Difference between Ricardian Theory and Modern Theory

This article will help you to learn about the difference between Ricardian theory and modern theory of rent.

Difference between Ricardian Theory and Modern Theory

1. Ricardo has spoken of rent of land. Ricardo has not told us that the inputs other than land may also obtain rent. According to the modern theory, on the other hand, any factor of produc­tion, not only land may receive rent.

2. In Ricardo’s theory, rent of land arises because the supply of land is completely inelastic (e = 0). On the other hand, the modern theory thinks that any factor of production may receive economic rent, provided its supply is less than perfectly elastic (0 < e < ∞)

3. Ricardo assumed that land can be put only to a single use; for example, land can produce only one type of crop, say, wheat, and land has no alternative use. In other words, it has been assumed in the Ricardian theory that land is specific to only one use.

This assump­tion signifies that the supply price of land is zero and the money that the owner of land receives is all a surplus or economic rent. We may remember that the minimum supply price of an input in its present use is the maximum amount of money received by it in an alterna­tive use.

On the other hand, the modern theory thinks that all the factors of production, including land, can be put to more than one use. This means that the supply price of an input is positive. Therefore, here, all the money earned by an input is not economic rent. One part of its earning is its supply price, and the other part is a surplus above the supply price—it is economic rent.

According to the modern theory, land also has alternative uses. For example, the land used for growing wheat may also produce jute or paddy. Therefore, if the land that is being used to produce wheat is to be engaged in jute production, the owner of the land must be given at least that amount of money which is obtained by him from his land under wheat production.

This money is the minimum supply price of land in jute production. This minimum supply price is also called the contractual rent. If the land can earn from jute production a surplus above the cost of production including normal profit and contractual rent, then that surplus will be the economic rent and it should be given to the owner of the land.

4. In Ricardo’s theory, the supply of land is seen from the point of view of the whole society. That is why the supply of land is considered here to be completely fixed (e = 0), and land has no supply price, land is a gift of nature.

But, in modern theory, the supply of any factor of production, including land, is seen from the point of view of a particular use or particular industry. That is why the supply price of a factor is obtained to be positive, and not zero. Here the supply price of a factor is the maximum amount of money it can earn in an alternative use.

5. In the Ricardian theory, rent of land does not enter into the price of the product, because rent is not a part of the cost of production. From the point of view of the society, land is a gift of nature, and so the society has to bear no cost for getting the supply of land.

The price the farmer of the marginal land receives does not contain any rent, for the marginal land is a no-rent land. The farmer of the intra-marginal land also gets the same price and rent does not enter into this price. Here rent emerges because the demand for intra-marginal land is greater than its supply which is fixed because the overall supply of land in the society is fixed.

In the modern theory, on the other hand, the economic rent of land does not enter into price. But the contractual rent does enter into price for it is a part of the cost of production. In the modern theory also, economic rent will be obtained if the demand for land becomes greater than its supply resulting in a rise in the price of output, and this rent does not enter into price.