Second Form of Differential Rent (Differential Rent II)

Differential Rent I, is based on the different product that arises from the investment of the same amount of capital on equal areas of land, i.e. from differences in fertility. This remains the basis of Differential Rent II, where different amounts of product arises from increasing amounts of capital invested in the same piece of land, i.e. in the terms of orthodox economics, there is falling, constant or rising marginal productivity of capital.

“But can it make any difference if capitals of different productivity are invested successively in the same plot of land or side by side in different plots of land, provided the results are the same?” (p 674)

If there is a capital of £10, and a rate of profit of 20%, then if the £10 of capital is divided equally into four equal investments of £2.50, the price of production is £2.50 plus 20%, = £3. Now, these four investments of £2.50 each can be made into four different pieces of land, A-D, as seen before, which produce 1,2,3, and 4 kilos of wheat respectively.

On the basis of Marx's assumption that demand for wheat is such that it can only be met at a price that guarantees A the average profit, wheat will sell at £3 per kilo, its price of production. A will make the average profit of £0.50. But, B will produce 2 kilos, thereby producing a surplus profit of 1 kilo, or £3, C 2 kilos or £6, and D 3 kilos or £9. B, C and D will pay differential rent, equal to their respective surplus profits.

Suppose, however, that instead of these four separate pieces of land, there is just one. Let us say land type D. Now we can consider what happens when successive investments of capital are made on it, assuming demand keeps the price at £3 per Kilo.

Table 1.

 Capital £'s Output Kilos Marginal product Kilos Marginal Revenue Product£ Average Cost Per Kilo £'s Price per Kilo £'s Total Revenue £'s Profit £'s Surplus Profit £'s 2.50 4.00 - 0.625 3.00 12.00 9.50 9.00 5.00 7.00 3.00 9.00 0.714 3.00 21.00 16.00 15.00 7.50 9.00 2.00 6.00 0.833 3.00 27.00 19.50 18.00 10.00 10.00 1.00 3.00 1.000 3.00 30.00 20.00 18.00

This is the situation if there is falling marginal productivity of capital. The total revenue when the whole £10 is invested is £30, the total profit £20, and the total surplus profit £18. If, however, marginal productivity is rising, we might consider the situation with land type A.

Table 2.

 Capital £'s Output Kilos Marginal Product Kilos Marginal Revenue Product £'s Average Cost Per Kilo £'s Price per Kilo £'s Total Revenue £'s Profit £'s Surplus Profit £'s 2.50 1.00 - 2.50 3.00 3.00 0.50 0 5.00 3.00 2.00 6.00 1.67 3.00 9.00 4.00 3.00 7.50 6.00 3.00 9.00 1.25 3.00 18.00 10.50 9.00 10.00 10.00 4.00 12.00 1.00 3.00 30.00 20.00 18.00

Once again, the total output when the full £10 of capital is invested is 10 Kilos, the total revenue is £30, the total profit £20, and the total surplus profit is £18. In terms of the total output, revenue and the total profit, and surplus profit produced, in terms of wheat and money, this is the same as if the £10 of capital were invested in four separate pieces of land, A-D, of varying fertility.

For example, suppose £2.50 is invested in four pieces of land A-D of differing fertility so as to produce the marginal product as set out above.

Table 3.

 Land Type Output Kilos Price per Kilo £'s Total Revenue £'s Profit £'s Surplus Profit £'s D 4.00 3.00 12.00 9.50 9.00 C 3.00 3.00 9.00 6.50 6.00 B 2.00 3.00 6.00 3.50 3.00 A 1.00 3.00 3.00 0.50 0.00 Total 10.00 30.00 20.00 18.00

But, in terms of rent, things are different in the second form, where successive increments of capital are applied to the same land, compared to capital applied to different pieces of land.

“This accounts for the obstinate resistance of English tenants to official agricultural statistics. And it accounts for their struggle against the landlords over the determination of actual results derived from their capital investment (Morton). For rent is fixed when land is leased, and after that the surplus-profit arising from successive investments of capital flows into the pockets of the tenant as long as the lease lasts. This is why the tenants have fought for long leases, and, on the other hand, due to the greater power of the landlords, an increase in the number of tenancies at will has taken place, i.e., leases which can be cancelled annually.” (p 675)