David Ricardo
The Last Field Ploughed
The further you spread, the poorer the ground the next share lands on
On the Principles of Political Economy and Taxation (1817), chapter 2, 'On Rent'; An Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815)
The business keeps growing and every new branch earns less than the one before. Ricardo explains why, and what that last branch quietly sets.
What actually happened?
Ricardo begins his account of rent with a newly settled country. Good land is plentiful and nobody pays for it. As people multiply and food runs short, second-rate land is ploughed, and from that moment the first-rate land earns a rent. Then the third grade is ploughed, then the fourth. The price of corn is set by the last and worst field. Nothing changed on the good land. What changed is the field at the edge.
The next share lands on worse ground
The best land is farmed first. Each new field, and each extra dose of capital on the same field, returns less than the one before. Nobody got lazy; the good ground was simply used up first.
Your first shop is on the corner you know best. The fifth is in a mall you have visited three times and still can't read.
The average hides the last share
The yield across the whole estate still looks fine, but whether this round pays is settled by the last field. He did his sums on the field that barely covers its costs and pays no rent, not on the average.
Five shops together make a decent profit. Taken alone, the fifth has been living off what the first four put by.
The gain from good ground goes to whoever holds it
The worse the new land, the higher the rent on the best. That was his case against the Corn Laws that propped up grain prices: dearer corn raised the landlord's rent and squeezed the profits of the farmer who rented from him.
When the mall gets busy, the rent goes up first, and most of what you sold extra goes back to the landlord at the end of the month.
How do I use it today?
Where you are: the first few branches make money, you are about to open another, and the average margin still looks fine.
Ask first: taken on its own, does the new one earn its own costs? Do not let the earlier ones' results pay for it.
Where it goes wrong: reading it as growth always loses. He said the new land is poorer, not that it should never be farmed. While good ground is left, or you can improve the poor ground, the sum has to be done again.
Lines to keep
Cost the last share on its own.
A healthy average can hide a losing edge.
The good ground goes first; what follows is poorer.
Same situation, other people are asking
I'm told this is just what it costs. Is it?Costs won't come down and I can't see where to cut first.Every stage in this takes a cut and each one says it is necessary.Every team keeps a buffer and I've stopped asking why.Everyone says it can't be done cheaper · all 9 questions →If this one named what you are going through,
send it to someone who needs it, or keep it somewhere you will find it again.