But, even if the marginal productivity of capital falls, surplus profit on A could still be made if demand rises so that the market price rises above the price of production.
This seems to pose a problem in terms of differential rent. The previously developed law was that it is the average individual price of production of output, from the worst land, or from the total capital employed on the land, in the case of Differential Rent II, which sets the limit and forms the basis of the surplus profit. But, here that is not the case. It is not the average price of production which is the determining factor, but the marginal price of production.
Suppose we have rising marginal productivity. Taking the price of production as the cost of the output.
Table 4.
Price
of production £'s
|
Total
Product Kilos
|
Marginal
Product Kilos
|
Marginal
Cost /Kilo £'s
|
Average
Cost/Kilo £'s
|
3.00
|
1.00
|
1.00
|
3.00
|
3.00
|
6.00
|
3.00
|
2.00
|
1.50
|
2.00
|
“The first investment of £2½ yielded 1 qr, the second — 2 qrs. In this case, a price of production of £6 will yield 3 qrs, so that the average cost of a quarter will be £2; i.e., if the 3 qrs are sold at £2 per quarter, then A, as heretofore, does not yield any rent, but only the basis of differential rent II has been altered; the regulating price of production is now £2 instead of £3; a capital of £2½ now produces an average of 1½ qrs on the worst soil, instead of 1 qr, and now this is the official productivity for all better soils given an investment of £2½.” (p 742)
This would mean that a portion of the surplus profit on the better soils disappears, as the regulating price has fallen from from £3 to £2. But, assuming demand is sufficient so that the market price remains £3, land type A sells its output for £9 and thereby makes a surplus profit of £3 or £1 per kilo, or 1 kilo of grain rent.
If a further investment of £2.50 is made, with marginal productivity remaining constant, at 2 kilos, we would have:-
Table 5.
Price of production
£'s
|
Total Product Kilos
|
Marginal Product
Kilos
|
Marginal Cost/Kilos
£'s
|
Average Cost/Kilo £'s
|
3.00
|
1.00
|
1.00
|
3.00
|
3.00
|
6.00
|
3.00
|
2.00
|
1.50
|
2.00
|
9.00
|
5.00
|
2.00
|
1.50
|
1.80
|
If demand rises sufficiently, so that it is the average cost of the initial investment that regulates the market price, then an additional surplus profit of £0.20 per kilo arises. But, if demand is only sufficient to absorb this increased supply, the market price falls to £1.80 per kilo. The surplus profit on land type A disappears, and the rent on all the better soils is also reduced.
“Whether or not a rent would arise here, whether or not a surplus-profit would be derived, would depend wholly upon the circumstances. Normally the regulating price of production would have to fall. This would be the case, if this improved but more expensive cultivation of soil A should occur only because it also takes place on the better soils, in other words, if a general revolution in agriculture should occur; so that when we now refer to the natural fertility of soil A, it is assumed that it is worked with £6 or £9 instead of £3. This would particularly apply if the bulk of cultivated acres of soil A, which furnish the main supply of a given country, should employ this new method.” (p 743)
However, by the nature of things, it is often the case that new methods are only introduced at a minority of farms. In that case, it would be only these that would produce at lower cost and thereby obtain the surplus profit. This is like the case seen in Capital I, of the firm that introduces a new machine ahead of others in the same industry.
The difference here is that the landlord would be quick to try to pocket this surplus profit as rent, which is why they sought to move to shorter leases, so as to be able to reassess the rent accordingly.
“In this way — if the demand kept pace with the increasing supply — as more and more of soil A began to employ the new method of cultivation, rent might be gradually formed on all soil of quality A, and the surplus-productivity might be eliminated wholly or in part, depending on market conditions. The equalisation of the price of production of A to the average price of its produce obtained under conditions of increased outlay of capital might thus be prevented by fixing the surplus-profit of this increased investment of capital in the form of rent.” (p 743)
This would then no longer be the application of differential rent but would be its transformation into absolute ground-rent. In other words, the landlord would not be charging a differential rent for use of land of better quality, but would be levying a rent purely for the use of the land, a rent that the landlord is able to charge simply because of their monopoly of ownership. The additional ground-rent then acts to raise the price of production.
“...it would again be the transformation of surplus-profit into ground-rent, i.e., the intervention of property in land, which would raise the price of production, instead of the differential rent merely being the result of the difference between the individual and the general price of production. It would prevent, in the case of soil A, the coincidence of both prices because it would interfere with the regulation of the price of production by the average price of production on A; it would thus maintain a higher price of production than necessary and thereby create rent.” (p 743)
If cheaper grain were imported, this situation may still continue. The worst land, incapable of producing rent at a market price equal to the imported grain may be used for other purposes, such as pasturing for cattle. In that case, only those soils capable of producing rent would be used for grain production.
“... i.e., only soils whose individual average price of production per quarter were below that determined from abroad. On the whole, it is to be assumed that in the given case, the price of production will fall, but not to the level of its average; it will be higher than the average, but below the price of production of the worst cultivated soil A, so that the competition from new soil A is limited.” (p 743-4)
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