Ricardo's theory of rent -- widely viewed as the intellectual coup of the Principles -- is disarmingly simple. It goes like this: Start with the premise that there are, in England, a number of different grades or qualities of land being offered to entrepreneurs for rent. The land is graded on its fertility, the degree of its ability to produce corn [i.e., wheat, barley, oats, etc] with varying applications of labor and capital. For the sake of simplicity, we assume also that the corn grown on one parcel of land is indistinguishable from the corn grown on any other parcel, regardless of how much or little labor and capital it takes to grow it. [We have to assume this; otherwise the various corns will command varying prices in the market because of those differences -- an example of comparing apples to oranges, as it were. We also assume, just to allude in a preliminary way to the question raised several days ago by Andrew Blais, that none of this corn is priced in part on the basis of some snob factor, such as a Whole Foodian assertion that it has been raised by happy workers on land that positively enjoyed being cultivated -- a sort of Schmoo claim, for those of you who are old enough to remember L'il Abner, the cartoon strip drawing by Al Capp.]
We also assume that land owners are interested in being paid rent for the use of their land, and will accept the largest payment they can get, even if it should turn out that all they can get is some vanishingly small payment. [This is the kind of continuity assumption mathematically inclined economists always make in order to be able to use their nifty mathematics. Even though Ricardo does not use nifty mathematics overtly, he makes the same sort of assumption.]
Now, the quantity of corn grown is a response to the market demand for corn [not the price, just the quantity]. Smart entrepreneurs will not grow more corn than they can reasonably expect to be able to sell. [Not so smart entrepreneurs go broke, and do not interest us.] So long as that quantity can be more than met by growing corn solely on land of the best quality, the market for land for rent will be a buyer's market. More land being offered than is wanted by the buyers, the landlords will compete to see who succeeds in getting at least something for his or her land [some of the renters are titled ladies, of course.] The price for renting land will fall precipitously, until canny entrepreneurs are paying virtually nothing in rent, for if one of them is charged as little as a shilling an acre a year, he will go to one of the lazy, self-indulgent landed gentry who has failed to find any takers for his land and offer sixpence. This puffed up aristocrat, totally innocent of anything remotely resembling the Protestant Ethic, will snatch up the sixpence, because even sixpence is better than nothing. Under these conditions, the natural price of corn will be determined by the total quantity of labor directly and indirectly required for its production, which is to say the farm labor expended in growing it together with the bits of embodied labor passed along from the farm machinery, seed corn, and other capital inputs.
Now, as Thomas Malthus has explained to us [see above], the working class population [who are the principal consumers of corn, there being so many them and they having no money for anything better] will expand steadily until it starts to press against the available supply of corn. At this point, the relationship between the entrepreneurs and the landowners will shift dramatically. Now, there will be an actual shortage of the very best acreage, and competition for that land will commence. This will have two consequences. The first consequence is that for the first time, the entrepreneurs will be forced to pay a measurable rental on the best land. The second consequence is that some of the entrepreneurs will approach owners of the next best land, and offer them vanishingly small rentals -- tuppence an acre. Those owners, who have thus far been shut out of the rental market by a total lack of demand for their land, will snatch up this nominal fee.
The entrepreneurs face a calculation, which all of them are quite capable of making. It is cheaper to grow corn on the best land, but that corn will sell in the market for the very same price as corn grown on the less good land. What, they must calculate, is the highest rental they can afford to pay before it becomes more costly to grow corn on the best land than to grow corn on the second best land, which requires larger capital inputs but is available virtually rent free?
As population presses on available corn supplies, the second best land will all fall under cultivation, and some entrepreneurs will start seeking out the owners of the third best land. The second best land will start to command a non-trivial rental, while the owners of the third best land, newly entered in the lists, will have to be satisfied with that insulting tuppence per acre. Inasmuch as there is no limit save starvation to the expansion of the ranks of the poor [Ricardo accepts Malthus' argument on this], less and less economically desirable plots of land will be called into cultivation, and an entire hierarchy of rental rates will come into existence, attached to lands of differing degrees of fertility. As before, the very worst land, of which there is always some extra available [or so Ricardo assumes -- his argument requires it] commands in effect no rental at all.
Now comes the kicker. All the corn grown in England is thrown onto a single ferociously competitive market, where each bushel of it commands the same price. This means that it is the conditions of cultivation on the least fertile land that determine the price of corn in the entire market. Contrary to intuition and Adam Smith, rent plays no role at all in the determination of the natural price for agricultural goods. Ta da.
But the entrepreneur is paying rent on the land he employs [assuming he is not using land of the lowest quality.] If rent is not an element in the cost of corn, what is it? Simple: Is a deduction from profits, just as Adam Smith thought. It is a transfer payment exacted by the landlords who, for historical, political, and legal reasons, have a monopoly of an essential input into production. Because they control an input for which there is no substitute, they can exploit that control to siphon off a portion of the profits earned by the entrepreneurs. As population increases, so will rentals, with the result that a larger and larger share of profits will be diverted from productive reinvestment to wasteful luxurious living in the Stately Homes of England. Eventually, the landowners will suck up so much of those profits that economic expansion will be threatened, for growth results from the productive re-investment of profits.
To repeat, because the landowners control an essential component of the means of production, they can exploit the entrepreneurs. A corollary of this conclusion, not drawn by Ricardo, alas, is that if there is any major social and economic class that has no control over any of the means of production, it will be vulnerable to being exploited by the social class that does control the means of production. Enter Karl Marx.