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The Insider’s Economic Dictionary: R Is for Rentier

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Posted on Apr 14, 2014

Photo by Cal Dellinger (CC BY 2.0)

By Michael Hudson

(Page 2)

Rent, monopoly: Unlike the case with economic rent, monopoly rent adds to price. In agriculture, the idea that landlords receive a monopoly rent as a result of the scarcity of soil (over and above Ricardian economic rent) was formulated by David Buchanan in his notes to Adam Smith’s Wealth of Nations, although denied in principle by Ricardo.

Monopolies such as the royal trading companies created by Britain from the East India Company to the South Sea Company were empowered to impose an artificial scarcity. In modern times this is done by technology companies such as Microsoft, which obtains a monopoly rent on software exclusively installed on millions of computers around the world. A similar monopoly rent has been incorporated into intellectual and copyright property law. Today, monopoly rent and groundrent are the major revenue flows that creditors seek to transform into a flow of interest and dividends, as well as to achieve capital gains.

Rent, tenant: In colloquial speech, people pay rent to their landlords, who use the money to cover the property’s expenses, including the cost of buildings (which strictly speaking is profit), and usually mortgage payments for credit borrowed to buy the property.

Rent of location: The groundrent resulting from favorable location. In Die isolierte Staat the 19th century economist Heinrich von Thünen distinguished this type of rent from Ricardian rent attributed to inherent soil-fertility differentials. Today, this rent results not only from location as such, but from zoning permission to shift land use from agriculture or “brownfields” to more remunerative forms of commercial or residential suburban use, as well as from public transportation facilities that raise rent on hitherto outlying sites, and lower rents elsewhere by increasing the supply of readily accessible sites. The Erie Canal lowered rents on Western grain-producing lands, while raising rents on upstate New York properties. Railroads likewise increased land prices, as do subway lines, roads and other public transport infrastructure.

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Rentier: Someone living on a fixed income, such as the French rentes, government bonds. What Keynes called a “functionless investor” in his recommendation for “euthanasia of the rentier” (General Theory, p. 376 1961 Papermacs edition, MacMillan & Company). Property rents and interest are the two major modern forms of rentier income. (See Adam Smith, Economic Rent and FIRE Sector.)

Rentier income: The essence of classical political economy was that no outlay of living or embodied labor is needed to obtain rent and interest. (See Labor Theory of Value.) This analysis offended the vested interests, which sponsored a post-classical reaction by applying the maxim, “If the eye offend thee, pluck it out.” (See Neoclassical Economics.) The ensuing marginal utility theory ignored the wealth addiction that historically has gone hand in hand with rentiers and the tendency for their compound interest demands to approach infinity.

Ricardo, David (1772-1823): A bond broker, Member of Parliament and political lobby for Britain’s financial sector, his Principles of Political Economy and taxation (1817) defined economic rent as rising as crop prices rose as a result of diminishing returns, providing a windfall to farmers on existing lands with higher fertility. This rent was expected to rise as population grew, raising subsistence wage costs and hence channeling revenue from industrialists to landlords. The way to make Britain the workshop of the world, Ricardo explained, was to repeal its Corn Laws (agricultural tariffs) and adopt free trade so as to buy its food and raw materials in the cheapest markets, in exchange for other countries removing their own tariffs against Britain’s industrial exports.

As a Bullionist (an early equivalent of today’s Chicago School monetarists), Ricardo claimed that a balance-of-payments deficit would set in motion self-stabilizing reciprocal flows that would prevent any financial crisis from resulting from a general inability to pay. Hence, neither money nor the balance of payments could cause a serious debt problem, as economies would settle at a new equilibrium permitting domestic and international debts to be paid.

Risk: The rationalization for interest and profit by the 13th-century Schoolmen. However, the aim of business is to minimize risk or, if it must be undertaken, to demand government bailouts. (See Moral Hazard.) Inasmuch as interest on government bonds is risk-free, the risk premium applies only to rates above the yield set by the central bank for public borrowing.


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