## Differential Rent: General Remarks

Its assumed that agricultural and mining products sell at their prices of production, as with any other commodity. That is their price comprises their cost of production plus an amount of profit calculated on the basis of the general rate of profit, on the advanced capital, C, i.e. the total value of the fixed capital plus the circulating capital advanced for one turnover period.

The question then arises how it is possible to pay ground-rent on this basis. Marx begins by giving an example from industry rather than agriculture. Suppose nearly all factories derive their power from steam engines, but a few obtain their power from natural waterfalls. The former, as part of their cost of production, will have the cost of buying the steam engines, and of the coal to keep them running. The latter will have lower costs, therefore, because the waterfall provides free energy.

As a result, the individual value of commodities, produced by the latter will be lower than the social value of those commodities, because the social value will be determined by the higher costs of the former, which account for the majority of production. But, the latter will sell their commodities at the market value all the same, and thereby obtain a surplus profit over and above that of the former.

The surplus profit is equal to the difference between the individual price of production and the market price of production.

If the general rate of profit is 15%, and assuming the capital turns over once, then if the cost of production, for the producers, using steam engines, is 100, and for the others only 90, then the price of production for the former is 115, and for the latter 103.5. The latter, therefore, makes 11.5 in surplus profit. If the price of coal fell, the cost price of the former would fall, which would reduce the general price of production, and thereby reduce the difference, and the surplus profit.

The producers using the waterfall are able to produce the same quantity of output as the others, but with less constant capital. In other words, the productivity of labour for these firms is higher. But, because it is the owner of the firm who benefits from the higher profits, not the worker, it appears that the higher productivity is a higher productivity of capital not labour.

These kinds of differences in individual values between between firms were analysed earlier. They mean that where a firm produces commodities with a lower individual value, because it has been lucky enough to buy constant capital at lower than average prices, or where its management is more astute etc. it is able to pocket these surplus profits.

But, here the surplus profit arises not because of any of these things, but because the firm is able to benefit from the advantages of a freely available natural force. But, this cannot be the whole story. After all, the firms who employ the steam engines also benefit from a freely available force of nature, the power of steam to expand. They pay for the steam engine, and for the coal to fuel it, but not for this natural capacity of steam.

“This monopolisation of natural forces, that is, of the increase in labour-power produced by them, is common to all capital operating with steam-engines. It may increase that portion of the product of labour which represents surplus-value in relation to that portion which is transformed into wages. In so far as it does this, it raises the general rate of profit, but it does not create any surplus-profit, for this consists of the excess of individual profit over average profit. The fact that the application of a natural force, a waterfall, creates surplus-profit in this case, cannot therefore be due solely to the circumstance that the increased productivity of labour here results from the application of a natural force. Other modifying circumstances are necessary.” (p 643)

In industry, in general, if some additional benefit is obtained, for example, from the use of a new machine, which increases productivity, this produces a surplus profit, only where one or a few firms are able to monopolise its use, and thereby reduce their cost of production below the average. But, in industry it is always the case that other firms will then seek to introduce this machine, so that the advantage and the surplus profit disappears.

What is different about the capital that is able to use the waterfall is that this is a free gift of nature that is not available to all other capitals. All capitals can obtain the free gift of the power of steam to expand, provided they buy a steam engine. All capital can obtain the benefit of higher productivity obtained from a particular machine, if they buy the machine. But, not all capital can obtain the benefit of a waterfall, because it is specific to its geographical location.

“It is found only locally in Nature and, wherever it does not exist, it cannot be established by a definite investment of capital. It is not bound to goods which labour can produce, such as machines and coal, but to specific natural conditions prevailing in certain portions of land. Those manufacturers who own waterfalls exclude those who do not from using this natural force, because land, and particularly land endowed with water-power, is scarce.” (p 645)

Where a capital has the use of such a force of nature, its power can be increased. More efficient water wheels or turbines can be introduced, but this increase in power remains one monopolised by this particular capital.

“... this natural force, which can be monopolised in this manner, is always bound to the land. Such a natural force does not belong to the general conditions of the sphere of production in question, nor to those conditions of the latter which may be generally established.” (p 645)

Because these natural forces are associated with the land, and restricted to particular locations, and because the land becomes owned by individuals, landowners, these natural forces can themselves be monopolised.

“Therefore, the surplus-profit which arises from the employment of this waterfall is not due to capital, but to the utilisation of a natural force which can be monopolised, and has been monopolised, by capital. Under these circumstances, the surplus-profit is transformed into ground-rent, that is, it falls into possession of the owner of a waterfall.” (p 646)

Suppose,the capital that uses the waterfall, and whose cost of production is £90, pays the owner of the waterfall £10, for its use, as ground-rent, then their total capital advanced becomes £100. Adding the 15% average profit, that makes their price of production £115, the same as the general price of production. The surplus profit, thereby, disappears.

If the capitalist themselves owns the land, and the waterfall, this does not change anything. It simply means that they pay the £10 of ground-rent to themselves as landowner. There is an apparent difference here that Marx does not pick up on. The surplus profit was initially £11.50, being the difference between the individual price of production and the general price of production. When the capitalist pays £10 in ground-rent, this still leaves a surplus profit of £1.50. However, that is only because this is equal to the average profit of 15% on the additional £10 that the capitalist now has to advance as rent. However, if the capitalist owns the land, they do not actually advance this £10 of rent as capital, because it is paid to themselves.

But, this is only apparent. In fact, the capital is advanced but as capitalised rent, i.e. they have had to buy the land, in the first place. Even if they did not buy the land, its value has to be taken as being advanced, because it takes part in production, and moreover, this capital-value could otherwise have been used in some other activity.

“First, it is evident that this rent is always a differential rent, for it does not enter as a determining factor into the general production price of commodities, but rather is based on it. It invariably arises from the difference between the individual production price of a particular capital having command over the monopolised natural force, on the one hand, and the general production price of the total capital invested in the sphere of production concerned, on the other.” (p 646)

As differential rent, it arises not because of an absolute rise in productivity, which simply causes a fall in values, but because of a relatively higher level of productivity in one capital compared to another, arising from the ability to monopolise these natural advantages.

“For instance, if the use of steam should offer overwhelming advantages not offered by the use of water-power, despite the fact that coal has value and the water-power has not, and if these advantages more than compensated for the expense, then, the water-power would not be used and could not produce any surplus-profit, and therefore could not produce any rent.” (p 646)

It is not the natural force that is the source of the surplus profit, but only the fact that, as a natural force, related to the land, it can be monopolised. The same applies to any other such advantage that can be similarly monopolised, e.g. a drug company that can monopolise some new drug as a result of patent laws.

“In the same way, use-value is in general the bearer of exchange-value, but not its cause. If the same use-value could be obtained without labour, it would have no exchange-value, yet it would retain, as before, the same natural usefulness as use-value. On the other hand, nothing can have exchange-value unless it has use-value, i.e., unless it is a natural bearer of labour.” (p 647)

If commodities sold at their individual values, rather than exchange values, or prices of production, the fact that the waterfall increases productivity would simply reduce the prices of commodities produced with its use.

“Similarly, on the other hand, this increased productivity of labour itself would not be converted into surplus-value were it not for the fact that capital appropriates the natural and social productivity of the labour used by it as its own.” (p 647)

Nor is it the fact that the land is privately owned that creates the surplus profit. If the land was not owned by anyone, but was simply used by this particular capital, they would continue thereby to monopolise its use, and the specific advantage it provides in reducing their costs. They would thereby continue to be able to obtain a surplus profit as a result. What the private ownership of the land does is to enable the landowner to claim this surplus profit for themselves as ground-rent, and thereby to put it in their pocket rather than the pocket of the capitalist.

The price of production is determined by the cost-price of commodities produced using steam engines, because these constitute the majority of production. On this basis, the surplus profit of the capital using the waterfall is determined and thereby the ground-rent is determined.

The ground-rent, therefore, does not determine the price of production of these commodities, but is itself determined by the price of production. However, the ground-rent does enter the cost price of the capital that uses it. But, if the price of the waterfall, like the price of all land is an irrational price that is based on the capitalised rent.

In other words, if the average rate of interest is 5%, and the rent is £10, the price of the waterfall, should its owner sell it, would be £200.

“That it is not the waterfall itself which has value, but that its price is a mere reflection of the appropriated surplus-profit capitalistically calculated, becomes at once evident from the fact that the price of £200 represents merely the product obtained by multiplying a surplus-profit of £10 by 20 years, whereas, other conditions remaining equal, the same waterfall will enable its owner to appropriate these £10 every year for an indefinite number of years — 30 years, 100 years, or x years; and, whereas, on the other hand, should some new method of production not applicable with water-power reduce the cost-price of commodities produced by steam machinery from £100 to £90, the surplus-profit, and thereby the rent, and thus the price of the waterfall, would disappear.” (p 648)