capital goods; and it contains in itself the wages of all the labor in this series of subgroups, the interest on all the capital there used, and, in addition to these, the sinking fund that is necessary in order to keep the active capital intact. Some of the articles of the kind A´´´ will have to be given over to the men who keep the tools, buildings, etc., in repair and replace them when they are worn out. The whole force of the industry of this group expends itself simply in making good the loss that the withdrawal of the A´´´ for use occasions. It does, in short, nothing but replace the perpetually wasting tissue of the A's. All industry, except that of the makers of active instruments, may be considered in the light of an operation, the aim of which is to keep the stock of passive capital goods intact, or, what is the same thing, to keep the fund of circulating capital undiminished. Whoever puts anything into this fund enables it to overflow and to furnish an income without suffering any diminution. The sole purpose of such capital is to overflow, that is, to suffer, at one and the same time, a loss and a replenishment which neutralizes the loss. It exists for nothing else except to ripen into consumers' wealth. Nevertheless, though the ripened A's are perpetually consumed, the series of A's is abiding capital, is entitled to its share of interest, and is certain to get it. A part of the perpetual flow of A´´´'s is this interest. As the whole income of the society consists in A´´´'s, a certain number of the A´´´'s that are withdrawn for consumption go to capitalists as interest on the permanent fund which is kept in existence in the form of A, A´, A´´, and A´´´. A certain other part of the outflow of A´´´'s goes also to capitalists as interest on that other permanent fund which is maintained in the form of tools, machines, and buildings, such as must everywhere be used in the series. A third part of the flow of A´´´'s is wages of labor in this group; and a final portion is what we have called the sinking fund, the amount that is given over as an income to the producers in another group, not here represented, who keep the stock of buildings, tools, etc., intact. These four withdrawals of income constitute the process by which the stock of passive goods is depleted, and the grand resultant of all industry is to atone for that depletion.

Labor and the Obtaining of its Product, in Static Industry, Synchronous.—One function of the permanent series of A's is to enable labor everywhere to get its virtual product without waiting, and that too in the form in which it needs it for use. The labor that converts A´´ into A´´´ supplies the waste of tissue that takes place at that end of the line by withdrawal of an A´´´. The labor that turns A´ into A´´ replaces the waste that takes place at that point when an earlier A´´ becomes an A´´´. The labor at A´ replaces the waste at that point, and that at A replaces the waste at still another point. They are all at work keeping the stock of A's unimpaired, and one of them does as much toward keeping up the perpetual flow of A´´´'s as any other.

If we pump water in at one end of a full reservoir, we instantly cause it to overflow at the other end; and every worker in such a series as we have described may be thought of as putting something into the permanent reservoir of capital and so causing a corresponding overflow. He gets his reward day by day as the work proceeds. Wherever a laborer may be in such a series, his work creates a ripened product as it goes on. He has not to wait for it. His work and its fruit are synchronous.

Differences between Land and Made Instruments Apparent in Dynamic Conditions.—A point that has great theoretical interest is the nature of the difference between land and other productive instruments. In a static society the difference would be comparatively unimportant, but it is brought into prominence by the changes which constitute a dynamic state. The static hypothesis requires that capital should not increase or diminish in quantity, and that it should not change its forms. The equipment of every mill and of every ship is kept unimpaired but not enlarged or improved. There is a fixed number of spindles in the cotton mill, of lathes in the machine shop, of sewing machines in the shoe factory, etc., and this fact removes the most striking difference which, in a dynamic society, actually distinguishes land from other things.

Land, in the economic sense, does not increase in quantity, however changeful and progressive a society may be. The chief distinguishing mark of land—that of being fixed in amount—separates it from other things only in a dynamic state and because of the action of the forces which produce organic changes. These are subjects to be studied in the dynamic division of economic theory.

A Distinguishing Mark of Land which appears in a Static State of Industry.—In a static state there remains this difference between a piece of ground and a building, a tool, or any other instrument: the ground is not artificially made and does not perish in the using; while the building or the tool or other appliance is so made and does so perish. It must in wearing itself out create in the indirect way which we have described its own successor. The engine must, by a part of its product, pay the men who will make another engine and so perpetuate the series of engines. This makes it necessary for the owner of the engine to save some of its gross rent to pay for depreciation and renewal, while he can safely use the whole rent of land.

This Mark of Distinction not Applicable when Land is contrasted with a Permanent Stock of Capital Goods.—If we look, not at one particular instrument, but at an entire series of them,—if we take into view, not only the engine which is now driving the mill, but also the one that will succeed it, and again the one which will succeed that second engine, and so on forever,—this difference between land and the artificial instrumentality vanishes. The series of engines, like land itself, yields only a net rent. The remainder of its gross product is not a true rent at all, since any one of the engines creating it has to consume it on itself and cannot give it to the owner as an income. This remainder pays certain men for keeping the series of engines intact, and what is given to them as pay for their services cannot accrue to any one as an income from the series of instruments so maintained. It is the earnings of the corps of maintenance created by their own labor and capital. What the series of engines yields over and above what it expends in maintaining itself it gives to its owners as an income. This is their net return and they can use it without trenching on their property. The analogy between the returns from land and those from a self-perpetuating series of made capital goods is in this particular complete.

The Source of the Fund for Repairs and Renewals.—The fund for repairs and renewals must, of course, like the net income itself, be furnished by instruments that are above the no-rent grade. A machine will naturally be used as long as it pays anything whatever, and during the latter part of its career it usually produces less than mere interest on its cost. So long as the labor and the auxiliary capital that are combined with the instrument produce by its aid any more than they would produce if they were withdrawn from it and added, as marginal increments, to the labor and capital that are working in connection with good instruments, they will continue to use the machine and they will abandon it only when it ceases to pay anything whatever. Out of the total amount it produces before reaching this point of abandonment comes the amount that is needed as an offset for the cost of providing a new machine.

Incorrectness of a Common Statement concerning Rent and Price.—This brings into view a striking fallacy of what has been current economic theory. It has been customary to claim that the rent of land "is not an element in price," although the interest on capital is such an element. The rent of land is the net product of land; and if interest be kept distinct from it, this income is the net product of a permanent stock of capital goods. The relations of these two component parts of the constant output of goods to the prices of the goods are identical.

Proof of the Incorrectness of the Current Statement concerning Rent and Price.—The vague form of the current statement concerning rent and price is responsible for much confusion of thought on that subject. What the statement would mean is that the price of wheat is not affected by the great contributions to the supply of it which good lands are making. These contributions are the rent in its original form. The rent of wheat land is wheat, that of cotton land is cotton, that of mill sites is manufactured goods, etc. That money is used in payments made to landlords changes nothing that is essential. To say that such contributions to the supply of particular commodities are not an element in determining the prices of them, would be as unreasonable as to make the same assertion concerning other parts of the supply. Quite as logically might it be asserted that other components in the supply do not affect prices—that the amount of wheat which is attributable to harvesting machinery or the amount of calico which is imputable to looms has no influence in the market values of these articles. Why the Produce due to Good Land prevents Prices from greatly Rising.—If the use of good wheat land were merely discontinued, the supply of wheat would of course be not only lessened, but reduced almost to nothing, and a famine price would at once result. If, now, an attempt were made to make good the shortage of the supply of this cereal by tilling lands which are now at the margin of cultivation, it would at once appear that not enough of such land exists to enable us to accomplish the purpose, and it would be necessary to push the margin outward and till poorer and poorer soils, at a greatly enlarging cost. We should grub out worse thickets, drain worse swamps, terrace more discouraging hillsides, irrigate more remote and barren deserts, etc. All this would mean a greater cost of production of wheat and a higher price for it in the market.

It would also mean another thing. The extending of the margin of cultivation which makes it include poorer grades of land causes that part of the area now tilled which does not command any rent to yield one. After the margin should have been greatly extended and finally located in a region where getting anything out of the soil would require a struggle, it would appear that all of the lands newly annexed to the cultivated area except the last and poorest would command a rent. All but those on the new margin would add a definite quota to the supply of wheat, and this contribution would be their rent. Entering into the supply, it would of course count in the adjustment of price.

What can reasonably be conceded concerning Rent and Price.—There is another possible meaning of the phrase "Rent is not an element in price"; and, whether it was clearly in the minds of those early economists who made the assertion or not, it is what their argument proves. The payment of rent by tenants to landlords has no effect on the market value of the produce. "Food would not become cheaper," says Professor Fawcett, "even if land were made rent free." There would be the same need of food stuffs as before, and the tillage of lands would be pushed to the present margin, where the yield is smallest. The cost, in labor and capital, of that marginal part of the supply of food which has come from these poorest lands would continue to be what it has been heretofore. The farmers would, of course, get from the good lands the same surplus that they get at present; but the fact that land had been made rent free would enable them to keep it. This surplus is, of course, rent, and transferring it from landlords to tenants does not affect prices. So much of the doctrine formerly current is true; and it would have forestalled much confused thought as well as much controversy if the statement concerning rent and price had made it clear that any rent in its original form is an element in the supply of produce, and the existence of it helps to determine prices, while the payments made by tenants to landlords do not affect them. If these payments should cease and the tenants should retain the rent, prices would continue to be what they now are.[4]