Tuesday, 17 May 2016

The Rate of Rent

The rate of rent is the relation of rent to the capital advanced. In that respect it is the equivalent of the rate of profit, or the rate of profit of enterprise, or the rate of interest. As Marx explains in Theories of Surplus Value II, some economists, like Rodbertus, confused the rate of rent with the other measure of rent, which is rental. Rental is the amount of rent per unit of land, e.g. acre, or hectare.

These two types of measurement can move in different directions. Rent is surplus profit, i.e. any profit above the average rate of profit. Where that surplus profit is not the result of some form of monopoly, it derives from specific advantages for the particular capital that reduce its costs below those of the average producer. In terms of agricultural production, the basis of such advantages always reside in the fertility of the land. These relative differences in fertility are the basis of Differential Rent I, whereas Differential Rent II, arises from the incremental investments of capital. But, Differential Rent I, still provides the basis for Differential Rent II, because the marginal productivity of capital, arising from additional investments of capital, still depends on the level of fertility of the land, whether the marginal productivity of capital is falling, rising, or constant.

If £1,000 of capital is invested in one hectare of land, and produces 1,000 kilos of grain, that sells at the price of production of £1.20 per kilo, if the average rate of profit is 20%, then this capital will only make average profit. No Differential Rent will then arise. If the farmer invests an additional £1,000 of capital, and output rises to 2,000 kilos, which again sells at the price of production of £1.20, the capital will again only make average profit, and so no Differential Rent will arise.

However, if this second investment of £1,000 results in output rising to 3,000 kilos, which sell at the price of production of £1.20 per kilo, the profit will be £1,600, whereas average profit would only have been £400, so a surplus profit of £1,200 arises. The surplus profit arises because of the rising marginal productivity of capital, i.e. the additional investment of capital, brought about a proportionally larger rise in output – capital doubled, but output trebled. This £1,200 of surplus profit, therefore, constitutes Differential Rent II, it arises from this addition of capital, and not from the relative fertility of this piece of land, but the rising marginal productivity of capital is expressed in a rising fertility of the land.

Differential Rent I remains as the basis of Differential Rent II, because it is the land whose fertility is raised as a result of the additional capital. It is on the basis of this higher fertility of this land that the landlord, now appropriates the £1,200 of rent, even though this increased fertility is the result of the additional capital applied by the capitalist and not to any contribution by the landlord. This is one important way that large landlords accrued wealth, and was particularly significant in London, in relation to their appropriation of houses built on land leased to builders and developers.

The rental in the above case would then be £1,200 per hectare, whilst the rate of rent would be £1,200/£2,000 = 60%. So, the capital advanced was £2,000, the value produced was £3,600, giving a total profit of £1,600. The rate of profit, therefore, was 80%. The average rate of profit is 20%, giving a surplus profit of 60%, which is appropriated as rent by the landlord, leaving 20% profit of enterprise for the capitalist farmer.

Suppose that the price of production for grain rises to £1.40 per kilo. In that case, the 3000 kilos produced on this land, will now brings in £4,200, making a total profit of £2,200, and a surplus profit now of £1,800. The additional £200 of surplus profit will then be due to Differential Rent I, arising directly from the higher relative fertility of this land compared to others. The rental will rise to £1,800 per hectare, and the rate of rent to 90%.

However, suppose that instead a further £1,000 of capital is invested, and output rises to 4000 kilos. Total value is then 4000 x £1.20 = £4,800. Total profit is then £1,800. Average profit on £3,000 is £600, so the surplus profit is £1,200. The rental is then £1,200 per hectare, whilst the rate of rent falls to 40%.

If we take the initial situation whereby £1,000 of capital is invested in one hectare of land, but take the price of production as being £1.40, with this land producing 1,000 kilos, it then produces a value of £1,400, a profit of £400, and so a surplus profit of £200, constituting Differential Rent I. The rate of profit is 40%, the rental is £200 per hectare, the rate of rent 20%, and the rate of profit of enterprise 20%.

Suppose now that an additional £1,000 of capital is invested, and output rises to 1,950 kilos. The value will rise to £2730. That gives total profit of £730. Average profit on £2000 is £400, giving surplus profit of £330, which constitutes rent. The rental, therefore rises to £330 per hectare, but the rate of rent falls to 330/2000 = 16.5%.

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