Understanding "Economic Rent"

Economic rent is different from the every day term of rent that is generally used to describe rental payments received or made for the use of buildings including the land that the buildings are on.

Henry George describes the concept of rent in economics as follows:

"[I]n the economic meaning of rent, payments for the use of any of the products of human exertion are excluded, and of the lumped payments for the use of houses, farms, etc., only that part is rent which constitutes the consideration for the use of the land. The part that is paid for the use of buildings or other improvements is properly interest, as it is a consideration for the use of capital."

In simple terms then, economic rent is any unearned income.

Sure, the thinking goes, $100,000 borrowed today will cost more than $200,000 to pay back over the next thirty years, but land, which they are not making any more of, will appreciate even faster. In the odd logic real estate, debt has come
to equal wealth.
And not only wealth but freedom—an even stranger paradox. After all, debt throughout most of history has been little more than a slight variation on slavery. Debtors were medieval peons or Indians bonded to Spanish
plantations or the sharecropping children of slaves in the postbellum South.

Few people today would volunteer for such an arrangement, and therefore would-be lords and barons have been forced to develop more sophisticated enticements.
The solution they found is brilliant, and although it is complex, it can
be reduced to a single word—rent.

Not the rent that apartment dwellers pay the landlord but economic rent, which is the profit one earns simply
by owning something.

(Economic rent can take the form of licensing fees
for the radio spectrum, interest on a savings account, dividends from a
stock, or the capital gain from selling a home or vacant lot.)

The distinguishing characteristic of economic rent is that earning it requires no effort whatsoever. Indeed, the regular rent tenants pay landlords becomes economic rent only after subtracting whatever amount the landlord actually spent to keep the place standing.
Most members of the rentier class are very rich. One might like to join that class.

For example, a computer shop that is located near to customers will likely have a higher land value than one that is not, all else being equal. The owner of the land of greater value receives more payment despite not having to do anything to earn this higher income.

The economic rent, that is the payment for the extra value of the land created by the community, public infrastructure and so on (i.e. excluding the value of buildings and other improvements), is received by the landlord due to the structure of property rights.

(The concept of economic rent can be generalised as an unearned income and need not apply to physical land. The classical political economy of Adam Smith, David Ricardo, and Henry George belong to the late eighteenth and nineteenth centuries. It focussed particularly on land in the physical sense due to the structure of the economy, about which they wrote. Nevertheless the concept of economic rent still holds true, as the economy continues to function on the basis of property and rights, the concept of land can be broadened to include such things as radio spectrums and so forth.)

"So that’s another reason why I think land prices are highly likely to keep going up. Not only for the next few years, but the entire century, give or take a few busts along the way."

read more