(1) The document discusses various theories on rent and wages, including the Ricardian theory of rent, modern theory of rent, and theories of wages such as the subsistence theory, wages fund theory, and marginal productivity theory of wages. (2) Key aspects of the Ricardian theory are that rent arises due to differences in land fertility and location, and rent is a surplus from more productive "intra-marginal" lands over the least productive "marginal" land. (3) The modern theory extends the concept of rent beyond just land to other factors with inelastic supply like labor and capital in the short-run.

1. THEORY ON RENT
AND WAGES
PRESENTED BY:
KRUTHIKA R
GOVIND C
MAHESH
NAGESH
YASHASWINI

2. MEANING OF RENT
The term rent refers to the payment made to the owner of
the factor to use the same for a specific period of time.
Here, the term land includes any material asset which has
a fixed supply. For instance, payment made to use a
house, vehicle, or machine is termed as rent.
For economists land is a natural product and cannot be
reproduced, the supply of land is permanently fixed and in
general perfectly inelastic.

3. THEORIES OF RENT
Prominent among the theories of rent are the Ricardian theory and the modern
theory of rent.
Ricardian Theory: David Ricardo, (Ricardo) a British economist, proposed
the 'Ricardian theory of rent'. The definition of rent as, "Rent is that
portion of the produce of the earth which is paid to the landlord for the use of
the original and indestructible powers of the soil."
It can be deduced from this definition that rent arises due to the following two
reasons:
1. Differences in the productivity of various pieces of land.
2. Situational differences .

4. Postulates of the Ricardian theory:
Some of the basic assumptions of Ricardian theory are:
*The supply of land is fixed and the existing quantity of land gifted by nature
cannot be increased or decreased.
*Another assumption is that original powers such as fertility of land are gifted by
God and are not due to human efforts of any type.
*Ricardo's theory of rent was based on assumption that land is a non-perishable
factor of production. The powers/qualities of land cannot be destroyed and the
fertility of land never diminishes.
*Another basic assumption is that utilization of land for cultivation is done based
on the order of fertility of land. Most fertile land is cultivated first before using the
next grade land.

5. Explanation:
Ricardo believed that rent is a surplus arising because of differences in fertility and
locations of land. Ricardo explained the origin of rent based on the assumption that
'marginal land' exists.
Marginal land can be defined as that area of land that barely covers its costs with
the market value of its produce.
To put it differently, marginal land represents the grade of land below the level of
which no land is used. The land with better productivity than marginal land is termed
as 'intra-marginal land'. Ricardo opined that rent is the differential surplus between
the earnings of marginal land and intra-marginal lands. Rent arises in both the two
types of farming techniques-extensive cultivation and intensive cultivation

6. Extensive cultivation:
In the farming technique of 'extensive cultivation', production of farm is increased by
bringing more and more land under cultivation.
Ricardo used the assumptions listed earlier to explain the origin of rent in the
extensive cultivation technique.
Intensive cultivation:
Under intensive cultivation technique of farming, the production of the land is
increased by employing increased number of labor and capital units.
Ricardo assumed the function of the law of 'diminishing returns' in agriculture. It
implies that when more and more units of labor and capital are employed after a
certain stage, there is going to be diminishing rate of increase in the production of
the farm.

7. Implications
(1) Land according to Ricardo is limited in supply and of
different grades of fertility.
(2) Rent arises as differential advantage which superior lands
possess over the inferior lands.
(3) Rent arise from the operation of the Law of Diminishing
Returns.
(4) Rent is a surplus over and above no rent land.
(5) Rent does not enter into price.

8. Criticisms
(i) He restricted rent to land.
(ii) It is simply based on the natural variation of the
fertility of different pieces of land.
(iii) He took no account of the fact that there are
competing uses for some land, and as a result it is
not necessarily the least fertile land that will first go
out of cultivation.

9. Modern Theory of Rent
*The modem theory of rent is an integrated set of ideas of different economists
such as Marshall, Joan Robinson, and Boulding.
*The modem theory improves on Ricardo's theory of rent and extends the concept
of rent which was linked to land alone to other factors of production which have
inelastic supply in the short run.
*Ricardo believed that the supply of land is permanently fixed i.e., perfectly
inelastic, and further the various lands have different fertility levels.
*The surplus produced by more fertile lands over the marginal land is considered to
be the rent.

10. *Modern economists are of opinion that the supply of labor,
capital, and entrepreneurs are also limited when compared to their
demand and cannot be altered in the short run.
*As different lands differ in their fertility levels, other factors of
production differ in the level of efficiency and productivity.
*Therefore, an improvement was made over the Ricardian theory to
introduce the idea that apart from land, other factors of production,
labor, capital, and entrepreneur can also earn rent.
*Other improvements are that since the supply of land is fixed and is
scarce, it earns scarcity rent, and further due to difference in fertility
levels of various plots of land, they earn differential rents .

11. CONCEPT OF WAGES
*In economics, the term labor refers to both physical and
mental work.
*Wage is the remuneration paid for labor. Payment of
wages can be done in different modes such as time
wages, piece wages, task wages, cash wages, kind
wages and service wages.

12. Theory of Wages
(a) Subsistence Theory: This theory was originated by the French
economists and was developed by Adam Smith.
*According to this theory, wages tend to settle at the level just sufficient to
maintain the worker and his family at the minimum subsistence level. If
wages rise above the subsistence level, the workers are encouraged to
marry and to have large families.
*The large supply of labour brings wages down to the subsistence level. If
wages fall below this level, marriages and births are discouraged and
under-nourishment increases death rate. Ultimately, labour supply is
decreased, until wages rise again to the subsistence level. It is supposed
that the labour supply is infinitely elastic, that is, its supply would increase if
the price (i.e. wage) offered rises.

13. Criticism:
(i) Ricardo stressed the influence of custom and habit in determining what was
necessary for the workers. But habits and customs change over time. Hence, the
theory cannot hold good for a longer period of time, especially of a world
characterized by fast changing habits. Ricardo, therefore, admitted that wages
might rise above the subsistence level for an indefinite period in an improving
society.
(ii)The second criticism against this theory is that the subsistence level is more or
less uniform for all working classes with certain exceptions. The theory, thus, does
not explain differences of wages in different employment.
(iii)The third criticism is that the theory explains wages only with reference to
supply; the demand side has been entirely ignored. On the demand side, the
employer has to consider the amount of work which the employee gives him and
not the subsistence of the worker.

14. (b)Wages Fund Theory:
This theory is associated with the name of J.S. Mill. According to Wages
Fund Theory wages depend upon two quantities, viz.:
(i) The wage fund or the circulating capital set aside for the purchase of
labour, and
(ii) The number of laborers seeking employment.
Since, the theory takes the wage fund as fixed, wages could rise only by a
reduction in the number of workers. According to this theory, the efforts of
trade unions to raise wages are futile. If they succeeded in raising wages in
one trade, it can only be at the expense of another, since the wage fund is
fixed and the trade unions have no control over population. According to this
theory, therefore, trade unions cannot raise wages for the labour class as a
whole.

15. Criticism: This theory has been widely criticized.Even J.S. Mill himself
recanted it in the second edition of his book 'Principles of Political
Economy'. Mill thought that wages were paid out of circulating capital
alone. Whether the source of wages is capital or the present products, has
been the subject of a keen controversy in the past. The fact is that in some
cases, where the process of production is short (e.g., final stages of the
productive process), wages are paid out of the present production. On the
other hand, when a process of production is long, the laborer obviously
does not obtain wages from the product of his labour either directly or
through exchange. In such cases, wages mainly come out of capital. This
theory is inapplicable in highly industrialized countries, but, it is applicable
in an under-developed country suffering from capital deficiency, where the
wages cannot be increased unless national income is increased and capital
accumulated through industrialization.

16. (c)Residual Claimant Theory:
The Residual Claimant Theory has been advanced by an
American economist Walker. According to Walker, wages are
the residue left over, after the other facts of production have
been paid. Walker says that rent and interest are governed by
contracts but profit is determined by definite principles. There
are no similar principles as regards wages. According to this
theory, after rent, interest and profit have been paid, the
remainder of the total output goes to the workers as wages.

17. Criticism: This theory admits the possibility of
increase in wages through greater efficiency of
employees. In this sense, it is an optimistic
theory, the subsistence theory and wages fund
theory were pessimistic theories. Though this
theory has been rejected by most economists on
several bases.

18. (d)Marginal Productivity Theory of Wages: This theory state that, under the
condition of perfect competition, every worker of same skill and efficiency in a
given category will receive a wage equal to the value of the marginal product of
that type of labour. The marginal product of a labour in any industry is the
amount by which the output would be increased if a unit of labour was
increased, while the quantities of other factors of production remaining
constant. Under perfect competition, the employer will go on employing
workers until the value of the product of the last worker he employs is equal to
the marginal or additional cost of employing the last worker. Further, under
perfect competition, the marginal cost of labour is always equal to the wage
rate, irrespective of the number of workers the employer may engage. Since
every industry is subject to diminishing returns, the marginal product of labour
must start declining sooner or later. Wages remaining constant, the employer
stops employing more workers at that point where the value of marginal product
is just equal to the wage rate

19. Criticism :This theory is true only under certain assumptions such
as perfect competition, perfect mobility of labour, homogenous character of
all labour, constant rates of interest and rent and given prices of the product.
It is a static theory. The actual world is dynamic. All assumptions are
unrealistic. The following are the criticism against this theory:
(i) According to this theory, the labour is perfectly mobile so that they
can be moved from one employment to another employment, which is not
true in the real world.
(ii) According to this theory, there is unified wage rate across the market,
which is impossible. Workers of the same skill and efficiency may not
receive the same wages at two different places.

20. (e)Taussig's Theory of Wages: The American economist Taussig gives a
modified version of the Marginal Productivity Theory of Wages. According
to him, wages represent the marginal discounted product of labour.
According to Taussig, the laborer cannot get the full amount of the marginal
output. This is because production takes time and the final product of
labour cannot be obtained immediately. But the laborer has to be
supported in the meantime. This is done by the capitalist employer. The
employer does not pay the full amount of the expected marginal product of
labour. He deducts a certain percentage from the final output in order to
compensate himself for the risk he takes in making an advance payment.
This deduction, according to Taussig, is made at the current rate of
interest.

21. Criticism: Two weaknesses of the theory have been
recognized by Taussig himself, i.e.,
(i) a dim and abstract theory remote from the problem of real
life. To this he replies that this weakness is common to all
economic generalizations.
(ii) The joint product is discounted at the current rate of
interest, but according to his own analysis, the rate of interest
is a result of the process of advance to the laborers. To meet
this difficulty, Taussig suggests that we determine rate of
interest independently of marginal productivity by the rate of
time preference, and with the interest thus determined
discount the marginal product of labour.

22. (f)Modern Theory of Wages:
According to this theory, the wages are determined by the
interaction of demand and supply as in the case of ordinary
commodity. Thus, this theory is also referred to demand and
supply theory.
Demand for Labour: According to the modern theory of
wages, the demand for labour reflects partly labourer's
productivity and partly the market value of the product at
different levels of production.

23. Supply of Labour: The supply of labour depends on:
(a) The number of workers of a given type of labour which
would offer themselves for employment at various wage
rates, and
(b) The number of hours per day or the number of days per
week they are prepared to work,

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