Absolute Rent

Marx, following on from Ricardo, describes two types of capitalist rent – Absolute Rent and Differential Rent. Ricardo denied the existence of absolute rent, but Marx explains its basis, and inevitability in conditions where landed property exists.

Marx discusses Ricardo's argument against the existence of absolute rent, in Theories of Surplus Value, Chapter XIII. Ricardo's argument is a sleight of hand. He sets out an argument beginning with the colonisation theory of Adam Smith. So, he says, assume that a new land is colonised by agricultural producers. In this land, there is an abundance of land in general, for anyone who wishes to cultivate it. In those conditions, there could be no absolute rent, because any potential farmer would simply move to some other piece of land, and begin cultivating it.

He goes on to argue that, whilst there may be an abundance of land in general, there may not be an abundance of any particular type of land. The farmers would naturally start to cultivate the most fertile land first, he says, and at some point, all of this land would be occupied, and be cultivated. If additional land is to be cultivated, farmers would then have to start cultivating less fertile land. The consequence of this would be that for the same amount of capital and labour, the more fertile land would produce a greater level of output, and would thereby create a surplus profit, which would then constitute, not an absolute rent, but a differential rent.

Having set out this historical scenario, Ricardo then, however, simply uses it as the basis for describing agricultural production in general, including that in Europe, where no such conditions existed. As Marx points out, when capitalist production in agriculture commences, it does so in conditions where centuries of feudal land ownership already existed. There is no reason why an existing land owner will allow a farmer to use their land without requiring the farmer to pay an absolute rent.

The economic basis of this absolute rent, Marx explains, is the different organic composition of capital in agriculture compared to industry. Across all industries there is a variety of rates of profit. However, in industry, because capital seeks to obtain the highest rate of profit, it leaves those industries where the rate of profit is low, and migrates to those where it is high. In so doing, it increases the supply of commodities in the latter, so reducing their prices until they reach their price of production, and the supply of the former declines, raising their price towards their price of production. Its on this basis that an average rate of profit across all industries is formed.

However, Marx explains, in agriculture, this free movement of capital and labour is frustrated by the existence of land ownership. The landowner will not allow a farmer to use their land, unless they pay them an absolute rent, and where the land is more fertile, an additional differential rent on top of it. Suppose, the organic composition of capital in industry and agriculture is as follows:

Industry

c 80 + v 20 + s 10 = 110

Agriculture

c 60 + v 40 + s 20 = 120

The average rate of profit here is then 15%. If capital could move freely, it would leave industry and enter agriculture, where the rate of profit is higher. That would happen until agricultural prices fell, and industrial prices rose, so that they were both 115, and capital in both spheres produced the average rate of profit.

But, the landowner says to the farmer, you cannot use my land without paying me rent. The landlord can charge the farmer, in this scenario, £10 of absolute rent. Having done so, the capitalist farmer produces the same rate of profit as the industrial capitalist – 10%. It is not that the absolute rent, here, has added to the value of agricultural products. They sell only at their value of 120. The absolute rent arises, precisely because they do sell at their value of 120, and not at their price of production of 115.

The difference between the price of production of these products – 110 – and their value – 120 – is the basis of the absolute rent. The landlord is able to appropriate this rent, because they can refuse to allow the farmer to utilise the land for production, unless they pay this rent. Only when agricultural prices rise to 120, then can the farmer make the average profit of 10%, and still pay the £10 of absolute rent to the landlord.

Marx goes on to say that, therefore, if agriculture became more capital intensive, so that the organic composition of agriculture was higher than in industry, then absolute rent would disappear. However, whilst this economic basis, the fund from which the absolute rent is paid may disappear under those conditions, there seems no reason to believe that absolute rent itself disappears. After all, it will remain the case, as Marx argues against Ricardo, that the landlord will have no reason to lease their land to the farmer for nothing. It will still remain the case that the landlord will be able to withhold their land, until the farmer agrees to pay the rent, and the condition for the farmer being able to pay the rent will be that the market prices of agricultural commodities rises to a level whereby the farmer can pay the rent and still make the average profit.

Assume that we have a situation where:

Industry

c 60 + v 40 + s 20 = 120

Agriculture

c 70 + v 30 + s 15 = 115

Under these conditions, capital would leave agriculture and enter industrial production. The supply of industrial commodities would rise, and their prices would fall until they reached 117.5, where the same rate of profit would be made as in agriculture, with an average rate of profit of 17.5%. Similarly, the supply of agricultural commodities would decline, as capital left this sphere, and agricultural prices would rise, until the price reached 117.5.

However, the landlord would still demand rent for their land, just as a money-lending capitalist always demands interest on their money-capital from the industrial capitalist. If the landlord demands an absolute rent of 10, then capital will continue to migrate from agriculture to industry, reducing the supply of agricultural commodities until their price reaches a level whereby this absolute rent can be paid, and the farmer can still achieve the average profit.

The average rate of profit would have to fall to 12.5%. That would imply a significant movement of capital out of agricultural production, and into industrial production, thereby raising the supply of industrial commodities and reducing their prices from 120 to 112.5, and simultaneously reducing the supply of agricultural products whilst raising their price from 115 to 122.5. So, we would have

Industry

c 60 + v 40 = k 100 + p 12.5 = 112.5

Agriculture

c 70 + v 30 = k 100 + p 12.5 + r 10 = 122.5

Its clear then that a situation where the organic composition of capital is higher in agriculture than in industry requires a higher price of agricultural products, in order that an absolute rent can be paid, but it is by no means impossible for such an absolute rent to arise. It simply requires that a larger mass of land is withheld from production, so that agricultural production is reduced, and so that the supply of agricultural commodities is restricted, so that their prices rise to such a level that both absolute rent and average profit are obtained.

By the same token, it implies a higher investment of capital in industrial production than would otherwise have been the case, and a consequent increased supply of industrial commodities, along with a lower price for industrial products.