Tuesday, 27 September 2016

Differential Rent II

Differential Rent II arises when, instead of additional capital being invested on additional land, the same land is cultivated, but increasing increments of capital are applied to it. Differential Rent I remains at the root of this form of rent, but the changes in the amounts of surplus profits obtained result from the marginal productivity of the capital employed.

With Differential Rent I, the same amount of capital is applied in each case.  Any differences in output can then be seen to be attributable to the fertility of the particular type of land, not to the capital.  But, with Differential Rent II, the starting point is one type of land, to which varying quantities of capital are applied.  In that way, any changes in output can be determined as the product of this additional capital.

In modern orthodox economics, the three factors of production - land, labour and capital - are treated separately to determine their marginal productivity.  In other words, two of these factors would be held constant, and the result of marginal increments of the third analysed to determine its marginal product.  But, Marx includes labour in capital, in this analysis, because the capital applied consists of both constant and variable capital, and with prices of production, the profit appropriated by each capital is determined by the average rate of profit.

If we take, a hectare of land, therefore, if £1,000 of capital is applied to it, and it produces 1,000 kilos of wheat, and then on the same piece of land, observe that £2,000 of capital produces 2,000 kilos of wheat, we can determine that this additional 1,000 kilos is the product of this additional £1,000 of capital.  The amount of additional output produced by this additional £1,000 of capital, is the same as that produced by the first £1,000 of capital, and so the marginal productivity of capital here would be constant.  However, if the additional £1,000 of capital resulted in output rising to 2,500 kilos, this second instalment of capital would have been responsible for an additional 1,500 kilos.  In that case, the marginal productivity of capital would be rising.  Conversely, if the output rose, but only rose to say, 1,800 kilos, the second instalment of capital would have caused this rise in output, but it would be a rise in output of only 800 kilos, compared to the initial 1,000 kilos.  In that case, the marginal productivity of capital would be falling.

 Land Type Cost of Production £ Output Price of Production £ Income £ Profit £ Rate of Profit % Surplus Profit/ Rent £ A 4,000 4,000 1.25 5,000 1,000 25.00 0 B 8,000 15,000 1.25 18,750 10,750 134.38 8,750 C 4,000 6,000 1.25 7,500 3,500 87.50 2,500 16,000 25,000 1.25 31,250 15,250 95.30 11,250

As a result of a rising marginal productivity of capital, it now becomes land type B which produces the highest surplus profit and rent. The capital employed has doubled, but the output has trebled, causing the rise in the rate of profit.

In their analysis of rent, Marx and Engels give numerous examples of these multifarious changes in the amount of rent produced by different marginal productivities of land and capital, and under conditions where the marginal productivity may be rising or falling. Production on a larger scale makes possible the use of more effective capital, for instance. The continued use of fertiliser, and working of the land, can bring about more permanent changes in fertility etc.

Another aspect of Marx's analysis of rent is the difference between the rate of rent and rent per hectare (rental), and again, this is affected by whether the rent is a consequence of Differential Rent I or II. Where cultivation is more extensive than intensive, additional areas of land are brought into cultivation to satisfy the increased demand for agricultural products. The consequence is that more rent is levied, in total, but the amount of rent per hectare may be unchanged, because more hectares are cultivated. If however, the increased output is achieved by a more intensive cultivation, by applying more capital, this may result in an absolute rise in rents, as Differential Rent II rises, but as no additional land is brought into cultivation, the rent per hectare rises.

As with Differential Rent I the surplus profit, created by the marginal increments of capital, is the equivalent of the marginal revenue product of capital, in orthodox economics. But, similarly, as with Differential Rent I, although these marginal increments of capital result in variable increases in the physical product, that is not the same as an increase in the value created. The value created depends upon the labour-time expended, and if the employment of additional capital results in an increase in the volume of output relative to any given amount of labour-time expended, the value per unit of output will necessarily fall.