000 annually. The $300 000 of capital is thus earning economic
rent equal to $15 000 per year. In this case, rent is just another
name for profit in the economist’s sense of the term.The concept of economic rent is crucial for predicting the effects that
changes in earnings have on the movement of factors among alternative
uses. However, the terminology is confusing because economic rent is
often simply called rent, which can of course also mean the price paid to
hire something, such as a machine, a piece of land, or an apartment. How
the same term came to be used for these two different concepts is
explained in Lessons from History 13-1.
Lessons From History 13-1
David Ricardo and “Economic Rent”
In the early nineteenth century, there was a public debate
about the high price of wheat in England. The high price was
causing great hardship because bread was a primary source of
food for the working class. Some people argued that wheat had
a high price because landlords were charging high rents to
tenant farmers. Some of those who held this view advocated
restricting the rents that landlords could charge.
David Ricardo (1772–1823), a great British economist who was
one of the originators of Classical economics, argued that the
relationship between wheat’s price and the rent for land was