Sunday, 25 September 2016

Differential Rent I

Differential Rent I arises, because the land in cultivation has different levels of fertility. This applies also to things such as mining, where different mines produce more or less output for any given amount of employed capital and labour.
In orthodox economics terms, this equates to the marginal productivity of land. Indeed, the marginalist analysis that Marx undertakes here, building on the work of Ricardo, who himself took his theory from Anderson, essentially forms the basis of the development of marginalist analysis by the neo-classical economists.  Its unfortunate that Marx did not have the mathematical tools that the later marginalist school developed, because, if he had, it would have avoided some of the weakness in the conclusions he develops, out of his examples, in terms of resultant market prices.

The difference between Marx and the marginalists, in this respect, is as follows. The marginalists identify an amount of additional product that arises from adding an additional unit of some factor of production. This is called the marginal physical product. They then multiply this marginal physical product by the price of the commodity to arrive at a marginal revenue product, which they claim is thereby the amount of value which this additional unit of input has added to the end product. The most efficient point is reached when the price of the factor input is equal to this marginal revenue product.

Marx agrees that a factor such as land can be more or less productive. Land A might be less productive/fertile than land B, which might be less productive than land C, and so on. But, this productivity is only in terms of use values. In other words, a given amount of labour employed on land C, will produce a greater quantity of corn than the same amount of labour applied to land B, which in turn will be greater than the quantity of corn produced on land A. However, suppose that 10 hours of labour is applied to each type of land. If we ignore any constant capital, the amount of value produced, in each case, will be 10 hours.

However, this 10 hours of value will be embodied in a different quantity of use values in each case. Let 10 hours of value be equal to £100. Suppose, that land A produces 1,000 kilos of corn, B 1,500 kilos, and C 2,000 kilos. The consequence is that the individual value of a kilo of corn produced on A is then £0.10, on B it is £0.07, and on C it is £0.05. The point is that the value of corn, for Marx, is determined by the labour-time required for its production. More fertile land, means that labour can produce any given quantity of wheat in less time, and so the value of that wheat is thereby reduced compared with wheat produced on less fertile land. The same would apply to a machine that enhances the productivity of labour. In fact, rather than such a machine, or a more fertile type of land, contributing additional value, as the marginalists suggest, they reduce value, because they reduce the amount of the value creating substance - labour - required to produce any given quantity of use values.

The marginalist error arises, in this relation, because they have inherited the error of Adam Smith, the “absurd notion”, as Marx describes it, that the value of a commodity can be reduced to the factor inputs – land, labour, and capital – and that, therefore, the value of a commodity is equal to the revenues received by these factors, in the shape of rent, wages and profits. Like Smith, therefore, they end up with a cost of production theory of value. 

The basis of Differential Rent I can be seen in the following example. The average rate of profit is determined in industry. An average rate of profit of 25% is assumed.

Land Type
Cost of Production
Price of Production
Rate of Profit
Surplus Profit/


Unless capitals invested in land A can make the average rate of profit of 25%, they will not undertake production. That requires a market price of £1.25 per unit. At that price, however, capital invested on land type B, makes a surplus profit of £1,250, and on land type C a surplus profit of £2,500. These surplus profits are absorbed as Differential Rent I, by the landlords who own land type B and C.

Ricardo believed that it must be the case that capitals use the most fertile lands first. It was this belief that underlay his and Malthus' belief that the cost of producing food to feed a growing working population would continually rise, as less and less fertile land had to be brought into cultivation. It was the basis of Ricardo's faulty theory about the tendency for the rate of profit to fall, as wages had to rise to cover this higher cost of food.

Marx demonstrates, at length, that this view is false. There are numerous reasons why it is not the most fertile land, which is first brought into cultivation. The most fertile land may be distant from population centres, or means of transport; land may be fundamentally very fertile, but currently unused, because it requires large amounts of capital to first provide drainage etc. The development of technology may make possible the cultivation of land that was not previously cultivable. For example, the development of powerful steam engines was able to drive ploughs that were able to turn over much deeper, more fertile layers of soil.

Marx and Engels provide numerous examples of situations where it is first the least fertile soil to be developed, and only then the more fertile soil; then examples of where it is the most fertile cultivated first, moving to the least fertile; and then examples where a combined process may take place with first the more fertile soil cultivated, followed by a less fertile soil, followed by a more fertile soil, and so on.

In economic terms, the differential rent arises here because, the higher fertility of one type of land over another enables a surplus profit to be created, for capital employed on the more fertile land. But, it is the existence of landed property that enables this surplus profit to then take the form of the differential rent, which is pocketed by the landowner. If all land were of the same quality, whether that quality was good, bad or indifferent, differential rent could not exist. It does not arise as a result of the absolute fertility of the land, but only as a result of its relative fertility. Similarly, if there was an abundance of the most fertile soil, so that capital could always find some to cultivate, without the need to bring in to cultivation less fertile soil, differential rent could not exist.

This is an essential difference between agriculture and industry that gives rise to the existence of rent. In industry, surplus profits also exist, but they are competed away as capital from less profitable spheres enters those spheres where the rate of profit is higher. Within a particular sphere, an individual firm, might produce at a lower individual value than the market value, and thereby also make surplus profits, for example, as a result of introducing a new more productive machine, but again, other firms can then also introduce the same machine, and so reduce the labour-time they require for production, thereby reducing the individual value of their own output, so that again any surplus profit is competed away. But, in agriculture, capital can only obtain the benefit of more fertile land, if it first pays the differential rent to the landowner. Consequently, capital is prevented from freely entering agricultural production, and thereby increasing supply, reducing agricultural prices, and so competing away the surplus profit.

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