However, if the demand for wheat rises, pushing up the price, the most efficient producers can only increase their output, to fill this gap, if there is sufficient of the most fertile land to be cultivated, or else of additional capital employed on it to bring about the required increase in output, without causing the average cost of production to rise above that of the worst soil.
This was the basic thesis of Malthus, and following on from him of Ricardo, that, in fact, the increased demand could not be met without this continually rising cost, which for Malthus results in a population crisis, and for Ricardo results in a tendency for the rate of profit to fall, as wages are pushed higher. But, in fact, neither happened.
The expansion of capital brought new fertile lands into cultivation, across the globe, and even today there are vast, even more fertile, lands yet to be brought into cultivation. But, in addition, the development of science meant that even on the existing land under cultivation, the application of capital was able to increase the value of output, not at ever rising average costs, but at ever falling marginal and average costs.
If the farmer on land type A only makes average profit, there is no basis for them to pay differential rent. Any decision they make on the investment of additional capital, therefore, is no different to that of any other capitalist who does not pay rent.
However, the fact that the farmer only makes average profit is no reason why the landlord will allow him to use this land rent free! The landlord charges a differential rent on that land that provides a specific and additional use value, deriving from its higher fertility, but the landlord also provides the farmer with a use-value even with the worst soil, and the landlord will expect to receive something in return for doing so.
This is no different than with the provision of money-capital. Money-capital has no value. It is not the product of labour. But, it is a use value, and becomes a commodity precisely because it enables the productive-capitalist to buy productive-capital and thereby make profits. The money capitalist charges interest on the money-capital they lend out, as a price for that use value.
Here the land has no value. It has not been produced by labour. But, it is a use value. The productive-capitalist needs it in order to produce and thereby make profits. As was seen with interest bearing capital, it does not have to be the case that what is loaned out is actually money-capital. The owner of a machine can loan it out. They receive interest in return based on the money equivalent of the capital value of the machine.
It is essentially no different with land. The landlord loans out their land to the farmer, and thereby obtains in return interest/rent on the money equivalent of the capital value of the land they have loaned out. The difference here is that the capital value of a machine is determinable, and so is the capital value of a sum of money-capital, but what is the capital value of a piece of land?
It seems to be a paradox. The capital value of land is the value of the capitalised rent. For example, if the average rate of interest is 5%, and the annual rent is £1,000, then the capital value of the land is £20,000. But, if the rent were just the equivalent of interest on the capital value of the land, we arrive at a vicious circle. The rent cannot be calculated without knowing the capital value of the land, and the capital value of the land cannot be known without knowing the amount of the rent, so that it can be capitalised!
But, the paradox is apparent rather than real. As Marx points out, the value of £1,000 does not change. It can only be equal to itself. What changes is only the price of the use value provided by this £1,000 as money-capital. The money-capital itself has no value. As such, it could just as easily have been £10,000 of money-capital as £1,000. At any one time, £10,000 of money-capital would have a price ten times that of £1,000, but only because it provides ten times as much use value. The actual price is a consequence only of the interaction of supply and demand in the market, for that use value, whose lower bound is zero, and whose upper bound is the average rate of profit.
Similarly, with land. The land has no value. But, as a use value, which assumes the form of a commodity, it has a market price. As with the rate of interest, its lower bound is zero, and its upper bound is the average rate of profit.
On the one hand, a landlord has no reason to sell the use value of the land they own for nothing. On the other, the price a productive-capitalist will be prepared to pay for that use value will depend upon the average rate of profit they can obtain from production that requires its use. In the same way as with money-capital, the price paid for 10 hectares of land, or the rent paid for it, will be ten times that of one hectare of the same land.
In other words, the rent for any particular type of land will be determined by the demand and supply for that land, which in turn will be a function of the average rate of profit to be obtained from its use. The rent as with interest, will be nothing more than the market price for this particular use value. Once determined, the rent will then be the basis for determining the price of the land itself, on the basis of its capitalisation.
“The fact that the tenant farmer could realise the usual profit on his capital did he not have to pay any rent, is by no means a basis for the landlord to lend his land gratis to the farmer and to become so philanthropic as to grant crédit gratuit for the sake of a business friendship. Such an assumption would mean the abstraction of landed property, the elimination of land-ownership, and it is precisely the existence of the latter that constitutes a limitation to the investment of capital and the free expansion of capital in the land. This limitation does not at all disappear before the simple reflection of the farmer that the level of grain prices would enable him to realise the usual profit from the investment of his capital in the exploitation of soil A did he not have to pay any rent; in other words, if he could proceed in effect as though landed property did not exist.” (p 750-1)
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