I. The concept of rent
A. Economic rent
applies to amounts above those required to keep
factors employed at
their current use, i.e., the factors' opportunity cost.
1. Since economists
include a normal return on investment in costs,
profit represents rent.
2. Companies with
monopoly power that results in profit receive
economic rent.
B. Pure economic rent is
the concept of economic rent applied to
factors fixed in supply
such as land and other natural resources.
C. Economic implications of pure
economic rent
1. Supply
is fixed, perfectly inelastic, and price therefore
does not
perform
the incentive function of increasing quantity supplied.
2.
Socialist philosophers questioned whether pure
economic rent should
be paid.
a.
Originally free, owners of land receive pure economic rent
which is a surplus.
b. Henry George wanted to tax rent away in 19th century
America.
1) Called the single-tax movement, he wanted to replace
all taxes with one tax on land.
2) Three problems exist with this philosophy.
a) Land is not free to current owners.
b) Capital improvements are necessary to make modern
land useful.
c) Modern rent does perform a rationing function
because
land is of such differing quality.
3)
Read
Robert Clancy / The Story of the Georgist Movement
for
the latest on this movement.
D. A
modern demand schedule has land's rent derived from the revenue it generates
(MRPL).
For those interested in finance, land is valued at the
present value of future income.
II. Interest is the price paid for capital
A. The price of capital goods
(any person-made aid to production) will be analyzed.
B. Our main concern will be the cost of the funds
required to buy the physical goods, i.e., interest.
C. Interest rates are a function
of supply and demand for loanable funds.
1.
Demand for funds is a function of individual, business, and government
attitudes toward investment risk.
a. These attitudes determine the required rate of return
an asset must earn to be a viable part of the production
process.
b. The more the risk, the higher the required rate of
return.
2. Supply of funds is a
function of individual, business, and government saving
and Federal Reserve policy.
D. The market for loanable funds (debt)
may be depicted as follows.
1. Demand comes from the
needs on individuals, business, and government to borrow for investments.
2. Supply comes from the
savings of individuals, business, our governments, and foreigners who loan us
profits from
trading with us.
3. During the 1980's a
dramatic increase in the demand for loanable funds combined with a decrease in
savings
to yield a dramatic
rise in real interest rates. This increase caused a decrease in business
capital investment and
slow economic growth.
|
Business Cycle
|
30-Year
Treasury Yields (%)
|
Inflation Rate %
|
Real
Yields
%
|
 |
 |
 |
|
01/54 to 10/57 |
3.05 |
1.57 |
1.48 |
|
11/57 to 04/60 |
3.93 |
2.23 |
1.70 |
|
05/60 to 11/69 |
4.68 |
2.17 |
2.51 |
|
12/69 to 10/73 |
6.57 |
4.53 |
2.04 |
|
11/73 to 12/79 |
8.27 |
7.25 |
1.02 |
|
01/80 to 06/81 |
12.01 |
9.25 |
2.76 |
|
07/81 to 05/89 |
9.30 |
4.55 |
4.75 |
|
Source: Kleinwort Benson Government Securities Inc. as
published in The Wall Street Journal and the author's notes
for 04/96
|
|
Recent year-end real yields
from Economics Internet Library |
|
04/96 |
6.83 |
3.33 |
3.5 |
|
12/01 |
5.49 |
2.8 |
2.69 |
|
12/02 |
5.4 |
2.2 |
3.2 |
III. Enterprise and business profit
A. Economic profit is
revenue minus costs
(explicit + implicit).
B. An amount greater than zero
represents
economic rent.
C. Entrepreneurs receive
economic rent for
these activities.
1.
Initiative
2.
Decision making
3.
Innovation
4.
Risk taking
5.
Monopolizing markets
6. Controlling
Government
D. In theory, conomic profit, which exists
in
expanding industries, eventually disappears
as a result of competitive
forces. |
 |
 |
