[MUSIC] Thus far in our examination of land as a factor of production, we have defined pure economic rent and shown it to be different from the rent you pay a landlord. We've also shown that land rents are determined by the interaction of supply and demand, just as in other markets. In this module, and to truly understand what distinguishes land from most other factors of production, we'll get back into our time machine, always a fun prospect. And travel back to two controversies in 19th century history. The Corn Wars in England and the Single Tax Movement in America. [MUSIC] The most common explanation at the time was this. Landlords were raising the rent they were charging farmers for the use of their land. This rent gouging by landlords, in turn, forced farmers to raise the price of corn. So in this scenario, landlords were the clear villains. However, one of the great classical economists, David Ricardo, had a very different explanation. Ricardo said that the price of corn is not high because the rent is paid. Rather rent is high because the price of corn is high. In this scenario, the root cause of the problem was increased demand for corn which, in turn, was driving up rent for corn land. These figures illustrate this great Corn Wars debate. In the left-hand figure, we have the market for acres of corn land [MUSIC] In the right-hand figure, we have the market for corn. The corn controversy was based on the assumption that rising land rents would in turn lead to an upward shift of the corn supply curve in the right-hand figure. Making landlords to blame for high food prices. But what's wrong with this picture? Let's pause the presentation now so you can try to solve this interesting Ricardian riddle. [MUSIC] Well as David Ricardo pointed out, and as we have previously learned, supply decisions are based on marginal cost, not fixed costs, such as the cost of land. Instead, Ricardo envisioned the following chain of causality. In the left-hand figure we have the corn market. In this market, there might be an increase in demand as the English population grew. As demand shifts upward and outward from D1 to D2, price increases from P1 to P2, and quantity increases from Q1 to Q2. This, in turn, would increase the demand for land, from D1 to D2. And rents would rise from R1 to R2. [SOUND] Now look at what we've just done. We've illustrated that an increase in price in the product market, in this case corn, results in an increase in the price of the factor of production, in this case land. Of course, looking at this result, one might still conclude that landlords are unfairly benefiting from the situation. After all, these landlords would be just as willing to rent all of their land at a rent of R2 as they are at R1. However at the higher rent they appear to be enjoying an unearned profit or windfall profit. In fact, that is precisely the conclusion reached by someone a continent away in a similar situation. That person was the journalist Henry George. The time and place was the 19th century America. And the debate was over the so-called Single Tax Movement, the subject of our next module. [MUSIC]
