A Finance Approach to Understanding Patterns of Land Tenure

Economists and economic historians have generally understood different forms of land tenure as arrangements for the supply of labor. This paper suggests a different interpretation—that land-tenure arrangements be understood rather as arrangements for the supply of financing. The cost and availability of financing depend on the arrangements available to ensure the providers of the financing a fair return on their investment. The paper argues that the different forms of land tenure may best be understood in the context of such arrangements—as alternative ways of providing the family farm with the external financing that it requires. The discussion focuses on land-tenure arrangements in pre-industrial Europe, but the conclusions hold quite generally. JEL Categories: G3, N53, N23, O13, O52, Q14, Q15 Economists and economic historians have generally understood different forms of land tenure as arrangements for the supply of labor. They have interpreted them either in Marxist terms of power and class struggle between landowners and peasants or, more recently, in terms of a principal-agent problem with the landlord-employer as principal and the tenant-employee as agent.1 I will suggest a different interpretation—that landtenure arrangements be understood rather as arrangements for the supply of financing. Since my interest in the subject stems from my work on pre-industrial agriculture, the discussion will focus on land-tenure arrangements in Europe between the twelfth and eighteenth centuries. However, I believe that the conclusions hold quite generally. The farmer, even when he did not own the land, was not an employee but rather the owner of an economic enterprise. He was an owner because he managed the enterprise— often employing hired labor himself—and because he received the residual income from the enterprise once all other payments had been made. The sole proprietorship or family firm was the typical form of economic enterprise in the pre-industrial economy—in industry and commerce as well as in agriculture. This was so because the incentive advantage of having the decision-maker bear fully the consequences of his own decisions generally outweighed any potential economies of scale that might have favored a larger or more complex form of organization. Economic enterprises mostly finance themselves out of their own internal funds—the profits they themselves generate.2 Sometimes, however, their need for funds is such that they are forced to turn to external sources of financing. The cost and the availability of external financing depend on the arrangements that can be found to ensure the providers of the financing with a fair return on their investment. I shall argue that the different forms of land tenure may best be understood in the context of such arrangements—as alternative ways of providing the family farm with the external financing that it required. External financing, its difficulties, and the ways of addressing them are the subject matter of corporate finance. As its name suggests, this discipline concerns itself with the financing of the modern corporation. However its principles apply more generally and, as 1See Dasgupta, Knight et al. (1999) for a recent survey. 2Mayer (1990)