ance can be given that under such a system due consideration will be given to that wider basis of rating which is necessary to secure fair rates for all? Would not state interest demand that undue consideration be given fire losses in the particular state?

Further, since insurance is so completely a subject for state regulation, it may be asked what can be gained by a system of state rating which could not equally as well be secured by a proper supervision of rating.

Summing up, we may say that the public is primarily interested in the fire insurance contract in order to assure the buyer of insurance that the seller is able to fulfill his part of the contract. This interest is peculiarly justified by the fact that the buyer has no satisfactory means of determining the solvency of the insurance company. The thing sold, that is, indemnity, has no tangible expression by which the buyer can judge its quality. This fact is also the basis for the present agitation for the enactment of laws which will give to a public official the power to supervise the organization of companies, the sale of their stock, and their liquidation in case of insolvency. The state may also properly supervise rates in order to secure equitable charges for all purchasers of insurance. The working of competition will probably prevent excessive returns for the service rendered as a whole, but it cannot prevent discrimination between individuals and classes of property.

Washington University,

ST. LOUIS, Mo.

W. F. GEPHART.

RENT UNDER THE ASSUMPTION OF

EXHAUSTIBILITY

SUMMARY

The abstract character of the conception of land as the basis of rent, 466. Modification of the rent theory according to the possibility of preventing exhaustion, 469. Effect of the assumption of exhaustion upon the economic intensity of utilization, 471.- Influence of the rate of interest on intensity of utilization, 474. — Influence of prices on intensity of utilization, 477. — Determination of the extensive margin, 480.- The so-called royalty from mines forms a part of economic rent; Ricardo's discussion, 481.- Relation of royalties and rents to prices, 485.- Incidence of taxation under the modified assumptions, 486. — Conclusion, 488.

IN the infancy of economic science rent was distinguished from other forms of income as the periodic return from the use of land. And because land itself was regarded as one of the great agents in production, the existence of a peculiar type of income attributable to it appeared particularly suitable.

This complete correlation between rent as an income and land as its source was not destined to continue. In the England of the classical school rent was usually a form of income which seemed to leave the basis of income unimpaired. Year after year the landowner might receive a substantial return without decreasing the capital value of his investment. It is not strange that the imperishability of the basis of rent came to be considered an essential characteristic of rent as a form of income. It became necessary, therefore, to define anew the basis of rent so that it might conform to this preconceived essential characteristic of rent itself. Accordingly Ricardo modified the economic concept of land as the source of a rent payment, and introduced the

assumption that rent is a payment for " the original and indestructible qualities of the soil." Later writers have interpreted Ricardo's criterion of land more rigorously than did Ricardo; and after passing through a process of gradual refinement, the Ricardian assumption has been reduced to its extreme form in Professor Commons' conclusion that the property of extension is the essential quality which distinguishes land from other kinds of goods and constitutes the basis of rent.1 Thus the concept of land as the basis of rent has been gradually reduced to an abstraction.

A practical man might well ask why it is necessary to develop an elaborate and peculiar doctrine to explain the value of the services of natural agents when by very assumption a large part of natural agents are excluded from the scope of the explanation. Why must rent be a payment for an original and indestructible property in order to be rent? The question is a part of the long continued dispute as to the desirability of distinguishing land from capital, and rent from other forms of income. It is not necessary, however, in this connection, to wander so far afield. This question may be disregarded if it can be shown that indestructibility is not a characteristic which separates rent from other forms of income. The ground will then be clear for a reconsideration of the rent theory under the assumption of exhaustibility.

In one sense there is no basis of rent which is imperishable. For there is no conceivable basis which might not lose its utility, and therefore, its ability to yield a rent. A change in social demand may cause even the property of extension to lose the ability to yield a rent. However, it may be alleged with justice that the word indestructible has been employed by

1 Professor Marshall seems inclined to a similar view, altho he has not come out unreservedly in its favor. Principles of Economics, 5th ed., bk. iv, chap. ii, sec. i.

Ricardo and his followers in quite another sense: in the sense that the use for which rent is paid does not cause the impairment of the basis of rent. In this sense the basis of rent may be indestructible. The clearest illustration is urban land. In the case of agricultural land also it is frequently possible to isolate the income attributable to the indestructible properties. When the elements which are exhausted are economically replaceable, the expense of replacement determines the value of the exhausted elements; and the remainder of the total surplus may be considered the rent of the inexhaustible properties. In many cases, however, it is not possible to isolate the returns assignable to the indestructible properties. In the case of mines, for intance, it is impossible to separate the value of the exhausted properties from the value of the inexhaustible properties. It is easy to determine how much the capital value of a coal mine is reduced by the process of use. But this capital value is nothing more than the present value of the surplus income from the mine during a period of time, — that is, the present value of the total rent which it will yield, — and this rent consists of two indistinguishable elements: the return for the coal used up and the return for the site value of that coal. A similar impossibility exists in the use of agricultural land when it is more profitable to exploit the soil than to conserve it: for instance, under frontier conditions.

It seems clear, then, that under the Ricardian assumption rent may be referred to a small part only of the total category of natural objects. Moreover it is frequently impossible to distinguish rent from the income of the destructible elements. These facts appear to justify an attempt to alter the Ricardian statement of rent in such a way as to avoid the necessity of assum

ing that rent is paid only for the " indestructible qualities of the soil."

Exhaustion consists either in a change of place or in a change of form. Coal may be removed from a mine and continue undestroyed. In this case the exhaustion is merely relative to a given locality. So far as the theory of rent is concerned, it is the exhaustion with reference to a particular locality that is of primary importance whether the valuable elements are absolutely consumed or merely removed to another location.

This exhaustion with reference to location may be prevented by restoring other elements of the same kind in place of those removed in the process of utilization. Whether or not this is true depends to a large extent upon economic conditions. For instance, it is physically possible to restore a forest, but such a restoration may not pay. It is even physically possible to restore mineral that has been removed from a mine, but it is hardly conceivable that it would ever be economical. Even in the case of agriculture, the experience of the world has abundantly proven that restoration is frequently unprofitable. In this sense exhaustion may be characteristic, under certain conditions, of nearly all natural objects.

The relation of the assumption of exhaustion to the theory of rent largely depends upon the possibility of preventing exhaustion so far as a given locality is concerned. It is necessary, therefore, to consider several cases which may be presented schematically as follows: 1. Prevention of exhaustion is economical. (a) May be effected without additional expense. (b) Requires additional expense.

2. Prevention of exhaustion is not economical. When prevention requires no extra expense, the Ricardian theory is not invalidated by the assumption of