Friday, 12 August 2016

Capital III, Chapter 43 - Part 8

Marx describes the way, with falling marginal productivity, the marginal product continuously falls, so that it may reach a point where the cost of production of this marginal product is greater than the price of production on land type A. Yet, it may still be profitable to continue to invest on this land, because the average cost of production is still below the ruling price of production.

“It follows from this, firstly, that no increase in the regulating price of production is necessary under these circumstances, in order to make possible additional investments of capital in the rent-bearing soil — even to the point where the additional capital completely ceases to produce surplus-profit and continues to yield only the average profit. It follows furthermore that the total surplus-profit per acre remains the same here, no matter how much surplus-profit per quarter may decrease; this decrease is always balanced by a corresponding increase in the number of quarters produced per acre.” (p 730)

For farms which themselves contain soils of different levels of fertility, i.e. for which Differential Rent I applies, it may still be profitable to cultivate the worst soil alongside the better soils, and this is more the case as greater investments of capital are made.

In the theory of management accounting, there is a concept of the contribution to fixed costs. Suppose a firm owns a factory that is divided into four equal areas, with a different type of production taking place in each area.  The factory is a fixed cost, which we will assume amounts to £1,200 per year.  This fixed cost is apportioned equally to each of the four cost centres operating within the factory, i.e. £300 to each.  We will assume this is the only fixed cost.  The other four areas have variable costs as follows 1) £200, 2) £300, 3) £300 4) £500.  Each of these areas has revenues and profits, therefore, as follows 1) £1,000 revenue, £500 profit, 2) £1,000 revenue, £400 profit, 3) £1,000 revenue, £400 profit, 4) £700 revenue, £100 loss.

It appears then that the firm should close down its operations in cost centre 4, which result in a loss. However, that is not the case.  The total costs, revenue and profit are Fixed cost £1,200, Variable Costs £1300, Revenue £3,700, Profit £1200.  However, if cost centre 4 closes down, the £300 of fixed costs attributed to it, would have to be covered by the other cost centres.  In other words, the fixed costs attributed to the remaining three departments would rise to £400 each.

Total fixed costs would then be still £1,200, variable costs would fall to £800, revenue would fall to £3,000, and Profit would fall to £1,000.  In other words, by cutting out the loss making operation, the overall profit would actually fall.  The reason being that previously , although cost centre 4 made a loss on its total costs, it makes a profit of £200 on its current costs, and this £200 makes a contribution to the firm's fixed capital costs.

The same is true in relation to a farm with four pieces of land of differing fertility.  On the same basis as set out above, one piece of land may be less fertile than the others to the extent that either it cannot produce the average profit, or may even make a loss, on the basis of its total costs.  However, suppose that on the basis of farming the four fields it becomes worthwhile investing in fixed capital in the form of say a tractor, the provision of a range of farm buildings and so on.  In just the same way, so long as the loss making land, makes some profit on its current costs (which it may do if its productivity is raised as a consequence of the application of this fixed capital) then this profit on current costs will make a contribution to the total fixed costs, and thereby increase the total profit of the farm.

“So long as the additional capitals are invested in the same land with surplus-productivity, even if the surplus-productivity is decreasing, the absolute rent per acre in grain and money increases, although it decreases relatively, in proportion to the advanced capital (in other words, the rate of surplus-profit or rent).” (p 733)

The limit is reached when the average price of production equals the regulating price of production, or market price.

“The investment of additional capital yielding only the average profit, whose surplus-productivity therefore = 0, does not alter in any way the amount of the existing surplus-profit, and consequently of rent. The individual average price per quarter increases thereby upon the superior soils; the excess per quarter decreases, but the number of quarters which contain this decreased excess increases, so that the mathematical product remains the same.” (p 733-4)

Rising marginal costs act to increase the average cost of production so that the amount of additional surplus profit declines, but it is only when marginal costs rise above the market price that the quantity of surplus profit itself begins to fall. Surplus profit, and so rent only disappears when marginal costs are sufficiently higher than market price, so as to raise the average cost of production to the level of market price.

“In this case too, the regulating price of production, £3 per quarter, would remain the same, although the rent had disappeared. Only beyond this point would the price of production have to rise in consequence of an increase either in the extent of under-productiveness of the additional capital or in the magnitude of the additional capital of equal under-productiveness.” (p 734-5)

But, additional investment in the better soils, on this basis, may increase output to a level where the production of land A is not required. In that case, the regulating price of production would fall, and the amounts of surplus profit would fall along with it. Alternatively, if the marginal product from additional investment in the better soil falls to such a level that the average cost of production rises above that of land type A, then rather than this causing a rise in the regulating price of production, and market price, it may simply result in the additional capital being used to bring into production additional land of type A. In other words, an extension of production rather than a further intensification.

“Thus although differential rent is but a formal transformation of surplus-profit into rent, and property in land merely enables the owner in this case to transfer the surplus-profit of the farmer to himself, we find nevertheless that successive investment of capital in the same land, or, what amounts to the same thing, the increase in capital invested in the same land, reaches its limit far more rapidly when the rate of productiveness of the capital decreases and the regulating price remains the same; in fact a more or less artificial barrier is reached as a consequence of the mere formal transformation of surplus-profit into ground-rent, which is the result of landed property.” (p 737)

On the one hand, Differential Rent II acts to limit Differential Rent I, because differences in natural fertility may be evened out as a consequence of additional investment of capital, either because with rising marginal productivity the output of poorer soils is increased, or because with falling productivity, the average price of production of the better soils rises to that of the poorer soils.

On the other hand, Differential Rent I acts to limit Differential Rent II, to the extent that, with falling marginal productivity, at a certain point, the investment of additional capital in drawing in additional land, rather than more intensive production becomes more profitable.

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