Wednesday, 22 June 2016

Capital III, Chapter 37 - Part 6

This equation of rent with interest, however, is also the basis of determining the price of land, as capitalised rent.

“If a capitalist buys land yielding a rent of £200 annually and pays £4,000 for it, then he draws the average annual interest of 5% on his capital of £4,000, just as if he had invested this capital in interest-bearing papers or loaned it directly at 5% interest. It is the expansion of a capital of £4,000 at 5%.” (p 623)

In this sense, what is being purchased is not the land, but the ground-rent produced by it. The price is equivalent of twenty years rent. On this basis, the price of land moves up and down determined by movements in the interest rate. If rent is £100 per year, then with interest rates at 5%, this gives a price for the land of £2,000, but, if interest rates fall to 4%, this means the capitalised value of the rent rises to £2,500.

If, over the longer term, there is a tendency for the rate of profit to fall, and the rate of interest is ultimately determined by the rate of profit, then lower interest rates should mean a higher capitalised value of land, independent of any movement in ground rent. The increased supply of money-capital should also reduce interest rates, adding to the tendency for the price of land to rise. However, as with the rate of profit, this is only a tendency, and in practice there are many other factors, which prevent it operating as a mechanical and continuous law.

No comments: