Tuesday, 16 August 2016

Capital III, Chapter 45 - Part 1

Absolute Ground-Rent

In analysing differential rent, the assumption was that only those lands paid rent where their individual price of production was lower than the price of production of that land which regulated the market price. The basis of differential rent remains, whether this assumption is true or not. If land A pays no rent, but land B pays a rent of £10, C £20, and D £30, precisely because it is a differential rent, it is not changed if land A pays £10 in rent, rather than zero. It only means these other rents become £20, £30, £40.

But, in that case,

“The price of the product of soil A would not be regulated by the price of production on the latter, but would include an excess above this price, i.e., would be = P + r. Because assuming the capitalist mode of production to be functioning normally, that is, assuming that the excess r which the farmer pays to the landlord represents neither a deduction from wages nor from the average profit of capital, the farmer can only pay it by selling the product above its price of production, thus, yielding him surplus-profit if he did not have to turn over this excess to the landlord in the form of rent.” (p 748-9)

The total of rent would then increase in line with the increase in agricultural prices.

“It follows, then, that no matter what the case may be as regards the rent of the least fertile soils, the law of differential rent is not only independent of it, but that the only manner of grasping differential rent in keeping with its character is to let the rent on soil A = 0. Whether this actually = 0 or > 0 is immaterial so far as the differential rent is concerned, and, in fact, does not come into consideration.” (p 749)

The study of absolute ground-rent is then totally independent of differential rent.

Marx includes in his argument here an idea that he did not in his previous elaboration of differential rent, and which I pointed out earlier. That is that, in order for the worst soil to obtain the average profit, demand must be higher than the level of supply forthcoming at the price of production of this worst soil. In other words, in his original example, he has the price rising above the £1.50 price of production of the best soil, which at that price supplied 4 kilos. The price could only rise because demand was higher than this 4 kilos, at a price of £1.50 per kilo. 

On the basis of the information provided by Marx, at £1.50, the demand is 7 kilos. This demand is only choked back to 4 kilos, the level of supply, at a price of £3 per kilo. But, in his original example, Marx does not seem to take into account that, at this price, additional supply is forthcoming, which reduces the price. The price could only remain at this new price, therefore, if demand rose once again.

Marx here, however, recognises this point. Having noted that if the price rises to where the worst capital can make average profit, this would be sufficient for additional capital to be invested, he says,
“It should be noted here that in this case, too, the market-price must be higher than the price of production of A. For as soon as the additional supply is created, it is evident that the relation between supply and demand becomes altered. Formerly the supply was insufficient. Now it is sufficient. Hence the price must fall. In order to fall, it must have been higher than the price of production of A.” (p 750)

Marx is right when he says,

“But due to the fact that soil A newly taken under cultivation is less fertile, the price does not fall again as low as when the price of production of soil B regulated the market.” (p 750)

But, that is not the same as the price rising as high as the price of production of A. In fact, where the price will settle, as an equilibrium point, depends upon the price elasticity of demand. However, its clear that this price is lower than the price of production of land type A, which can only form “the limit” (p 750) of that price where demand continues to exceed supply. In that case, the basic assumption that Marx made in his analysis of differential rent, that the least fertile soil determines the regulating price, on the basis of its price of production falls.

If the equilibrium price is less than the price of production of land type A, then, by definition, land type A must make less than average profits. He is wrong then to say,

“The price of production of A constitutes the limit, not for the temporary but for the relatively permanent rise of the market-price.” (p 750)

because its clear that this can only be the case where the demand consistently exceeds the supply at this price. For one thing, every capital employed on land producing surplus profit will have an incentive to increase its supply, so as to to increase its surplus profit.

Marx says,

“On the other hand, if the new soil taken under cultivation is more fertile than the hitherto regulating soil A, and yet only suffices to meet the increased demand, then the market-price remains unchanged.” (p 750)

But, this is impossible. Firstly, if demand previously exceeded supply, but this new additional supply bridges the gap, then the price must fall, because the excess of demand over supply would have caused prices to rise to choke off the excess demand. If Marx means that the price is not changed from its level prior to the increase in demand, this is not possible either. If the new supply is lower cost than that provided by A, then the price of production must fall. If this new production is lower cost than that provided by A, then capital invested in it will make surplus profit, so there will be an incentive to invest more capital in this lower cost land, thereby increasing supply and reducing prices. In fact, depending upon the availability of this land, this would occur until prices fell to a level where land type A was excluded.

The only ways in which this scenario is possible is if demand continually rises, so as to exceed supply at any price. One means of this occurring is if supply is fixed or limited. So, for example, land type D might make surplus profit, as described above, but additional supply from land D is restricted by how much of it is available to bring into cultivation. That constraint may be eased if, as with Differential Rent II, additional capital can be utilised so as to increase output from the lower cost land and thereby obtain additional surplus profit, but this depends, as just seen, on, at least, the marginal productivity not falling by so much as to raise the average cost of production above that of the next most fertile land.

No comments: