Its previously been described that the price of land is capitalised rent. So, if rent levels remain the same, the price of land rises if average interest rates fall. If rent on a piece of land is £100 p.a. and interest rates are at 5%, the capitalised value of the rent is £2,000. If interest rates fall to 4%, it is £2,500.
But, the price of land may rise even if the rent does not rise, because capital invested in and incorporated in the land causes the interest on that capital to rise.
On the other hand, the price of land may rise even though the interest rate remains constant, if the rent increases. The rent may increase because the prices of the products of the land rises. This may cause rent to rise for a number of reasons. Additional land may be brought into cultivation; land that previously produced no differential rent may now do so; differential rent on all land where it exists, will rise.
The rent may rise even without a rise in product prices. If prices remain constant, rents can only rise if new, more fertile land is brought into cultivation, which is sufficient to meet increased demand. In that way, prices remain the same, but a new differential rent arises on the new land, and its price rises.
The rent may also rise if the mass of capital employed increases. If the marginal productivity of capital remains constant and the additional supply simply meets increased demand, the price of production remains constant. Although the rate of rent remains the same, because the amount of capital employed has risen, the mass of rent also rises.
Whether additional capital is invested in separate pieces of land of equal fertility, or in the same piece of land makes no difference here. In the first case, rent increases because more land is cultivated. In the second because more capital is employed.
The only real difference is that in the second case, having rented the land, no additional absolute rent is charged. In the first case, the monopoly of landed property constitutes a barrier, because a second absolute rent will be charged on the additional land.
“This accounts for the opposing tendencies by which these two different forms of investment curb each other in practice.” (p 778)
If the composition of the capital remains the same, an additional investment means that the mass of profit increases by the same proportion. The rate of surplus value and rate of profit remain the same, so a doubling of the capital leads to a doubling of the mass of profit.
By the same token, the amount of rent has doubled, and the rent per hectare has doubled, thereby causing the price of the land to double. Marx credits the work of Rodbertus in this area. He made one error though, Marx says,
“... of assuming, in the first place, that as regards capital an increase in profit is always expressed by an increase in capital, so that the ratio remains the same when the mass of profit increases. But this is erroneous, since the rate of profit may increase, given a changed composition of capital, even if the exploitation of labour remains the same, precisely because the proportional value of the constant portion of capital compared with its variable portion falls. Secondly, he commits the mistake of dealing with the ratio of money-rent to a quantitatively definite piece of land, e.g., an acre, as though it had been the general premise of classical economics in its analysis of the rise or fall of rent. This, again, is erroneous. Classical economics always treats the rate of rent, in so far as it considers rent in its natural form, with reference to the product, and in so far as it considers rent as money-rent, with reference to the advanced capital, because these are in fact the rational expressions.” (Note 41, p 778)
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