Economic rents are unearned income. They are not in return for exertion, like wages given for labour, and they are not in return for bringing capital to the market, like capital yield/interest*. Rents come from owning a finite resource, usually a natural resource.
Rents, unlike wages and capital yields, do not serve to incentivise economic activity. On the contrary, they tend to discourage it.
When a worker receives pay in return for work, they are incentivised to work. Ceteris paribus (all other things being equal), a worker who works more will be paid more, and a worker who works less is paid less. As a result, people are encouraged to contribute their labour to production.
Labour can be combined with natural resources (‘land’ as a factor of production) to produce goods and services for consumers or to produce capital. Consumer products directly satisfy the wants and needs of consumers, while capital products are themselves used for further production. Some products can be both consumer and capital goods, such as computers or vehicles. Laptops can directly satisfy the wants of households, or can be used by businesses in the process of production to generate wealth.
Since all capital is produced by labour and land, manufacturers of products obviously must charge prices sufficient to pay wages and rent (inventory costs consist of both wages and rent) to stay in business. Consumers will pay for products that they want, but capitalists are in business, and must recoup their costs. Therefore, they must receive a return to their capital (capital yield/interest) sufficient at least to cover the costs of purchasing, and also maintaining, capital. This is one justification for interest.
In addition, when an owner of capital receives capital yield or interest on their capital, they are encouraged to bring capital to the market. Someone who has saved $100 000 could stash it under their bed or floorboards (hoarding), which slows economic activity. Alternatively, they could use it to buy capital, such as a commercial vehicle or small shop, that facilitates economic activity. They could also pool their resources with others to buy more expensive capital goods, or lend their money to someone who needs it to purchase capital, likely an entrepreneur. Interest incentivises people to use their savings in a way that is beneficial to the economy. In summary, capital yield and interest pay for the costs of capital and encourage capital to be produced and brought to the market.
On the other hand, land has no production cost and can’t be produced. As a result, when a land owner leasing his or her land receives rent … nothing in particular happens. The land owner has done very little, probably no labour, as real estate agents, for example, can be paid a small fee for property management. They are not driven to produce more land, as land generally cannot be produced. Land reclamation is used only in extreme cases, and reduces the area of a body of water. While higher land prices and rents may encourage owners holding land vacant to release land, this is more than counteracted by the trend of rising land prices encouraging land owners to hold land vacant with the intention of selling for a higher price in the future.
This land speculation is destructive to the economy. When valuable locations are kept out of use, it means workers cannot produce wealth at those locations, and so are denied opportunities to make a living. They must accept other work, and since opportunities to work have been limited, wages are lower. In addition, they must set aside some of their already smaller income to meet rising housing costs. Workers may have no choice but to work under someone fortunate enough to possess some capital. Remember that since workers have less money, few people can afford capital. Since a small number of people have capital, they are able to force workers to work for low wages.
But capitalists do not have it all lucky. They too must forego good land, and put capital on inferior land, where lower capital yields are made. They too must pay rent to landlords. Landlords gain massively, workers lose massively, and capitalists are in between.
Unearned rents are the perfect source of government funding. Raising revenue from rent-based sources, far from inhibiting economic activity, increases economic activity. Not only will workers and capitalists no longer have to pay rents, but taxes on incomes, sales, profits and similar sources will no longer have to be levied. The productive parts of the economy will gain enormously.
Government revenue from rents is likely to exceed government spending. Social welfare programs designed to help those denied reasonably paying work will no longer be required. Stress and health problems will be reduced from less demanding lifestyles, reducing health costs. Infrastructure costs will be reduced, as the cause of urban sprawl, prime locations going unused, will be removed. The excess revenue may be distributed to every citizen via a basic income grant. Every citizen unconditionally receives a certain sum of money on a regular basis, to spend on whatever they like. Some may take care of family members, further their education, undertake creative endeavours, or even start a business. I have previously written about this topic in more detail here. Even land owners may be better off than they
would otherwise be, if economic growth is particularly fast, and the basic income exceeds what they would otherwise receive from their land.
In conclusion, while it is very beneficial to the economy for wages and interest/capital yields to be kept private, privatised economic rent is harmful to the economy. On the other hand, rents captured for purposes of government revenue may be a force for good.
*Here I use the terms ‘interest’ and ‘capital yield’ interchangeably. Both refer to the wealth distributed to owners of capital. Capital yield is a more precise term for my purposes, as interest can refer to returns on any loans or securities, which can be used to purchase land. Interest, however, is a more commonly used term to describe the return to capital.