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Ricardo’s Law simply explained

Some well-known commentators, including Richard Murphy of Tax Research, firmly deny the reality of Ricardo’s Law of Rent. This makes it difficult to engage in coherent discussion. Ricardo’s Law is not contested territory within economics. It is just ignored. However, you can verify it for yourself by considering a simple model – busking on the London Underground.

Other things being equal ie inputs of labour and capital are the same, the busker will take the most at the busiest station. This is probably at the bottom of the escalators at Victoria. The next best is probably somewhere inside Oxford Circus station – say the in the passageway linking the Bakerloo and Central Lines. At the other end of the scale, there are places in the outer reaches of the system where the busker could stand all day and collect next to nothing – Burnt Oak, Kingsbury, Snaresbrook, Collier’s Wood.

Now, and this is the key point – there are some locations where it is just about worthwhile for a busker to perform. Think of places like Camden Town, Golders Green, Hammersmith, Stratford. There will be a threshold figure below which the average busker will not regard it as worth the effort. The difference between the takings at these marginal locations and all the better ones is, by definition, rent (locational advantage). If the takings at the marginal site are X, then the rental value of all the other sites is Y – X, where Y is the gross take at the better site. All the other sites are sub-marginal and will not be worked.

These has two important implications. The first is that a busker will be willing to pay any amount up to this rental value in order to gain access to the better site. This value could take the form of a payment to London Underground, or it could be collected by a protection racketeer. In fact if it is not collected in an orderly way by the authorities, then some sort of unofficial system of allocation of sites will spring up, because the best ones will be coveted.

The second implication is that if a charge is made for use of the marginal site, it will drop out of use. This would happen if, for instance, there was a flat-rate charging system regardless of location, or if a proportion of the takings had to be paid over – the equivalent, in principle, to taxes on earnings and profits. The presence of these charges would result in a new margin, with place such as Green Park and Tottenham Court Road becoming marginal locations. The charges will have forced many locations out of use, which would have been viable locations in the absence of the charge.

This accounts for, amongst other things, the intractability of the north-south divide, the persistence of low wages and the growing gap between rich and poor.