Rent exists

[w]herever natural forces can be monopolised and give the industrialist who makes use of them a surplus profit, whether a waterfall, a rich mine, fishing grounds or a well-situated building site, the person indicated as the owner of these natural objects, by virtue of his title to a portion of the earth, seizes this surplus profit from the functioning capital in the form of rent.

And wherever rent exists, differential rent exists.

I  Rent on land for building

Marx notes that Adam Smith notes that the basis of the rent of non-agricultural land is governed by agricultural rent; in the case of land for building, the question of location is of characteristic importance (and the analogy here is with vineyards) on the differential rent.

Another characteristic of building land is ‘the palpable and complete passivity displayed by the owner, whose activity consists simply in exploiting advances in social development […], towards which he does not contribute and in which he risks nothing, unlike the industrial capitalist […].’ Finally, Marx notes the tendency towards monopoly pricing.

The rise in population, and the consequent growing need for housing, is not the only factor that necessarily increases the rent on buildings. So too does the development of fixed capital, which is either incorporated into the earth or strikes root in it, like all industrial buildings, railways, factories, docks, etc., which rest on it. It is impossible […] to confuse house-rent, in as much as this is interest and amortisation for the capital invested in the house, with rent of land pure and simple, particularly when, as in England, the landowner and the speculative builder are completely different persons. Two elements come into consideration here: on the one hand the exploitation of the earth for the purpose of reproduction or extraction, on the other the space that is required as an element for any production and any human activity. On both counts landed property demands its tribute. The demand for building land raises the value of land as space and foundation, while at the same time there is a growing demand for those elements of the earth’s physical constitution that serve as building material.

In the case of urban development, it is the ground-rent that provides the economic impetus, not profit on the buildings themselves. ‘It should not be forgotten in this connection that after the leasehold has expired, and this is ninety-nine years at the most, the land together with all the buildings on it, and with a ground-rent that has in the meantime generally doubled, tripled or more, reverts from the speculative builder or his heir to the original ultimate landowner.’

II  Rent of mines

The rent on mines is determined in exactly the same way as the rent on agricultural land. Marx cites Adam Smith:

There are some [mines] of which the produce is barely sufficient to pay the labour, and replace, together with its ordinary profits, the stock employed in working them. They afford some profit to the undertaker of the work, but no rent to the landlord. They can be wrought advantageously by nobody but the landlord, who, being himself undertaker of the work, gets the ordinary profit of the capital which he employs in it. Many coalmines in Scotland are wrought in this manner, and can be wrought in no other. The landlord will allow nobody else to work them without paying some rent, and nobody can afford to pay any.

Marx now makes the following important point. Is the price of the product of the mine the cause of the rent, or is the rent the cause of the price? The distinction is the following. In the case, for example, of an expensive wine, produced with the produce of an exclusive vineyard, the price that its producer is able to realise is over and above both its price of production and its value.

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Up to this point we have only been dealing with differential rent, rent that arises when the price of production on a given land type is below the price at which the product sells for on the market. Abstracting from supply and demand, i.e. ruling out situations when market demand pushes the market price above the highest production price of the land types under cultivation, this means that there can be no rent on the worst (highest cost, least productive) land under cultivation.

Let us call the production price of land I, the least productive land, pi . (Production price is costs plus average profit; costs at this level of abstraction reduce themselves to capital invested, while average profit is the average of the economy as a whole.) Abstracting from questions of supply and demand, this is the price that all the agricultural product will sell at. The production price of land II, the next least productive land type, is pii , where pi > pii; that of land III, piii , so that pii > piii ; and so on.

Let now pipii = rii′ , the surplus profit, transformed into rent, that accrues on land II; and pipiii = riii′ , surplus profit (rent) on land III; and so on.

On the assumptions set out in the first paragraph above, ri′ = 0 (= pipi).

Let now however the price of the product of land I = pi′ = pi + a , and let a > 0 . Now, (1) the price of the product of land I is no longer governed by its production price, and (2) there is now rent on I : ri′ = a .

[…] [a]ssuming the capitalist mode of production in its normal condition, i.e. assuming that the surplus […]that the farmer pays to the landowner is neither a deduction from wages nor from the average profit of capital, he can pay it only by selling his product above its price of production, so that it would yield him a surplus profit if he did not have to part with this surplus to the landowner in the form of rent.

Let us denote differential rent with the symbol d , and reserve r′ for total rent. Now:

rii′ = piipi

     = piipi + a

     = dii + a

By the same logic, riii′ = diii + a ; etc.

We now have two different forms of rent: differential rent, as we have been analysing it up to this point; and a.

The differential rent would thus be the same as before, and would be governed by the same law even though the rent contained an element independent of this law and underwent a general rise together with the price of the product. It follows from this that whatever the rent on the least fertile types of land might be, not only is the law of differential rent independent of it, but the only way to grasp the true character of differential rent itself is to set the rent for class A land at zero. Whether it really is zero, or something positive, is immaterial as far as the differential rent is concerned, and does not need to be taken into account. The rest of the chapter is an investigation of the conditions under which a , rent on the poorest land, arises as ‘an element independent of [the] […] law’ of differential rent, rent which Marx will call absolute rent. Marx will conclude that a will arise as a ‘normal’ part of the price of the agricultural product, although he will go around the houses somewhat before he gets to this conclusion.

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Marx’s argument is oblique here, and an intervention by Engels is unhelpful. Here I set out how I understand the matter.

Marx sets out the following scenario. We assume a rising demand for the agricultural product, a demand that can only be met by either (1) increasing the intensity of capital investment on rent-bearing land already under cultivation or (2) by increasing the capital intensity on the least productive land. In both these cases, we assume that the increase in capital investment is realised with diminishing returns, i.e. that the per unit of capital product of additional capital investment is less than the initial per unit of capital product. We also allow the option of (3) bringing under cultivation land even less productive than the currently least productive land.

We start with the following conditions (as throughout this part of the volume, I have changed Marx’s units and numbers so that they are comparable with those of my notes for previous chapters), as set out in table 1.

Because demand is outstripping supply, the market price – the price the product actually sells for on the market – rises above the price of production on I, the least productive land. We now effectively have two ‘market prices’: that which we have previously defined, the price of production of the least productive land, and now that obtaining in the market itself, determined by the interplay of supply and demand. Let us call these two prices ‘market price’, and ‘selling price’, respectively, such that, from this point onwards in this chapter, ‘selling price’ refers to the price obtaining in the market in function of the interplay of supply and demand, which is determined independently of the conditions of production, and market price continues to refer to the ‘regulating price of production’, i.e. to the price of production obtaining on the least productive land, which would be the price the whole product would sell at were it not for the interplay of supply and demand.

Obviously, a deviation of the selling price from the market price will affect profit, which will in turn affect surplus-profit, and ground-rent. Should the selling price fall below market price (because the market is oversupplied) the agricultural product will have to sell at below the price of production on the least productive land: rent will fall on the rent-bearing lands, and on the least productive land not even the average economy-wide ‘normal’ profit will be realised. Capital will thus be withdrawn from this land, reducing the supply of the agricultural product with respect to demand. This will push the selling price up. At the same time, withdrawal of the least productive land from production will lower the market price, for this will now be set by the next more productive land more productive than the least productive land, a land that had previously borne rent, but which now does not.

In the case to be considered here, we assume that the excess of supply over demand raises the selling price to €700 a tonne. The resulting state of affairs is set out in table 2. Obviously, now all lands now bear rent, since the selling price is higher than the market price, the regulating price of production, that of the least productive, highest cost land, so that a surplus profit, transformed into ground-rent, is now realised here too.

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Given that it is the price of production on the least productive land that determines the market price of the whole agricultural product, this last can only rise in the case of either a fall in the average productivity of this land or the introduction of even less productive land into cultivation.

I  The starting conditions

Let us first set out the scenario with which we began chapter 39. Initially, we assumed 1 hectare each of each land type under cultivation, as set out in table 1.

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In this chapter we consider differential rent II, ground-rent (transformed surplus profit) arising from changes in the amount of capital invested in the land, under conditions of a falling market price of the agricultural product. Again, as in the previous chapter, it is not that we are assuming a falling market price and then seeing what effect this has on other conditions; rather, we are looking at those patterns of additional capital investment under which the market price falls. In other words, it is the market price is that is the dependent variable here.

* * * * *

Let us first set out the scenario with which we began chapter 39. Initially, we assumed 1 hectare each of each land type under cultivation, as set out in table 1. There are four types of land: types I, II, III and IV, which yield, for a per-hectare capital investment of €500, 1, 2, 3 and 4 tonnes of wheat per hectare per growing season respectively. The economy-wide rate of profit is 20%.

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In this chapter we consider differential rent II, ground-rent (transformed surplus profit) arising from changes in the amount of capital invested in the land (as distinct from differential rent I, ground-rent only arising from differences in land productivity), under conditions of a constant market price of the agricultural product. We are not assuming a constant market price; rather, we are looking at patterns of additional capital investment that leave the market price unchanged. Over the course of the chapter, we shall examine four different scenarios.

First, let us remind ourselves of the scenario with which we started chapter 39. Initially, we assumed 1 hectare each of each land type under cultivation, as set out in table 1. There are four types of land: types I, II, III and IV, which yield, for a per-hectare capital investment of €500, 1, 2, 3 and 4 tonnes of wheat per hectare per growing season respectively. The economy-wide rate of profit is 20%.

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We have so far considered equal amounts of capital invested on land types of varying fertility, and we have seen that, in these conditions and under our operating assumptions, the market price for the agricultural product will be determined by the production price obtaining on the least productive land type. On all the other land types, where the production price is therefore lower than the obtaining market price, a surplus profit will be realised; should the land in question not belong to the capitalist farmer, but to a landowner whom the farmer pays for the right to work the land, this surplus profit takes the form of ground-rent. Marx calls this rent ‘differential rent’ because it arises from differences in the productivity of the land. Even though Marx’s exposition here looks similar to Ricardo’s in the Principles, we should note that while for the latter the existence of differential rent was a function of the declining productivity of labour as increasingly poorer land was brought under cultivation, for Marx the only precondition for the existence of this form of differential rent is that lands of differing levels of productivity be under simultaneous cultivation.

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I  The nature of differential rent

If, in a given sector, there are different capitals who produce at different rates of profit, then there will be a sector-wide average rate of profit, above which some of the capitals produce at; if different capitals in a sector produce a different rate of profit then surplus profit necessarily exists. Different rates of profit arise in a sector if there are capitals that employ techniques of production that differ in their productivity. As we have seen, differential rent arises when a capital enjoys the use of a lower-cost (i.e. more productive) technique of production which is monopolisable. The surplus profit that arises in these circumstances is transformed into ground-rent.

In the case of capital applied to the land, the existence of varying levels of productivity means that the same amount of capital applied to the same hectarage of land produces an unequal product (because to produce the same product the hectarage would have to vary inversely with productivity).

II  Factors influencing the productivity of the capital applied to the land

One source of variation of in the product of capital applied to the land is the level of fertility of the soil: more fertile soil will yield a higher per-hectare product given the application of a given amount of capital as compared to less. But the fertility of the soil is not simply an objective property, since it is also conditioned through social development in the form of different production and improvement techniques (such as the use of fertiliser, ploughing, drainage, rotation, etc.).

Another factor that Marx identifies as a source of greater or lesser productivity of capital applied to land is its location. Again, this is not simply given, for how it too affects the productivity of capital is also conditioned by social development, through, for example, the creation of local markets, centres of population, links to export markets, etc.

III  First scenario: higher-cost lands progressively coming under cultivation

Let us consider four types of soil, of differing fertility: soil types I, II, III and IV. Land I yields 1 tonne of wheat per hectare per growing season, land type II 2 tonnes, land III 3 tonnes and land IV 4 tonnes.

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Marx assumes that the products that produce a rent (be these agricultural products or the products of, say, mining) are sold, as are all other commodities, at their prices of production: cost price (the variable and constant capital laid out) plus average profit. Out of this, a portion of the surplus-value embodied in the commodity passes to the landowner as rent. Marx’s first task here is to explain how this is possible.

Imagine an economic sector in which a single commodity is produced. The commodity is manufactured in two types of factory, the first (the overwhelming majority) powered by steam, and the second (a small minority) powered by waterfalls.

The prevailing rate of profit is 15%. The cost price in the type of factory which uses steam as power is €100 (constant plus variable capital) for a given quantity of commodity product, which gives a price of production of €115.

However, let us also assume that the production method using waterfalls produces at a cost price of €90. What determines the market price? The price of production operative in the market ‘[…] is determined not by the individual cost price of any one industrialist producing by himself, but rather by the price that the commodity costs on average under the average conditions for capital in the whole sphere of production. It is […] the market price of production.’ The market price is set by the technique of production based on steam. Given this, if the producers using waterfalls sell at this market price, a €10 surplus profit will accrue.

But of course this is nothing new. We have already seen that, if the production price in a sector of production is determined by the cost price arising under average conditions of production plus the average economy-wide rate of profit, then, assuming that individual producers do not produce at the same level of productivity, those producing more productively will reap an individual profit above the average, while those who produce less productively will reap a profit below it. In these conditions, and all else being equal, competition between capitals in a given sector of production would the drive through the more productive techniques of production. ‘Competition between capitals […] tends to cancel out […] distinctions [in labour productivity], the determination of value by socially necessary labour-time tends to the cheapening of commodities and the compulsion to produce commodities under the same favourable conditions.’ In what way are circumstances here different? The more productive, lower-cost technique of production – the waterfall – ‘does not belong to the general conditions of the sphere of production in question nor to those of the conditions that are generally reproducible’; rather ‘it forms a monopoly in the hands of its owner, a condition of higher productivity for the capital invested, which cannot be reproduced by capital’s own production process […].’ Where does this surplus profit come from? ‘The surplus profit that arises from this use of the waterfall […] arises not from […] capital but rather from the use by capital of a monopolisable and monopolised natural force.’ In other words, the surplus profit does not come from the waterfalls, although these are indeed its basis, but from surplus labour.

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In June of 1862, in a letter to Engels, and after complaining bitterly at his family’s parlous economic state, Marx commented thus: ‘I have at last been able to sort out this ground-rent shit [Grundrentscheisse] […]. I had long harboured misgivings as to the absolute correctness of Ricardo’s theory, and have at length got to the bottom of the swindle.’

The purpose of this chapter is to deal with the preliminary issues that Marx feels are important before beginning his analysis of ground-rent proper.

I  The object of enquiry

Marx sets out at the beginning that here he is interested in an analysis of landed property only insofar as it is dominated by the capitalist mode of production, i.e. that ‘rural production is pursued by capitalists, who are distinguished from other capitalists […] simply by the element in which their capital and the wage labour that it sets in motion are invested.’ If this is the case then this also presupposes that capitalist production dominates production in general and that there exists: (1) the free competition of capitals; (2) the free transferability of capital from one sector to another; (3) an equalised average rate of profit.

Hence, under these assumptions, the ‘three classes that make up the framework of modern society’ confront one another in agricultural production:

  • direct cultivation is carried out by wage-labourers, employed by:
  • the capitalist, who ‘pursues agriculture simply as a particular field of the exploitation of capital’, and who in turn pays ground-rent to:
  • the landowner, the proprietor of land.

II  Capital fixed into the land

The capitalist farmer ‘fixes’ capital into the land: this fixed capital may take the more transient form of improvements in fertility through, for example, the application of fertiliser, or in more permanent form through an alteration in the land’s physical nature (for example, drainage, irrigation, levelling, physical construction in form of buildings, etc.). These capital investments ‘transform the earth from a mere raw material into earth-capital.’

But these improvements pass to the landowner once the contracted lease-period expires; when the new lease-contract is realised, the landowner ‘adds interest on the capital incorporated into the earth’, and his rent increases; if she sells the land, its value is augmented. ‘This is one of the secrets […] of the increasing enrichment of the landowners […] as economic development progresses.’ (Marx now makes an interesting comment. In a given mode of production, the forms of property that exist within it find their existential justification insofar as they ‘possess[…] a transitory historical necessity’; landed property, however, ‘is distinguished […] by the fact that at a certain level of development it appears superfluous and harmful even from the standpoint of the capitalist mode of production.’)

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