CHAPTER X. ON THE VALUE OF AN APPLIANCE FOR PRODUCTION IN RE- SITUATION RENT. COMPOSITE RENT. BOOK V. which this stands to § 1. WE have now considered the relation in which cost. of production stands to the income derived from the ownership of the "original powers" of land and other free gifts of Relation in nature, and also to that which is directly due to the invest- Chapter ment of private capital. But there is a third class, holding the two an intermediate position between these two, of which some- preceding. thing should be said here. It consists of those incomes, or rather those parts of incomes which are the indirect result of the general progress of society, rather than the direct result of the investment of capital and labour by individuals. for the sake of securing certain gains to themselves. of situation on the land. We have already seen how Nature nearly always gives Influence a less than proportionate return, when measured by the amount of the produce raised, to increasing applications of value of agricapital and labour in the cultivation of land; but that, on cultural the other hand, if the more intensive cultivation is the result of the growth of a non-agricultural population in the neighbourhood, this very concourse of people is likely to raise the real price which the cultivator can get for every part of his produce. We saw how this influence opposes, and usually outweighs the action of the Law of Diminishing Return when the produce is measured according to its value and not according to its amount; the cultivator gets good markets in which to supply his wants, as well as good markets in which to sell, he buys more cheaply while he sells more BOOK V. dearly, and the conveniences and enjoyments of social life are ever being brought more within his reach'. CH. X. In all trades access to External Again, we saw how the economies which result from a high Industrial Organization' often depend only to a small extent on the resources of individual firms. Those Internal depends economies which each establishment has to arrange for itself partly on Situation. are frequently very small as compared with those External economies Situation Rent. economies which result from the general progress of the industrial environment; the Situation of a business nearly always plays a great part in determining the extent to which it can avail itself of External economies. It is true that Situation often counts for little with regard to those economies that result from the gradual growth of knowledge, or from the gradual development of world markets for commodities the value of which is great in proportion to their bulk. Cost of carriage is not a very large element in the budget of a watch-factory whereever it is placed: though near access to markets where specialized skill can be easily got may be very important to it. But in the great majority of industries the success of a business depends chiefly upon the resources and the markets of its own immediate neighbourhood; and the Situation value which a site derives from the growth of a rich and active population close to it, or from the opening up of railways and other good means of communication with existing markets, is the most striking of all the influences which changes in the industrial environment exert on cost of production. § 2. If in any industry, whether agricultural or not, two producers have equal facilities in all respects, except that one has a more convenient situation than the other, and can buy or sell in the same markets with less cost of carriage, the differential advantage which his Situation gives him is the aggregate of the excess charges for cost of carriage to which his rival is put. And we may suppose that other advantages of Situation, such for instance as the near access to a labour market specially adapted to his trade, can be translated in like manner into money values. When this 1 Book IV. Ch. 1. § 6. 2 Ib. Ch. x.-XIII. SITUATION RENT. 475 CH. X. is done for, say, a year, and all are added together we have BOOK V. the annual money value of the advantages of situation which the first business has over the second; and the corresponding difference in the incomes derived from the two businesses is commonly regarded as a difference of Situation Rent. If we suppose the second of the two sites to have less advantages of situation than any other, we may regard it as having no special Situation Rent; and then the income derived from the differential advantage of the former site constitutes the whole of its Situation Rent1. al cases derived from ad vantageous to be re profits § 3. There are however some exceptional cases in which Exceptionthis income derived from an advantageous situation is not in which properly to be regarded as rent but rather as profits. Some- the income times, for instance, the settlement of a whole town, or even district is planned on business principles, and carried out as situation is an investment at the expense and risk of a single person or garded as company. The movement may be partly due to philan- rather than thropic or religious motives, but its financial basis will in any rent. case be found in the fact that the concourse of numbers is itself a cause of increased economic efficiency. Under ordinary circumstances the chief gains arising from this efficiency would accrue to those who are already in possession of the place but the chief hopes of commercial success, by those who undertake to colonise a new district or build a new town, are usually founded on securing these gains for themselves. 1 If we suppose that two farms, which sell in the same market, return severally to equal applications of capital and labour amounts of produce, the first of which exceeds the second by the extra cost of carrying its produce to market, then the rent of the two farms will be the same. (The capital and labour applied to the two farms are here supposed to be reduced to the same money measure, or which comes to the same thing, the two farms are supposed to have equally good access to markets in which to buy.) Again, if we suppose that two mineral springs A and B supplying exactly the same water are capable of being worked each to an unlimited extent at a constant money cost of production, this cost being, say twopence a bottle at A whatever the amount produced by it, and two pence halfpenny at B; then those places to which the cost of carriage per bottle from B is a half-penny less than from A, will be the neutral zone for their competition. (If the cost of carriage be proportional to the distance, this neutral zone is a hyperbola of which A and B are foci.) A can undersell B for all places on A's side of it, and vice versa; and each of them will be able to derive a Monopoly Rent from the sale of its produce within its own area. This is a type of a great many fanciful, but not uninstructive, problems which readily suggest themselves. Compare Von Thünen's brilliant researches in Der isolirte Staat. BOOK V. CH. X. Illustrations from Saltaire and Pull When, for instance, Mr Salt and Mr Pullman determined to take their factories into the country and to found Saltaire and Pullman city, they foresaw that the land, which they could purchase at its value for agricultural purposes, would man City. obtain the special Situation value which town property derives from the immediate neighbourhood of a dense population. And similar considerations have influenced those who, having fixed upon a site adapted by nature to become a favourite watering-place, have bought the land and spent large sums in developing its resources: they have been willing to wait long for any net income from their investment in the hope that ultimately their land would derive a high Situation value from the concourse of people attracted to it1. In all such cases the yearly income derived from the land (or at all events that part of it which is in excess of the agricultural rent) is for many purposes to be regarded as profits rather than rent. And this is equally true, whether the land is that on which the factory itself at Saltaire or Pullman city is built, or that which affords a high “groundrent" as the site of a shop or store, whose situation will enable it to do a brisk trade with those who work in the factory. For in such cases great risks have to be run; and in all undertakings in which there are risks of great losses, there must also be hopes of great gains. The normal expenses of production of a commodity must include payment for the ventures required for producing it, sufficient to cause those who are on the margin of doubt whether to venture or not, to regard the probable net amount of their gains—net, that is, after deducting the probable amount of their losses— as compensating them for their trouble and their outlay. And that the gains resulting from such ventures are not much more than sufficient for this purpose is shown by the fact that they are not as yet very common. They are however likely to be more frequent in those industries which are in the hands of very powerful corporations. A large railway company, for instance, can found a Crewe or a New Swindon 1 Cases of this kind are of course most frequent in new countries. But they are not very rare in old countries: Saltburn is a conspicuous instance. RENT, QUASI-RENT, AND PROFITS. 477 for manufacturing railway plant without running any great BOOK V. risk'. CH. X. ments ef owners Somewhat similar instances are those of a group of land- Improveowners who combine to make a railway, the net traffic receipts fected at the joint of which are not expected to pay any considerable interest on expense of the capital invested in making it; but which will greatly raise the landthe value of their land. In such cases part of the increase concerned. of their incomes as landowners ought to be regarded as profits on capital which they have invested in the improvement of their land: though the capital has gone towards making a railway instead of being applied directly to their own property. Other cases of like nature are main drainage schemes, and other plans for improving the general condition of agricultural or town property, in so far as they are carried out by the landowners at their own expense, whether by private agreement or by the levying of special rates on themselves. Similar cases again are found in the investment of capital by a nation in building up its own social and political organization as well as in promoting the education of the people and in developing its sources of material wealth. Thus that improvement of the environment, which adds to the value of land and of other free gifts of nature, is in a good many cases partly due to the deliberate investment of capital by the owners of the land for the purpose of raising its value; and therefore a portion of the consequent increase of income may be regarded as profits when we are considering long periods. But in many cases it is not so; and any increase 1 Governments have great facilities for carrying out schemes of this kind, especially in the matter of choosing new sites for garrison towns, arsenals, and establishments for the manufacture of the materials of war. In comparisons of the expenses of production by Government and by private firms, the sites of the Government works are often reckoned only at their agricultural value. But such a plan is misleading. A private firm has either to pay heavy annual charges on account of its site, or to run very heavy risks if it tries to make a town for itself. And therefore in order to prove that Government management is for general purposes as efficient and economical as private management, a full charge ought to be made in the balance-sheets of Government factories for the town-value of their sites. In those exceptional branches of production for which a Government can found a manufacturing town without incurring the risks that a private firm would incur in a similar case, that point of advantage may fairly be reckoned as an argument for Governments undertaking those particular businesses. |