The Law of Rent is Easy

Intro

(Skip the intro and formulate the Law of Rent!)

If I had to recommend someone a course of study to help them understand life on Earth, I would recommend two fields: Biology and Economics. In the field of Biology, there is perhaps no theory more important than the Theory of Evolution by Natural Selection. And in the field of Economics, there is no law more important than the Law of Rent.

The very word “economics” turns many people off, and understandably so. Over the last century the field has devolved so markedly that anyone who calls it a “science” is right to be laughed out of the room. Do you, like most, get frustrated at the thought of economics – at the thought of old men trying to explain why you should work harder for less, and at your sense – or perhaps conviction – that no policy they recommend will ever change things for the better? Or, simultaneously, at your own inability to offer an alternative?

Imagine that frustration turned in reverse. Imagine you knew exactly where hardship comes from and how to fix it; that you could explain every real-world human behavior you saw; that not a single economic phenomena were any longer a mystery to you. And then imagine that everyone you tried to enlighten ignored you and just kept nodding at the old, suited men on TV, debating which pint of poison – austerity or labor taxes – will taste better jammed three feet up everyone's asses.

That's what the Law of Rent will do for you once you understand it. It will take you, the casual observer, and make you more qualified to run a country than anyone currently attempting it. And that feeling of frustration as you watch everyone else fail at it? Well, welcome to being a geoist. (There's a chance that knowing the Law of Rent could also turn you into a geo-snob like me.)

Let's Formulate!

The most beautiful aspect of the Law of Rent, given how foundational it is to economics – and how critical its implications are for the fates of civilizations – is its simplicity. There is perhaps no simpler law of bargaining power in all of economics. I'm convinced that anyone, presented with a little bit of context, can formulate it for themselves.

Ready to give it a try? Put on your thinking caps, little Ricardos.

1. Assume that land cannot be produced. (In the real world, this is true. It's the First Law of Thermodynamics.)


2. Assume that land is necessary for all life and production. (Also true.)


3. Imagine you are a living thing – say, a human – who therefore needs to use land. (If this isn't true, contact me about my Imaginary Persons Tea and Cupcake Social.)


4. Now let's say you have two choices: (a) Live and work in the city at Parcel A where your work can get you $60,000 per year, or (b) Live and work at Parcel B in the remote countryside – where nobody else lives, works or wants to – and where your same line of work can get you $10,000 per year.

Question: What is Parcel A's market rental value? Hint: This is not a trick question.

Answer: As you probably intuited, the rent for Parcel A will be the extra earning power it grants you: $50,000 per year.


Did you get it right? Congratulations! You've formulated the Law of Rent*. You now know more about economics than 99% of the population. Would you like to increase that percentage? Consider the implications of this law. You can start with the following considerations:

• Did we mention the word "landowner" anywhere above? No. The rental value of a parcel of land has nothing to do with the name on a title to it. It is determined by users alone.


• What might happen on a large scale if landowners could arbitrarily keep you and other land users off Parcel A?


• What might happen on a large scale if landowners allowed the use of Parcel A but by inefficient users?


• "Good" or "bad," in describing land, refers to its productivity. What allows a user to produce more at a good location than a bad one?


• As more land comes into artificial use -- due to people's arbitrary exclusion from the good land -- what happens to the earnings available on the best unused land? How low can they go? Remember that this is important because it determines what landless workers throughout the economy will be able to keep after paying rent.


• To whom should the rent rightfully go? If it doesn't go to its rightful recipients, what kind of activity is being incentivized? What kind of social and economic diseases might arise?

*Disclaimer: Admittedly, there's a little more going on here. Example: We're assuming that you're the best user for Parcel A -- in other words, that nobody would be able to earn more at the location than you. I wanted to simplify things a little. Sue me.