Economic Rent

Economic rent is different from the every day term of rent that is generally used to describe a payment 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 short economic rent is any unearned income. Economics puts forth a model that makes generalisations about the production process. It suggests that the production of anything can be assumed to be some combination of land, labour, and capital. For example, a computer is made of various components.

Each of these components originally came from the land in some form or other, and has been extracted from the land by people, using tools constructed by other people from materials again extracted from the land. In this example, the people involved in all parts of the production process are labour and are assumed to receive a wage.

The tools that the labour employs to extract materials from the land and make the components of the computer and put the computer together are capital, these tools (or rather the owners of capital) receive payment for being employed in the production process called interest. Finally, there is the payment to the owners of land, at each part of the process from extraction of minerals to the sale of the computer; this is economic rent.

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.