## Wednesday, 6 July 2016

### Capital III, Chapter 39 - Part 5

On the basis of Marx's assumptions here, if the capital employed on A obtains the average rate of profit, of 20%, or £10 per kilo, then the other capitals, which produce at lower cost, obtain surplus profits, because they sell their output at the same market price of £60 per kilo as land type A. The lower the cost of production of each type of land, the greater the amount of surplus profit. Their lower costs, and so this surplus profit is derived from the higher fertility of that particular type of land, signified by its higher level of output. The surplus profit is appropriated as ground-rent by the landlord, reducing the profit of each type of land back down to the level of average profit, as indicated by the table.

 Type of Soil Product Capital Advanced £'s Profit Rent Kilos £'s Kilos £'s Kilos £'s ABCD 1.002.003.004.00 60.00120.00180.00240.00 50.0050.0050.0050.00 0.1671.1672.1673.167 10.0070.00130.00190.00 —1.002.003.00 —60.00120.00180.00 Total 10.00 600.00 200.00 6.667 400.00 6 .00 360.00

If the process involves a movement from D to A, the most fertile to the least fertile soil, it occurs as follows. D produces four kilos of wheat at a price of production of £15 per kilo. Demand rises beyond this level of supply, so that the market price rises. When the market price rises to £20 per kilo, it becomes profitable for land type C to be brought into cultivation. It then supplies an additional three kilos.

Capital farming land type D, at this point is making a surplus profit of £5 per kilo over the average profit, because the individual value/price of production of its output is still £15 per kilo, whilst it sells at £20 per kilo. This enables the landlord to charge a rent of £5 per kilo.

There is an obvious logical flaw in Marx's argument here, related to what was said previously, and it is highlighted further in Marx's own later development of the theory. It relates to what was said earlier, in relation to the least efficient producer making average profits. Later, in considering the process being a movement in the other direction, from the least efficient land to the most efficient land, Marx says that, initially, if demand rises above the supply, provided by the least efficient producer, the price rises. Its only when additional supply is then provided by producers on land type B, that the price falls.

But, Marx fails to make this connection in relation to the process in the other direction, now being discussed. If we start from a position where the market price/price of production of wheat is £15 per kilo, and where demand and supply are in equilibrium, at this price – four kilos being demanded and supplied – the price only rises above this price because the equilibrium is disturbed, demand exceeds the supply of 4 kilos at a price of £15. Price then acts to ration demand, so that it falls back to the available supply of 4 kilos. In order for demand to be reduced to this level, the market price rises, here to £20 per kilo. The problem for Marx, is that the later techniques for analysing the interaction of demand and supply had not been developed at the time, and so he confuses a shift in the demand curve to the right, so that demand increases at every price, with a movement along the demand curve, where the level of demand rises or falls in response to a change in price.

But, at a market price of £20 per kilo, land type C comes into production and throws an additional supply of three kilos on to the market. If a price of £20 per kilo was required to choke back demand to 4 kilos, then this additional supply from land type C, must result in the market price once more falling back, because at this market price, demand amounts to only 4 kilos whilst supply has risen to 7 kilos!

How much the price falls below £20 per kilo depends on the price elasticity of demand. It cannot fall back to £15, because at that price things would simply be back to where they were when it was not possible to bring in additional production. Similarly, the price could only remain at £20 if at that price demand continued to exceed supply, and this price was now required to choke back demand to 7 kilos. For example, if at a market price of £15 per kilo demand was 7 kilos, and was choked back to 4 kilos by raising the price to £20 per kilos, it might be the case that at a price of £20 per kilo, this further shift in the demand curve, reflects the fact that demand is 9 kilos, and can only be choked back to 7 kilos by the market price rising to £30 per kilo.

The actual equilibrium price, or market value of 7 kilos produced on land D and C, would be the total value of that production divided by 7. That is 4 x £15 plus 3 x £20 = £120 divided by 7 = £17.14 per kilo. The market price would revolve around this market value, but the consequence is that contrary to Marx's assumption here, producers on land type C would make below average profits, whilst those on land type D would continue to make above average profits.

The demand and supply graph below illustrates this.

 Marx assumes that demand rises, which in his example means a shift in the demand curve from D-D to D'-D'.  But, supply cannot immediately meet the demand, so the price rises to ration out the available supply.  Now, the higher price causes a shift along the existing supply curve S-S.  Producers increase supply to take advantage of the higher prices and profits. Marx assumed a move to inferior land - rising marginal costs of production.  So, the supply curve slopes up from left to right.  It means that supply rises, but not by enough to match the rise in demand at the old price, so the price  remains higher than originally.  The price could only return to its old level if the supply curve S-S, was horizontal, meaning that supply increased from the  same type of land.  The extent of the initial rise in price can be imagined if the  supply curve is pictured as vertical.  The process can then be thought of as one in which from this initial high price required to choke back demand to the available supply, it falls as the price encourages additional supply to come forward, until a new equilibrium point is reached.  As the new incremental increases in supply causes incremental falls in price, so the demand rises.  The equilibrium price is one then that is lower than its short run level required to ration demand to available supply, but higher than the price prior to the shift in demand.  Supply does not rise enough to meet the demand at the original price.
The consequence would then be that agriculture, like every other industry, would tend to obtain the average rate of profit at an industry level, but, within that, some individual producers would make above, and others below this average rate of profit, and indeed, in every country, the existence of a class of farmers who barely exist at a subsistence level, let alone make average rates of profit (Lenin's Muzhiks), is to be seen alongside other classes of farmers who make average profits (Lenin's Middle Peasants), and the rich farmers who make above average profits (Lenin's Kulaks).

This does, however, pose a problem for Marx's theory of rent, because if only average profits are made at the industry level, whilst rents are charged on land producing above average profits, this means that, after rent is deducted, the rate of profit at the industry level, thereby falls below the average. I will return to these questions later, but for now, I will continue to set out Marx's theory.