Does the Collection of Rents Contribute to the Economy?
Most likely you’ve heard comments that one measure of the state of the economy is the property market. If property prices are up, then it is a sign things are moving in the economy. In one sense, this seems right. If people can afford higher prices in property, it means people are bringing in more in wages and profits.
Another way of thinking about this relation is with respect to the rents people and businesses pay. Higher property values = higher rents. The higher the rents are, the more it seems the economy is doing well.
In this inaugural segment of Thought Walk, I want to consider the role the collection of rents has in the economy. So let us begin!
Imagine a small community – call it Neverland – where land is not needed to produce any objects to be sold or traded. We can say that Neverland is basically a community of laborers and consumers. And what we find is that for every trade and service provided, what results from the effort and toil of each citizen is essentially a kind of value created and available to the community. The value that bakers offer is bread. The value that cobblers offer is shoes. The value police constables offer is preservation of the peace.
In classical economic terms, the value created and offered is essentially a wage. In the examples above, the object or service only has to be traded or sold to result in some return, either in terms of another object or service, or in terms of money.
Imagine a second community – call it Openland – where land is needed for production. What you will find is that not all land is equal and that because of this, citizens of the community will try to obtain specific sites that provide an advantage for what they do. This advantage can be natural, as in fertility of the soil for farming, or it can be artificial, as with respect to location to the hub of social activity.
Assuming there is collective ownership of the land, how might specific sites be distributed?
An interesting question, and one which we will have to leave unanswered in this exercise. Let it suffice to say that conventional Marxism attempts to ignore this dilemma and typical versions of capitalism tend to exploit it.
Imagine a third community – call it Offland – where a minority of the citizenry owns the land used for production. Let’s call these owners "Middlekins". What role do Middlekins play in the production of value?
Unlike Neverland, where land is not needed to produce anything, in both Openland and Offland it is necessary to have access to land. Trees cannot be grown without the soil; a cobbler cannot make shoes levitating in mid-air; and police constables must have a base of operations.
How do the workers of these two communities gain access to land? At least for Offland, they will most likely have to pay a fee. This fee is called rent. Setting aside how the amount of this fee is determined, let us assume it is a modest percentage of 10% of the gross value produced by a tenant. So if a cobbler earns on average 5000 guilders a month, the Middlekin takes 500 guilders as the fee (or rent).
How does the 500 guilders relate to value production?
It appears to take away from the value production of the cobbler. It could be observed that the Middlekin provides a service so that the cobbler can in fact work. The Middlekin provides a basic business site that can be used in a variety of ways.
If that is the case, it seems such a service would be a one-off fee. Call this service “business onsite start-up”, which seems to be something that happens only when a business is setting up.
Perhaps the service is the upkeep of the real estate (buildings, etc.). This seems reasonable in principle. But such a service often seems much less costly than the rents that businesses pay, which typically amount to 1/3 of their income (or 1650 guilders for our cobbler)!
In fact, it seems that the fee the Middlekin takes is actually one derived from his or her advantage of owning the site in perpetuity. Or another way of putting it, the advantage of the Middlekin seems to equate to the disadvantage of the cobbler. The cobbler has to pay the fee every month, while the Middlekin seems not to have to do much to obtain this fee, except initially obtaining the rights to the land in question.
Now imagine that the cobbler’s business is really taking off. Her unisex stiletto clogs are all the rage!
What do you think will happen to the fee the Middlekin requires?
Indeed, it will go up.
What can we learn from Offland with respect to our guiding question on this Thought Walk?
It seems to suggest that higher rents (property value) tend to reflect an economy that is doing well because business seems to be up—that is, business owners seem to be earning more and can thus pay more for land use.
But in the end, it also seems that the higher rents disadvantage those same businesses. And so higher rents do not add to production, but take away from it.
Of course, it can be argued that rents eventually return to the circulatory flow of the economy via spending and investment. (This is a version of Adam Smith’s infamous “invisible hand”.) This point may be true, but rents may also return to investing in more land (or what is called land speculation and buy-to-rent)!
But I think more important is this suggestion: There seems to be no satisfying rationale for the original disadvantage of the Middlekin collecting rent. The rebuttal that it might return to the general flow of the economy only raises other questions:
Why not just have the rents return directly to the economy?
Why have the middleman, I mean the Middlekin, involved at all?
Dr Todd Mei is Senior Lecturer and Head of Philosophy at the University of Kent. He researches in the philosophy of work and economics and also runs the public philosophy website philosophy2U.com. He is an aspiring literary author and is a keen windsurfer and recovering rock climber.