Tuesday, 25 October 2016

Profit, Rent, Interest and Asset Prices - Part 10 of 19

Prices are an expression of the value of some amount of a particular use value, in its universal equivalent form, i.e. as a quantity of the money commodity. The price of a coat is £20, the price of 10 kilos of corn is £5, and so on. In the same way, it might be thought that the price of a hectare of land can be similarly determined. However, land, like capital, is not the product of labour, and so has no value. But land is different to capital, in that its use value, like other commodities, is measured by some physical unit, e.g. a hectare, whereas the use value of capital is itself measured as a quantity of money.

I cannot rationally ask what is the price of £10, because it is tautologically £10. However, I can ask what is the price of £10 of capital, by which is meant the use value of £10, used as capital, to self-expand its value. That price will be determined, in the market, as a result of the demand and supply for this £10 of capital value. That price will be the rate of interest.

In the same way, I can ask what is the price of an hectare of land, but it is equally irrational, because land like capital has no value. Because it has no value, it also has no price of production, and therefore, no objectively determinable point around which its market price can revolve. But, land like capital has become a commodity, which is bought and sold in the market, and which, therefore, does have a market price.

Marx has a means of resolving this problem. The rate of interest determines the amount of interest/revenue obtained from a given amount of capital value. Conversely, given any rate of interest, the capitalised value of any revenue producing asset can be determined on the basis of the actual revenue produced by the asset. A hectare of land, that produces rent is a revenue producing asset. If the rent produced is £1,000 per annum, and the average rate of interest is 10%, then the capitalised value of the land is £10,000. In other words, if I had £10,000 of money-capital, I would, with a 10% rate of interest, expect to receive £1,000 of interest/revenue from it. If I used the £10,000 of money-capital to buy a hectare of land, I would expect to obtain the same revenue of £1,000, now in the form of rent rather than interest.

Discounting factors such as risk, I would not pay more than £10,000 for the land, because I could simply use my £10,000 of money-capital to buy a bond that guaranteed me £1,000 of interest p.a. Similarly, if I bought the land for £10,000, and subsequently the rate of interest fell to 5%, the capitalised value of the land would rise to £20,000, and I would not sell it for less. The land, produces £1,000 of revenue, in the form of rent, each year. But, with an average rate of interest of 5%, I would require £20,000 of money-capital, to generate an equivalent amount of income. If I sold the land for the original £10,000, and used the proceeds to buy a bond, it would only provide me with £500 of revenue per year.

So, for Marx, the answer to determining the price of land, on an objective basis, becomes this capitalised value of the rent. In order to determine the objective basis for the rent, Marx again turns to the rate of profit. The rent, he argues is merely the surplus profit. In industry, this surplus profit is competed away. An individual capital within an industry that enjoys surplus profit, because it has introduced some lower cost means of production, loses that advantage when other capitals introduce the same methods. An industry that enjoys surplus profits, because it has a lower organic composition of capital, or a higher than average rate of turnover of capital, encourages additional capital to enter that industry, thereby raising the supply of that industry's commodities, and so reducing market prices to the price of production, where only average profits are obtained.

This does not happen in agriculture (or mining etc.), because the land is owned by landowners, who demand rent for the land, before they will allow it to be used. But, agricultural capitalists will only start production when they are able to make at least the average annual rate of profit, after having paid this rent. The objective basis for this rent then seems to be established. The average annual rate of profit is determined in industry. Let us say that the average annual rate of profit is 10%. In that case, a capitalist farmer with £10,000 of capital, will need to be able to sell their output for £11,000, in order to make £1,000 of profit, equal to the average annual rate of profit. However, if the landlord requires the farmer to pay £200 a year in rent, the farmer will need to be able to sell their output for £11,200. Only when agricultural prices rise to a level where this is possible, will the farmer commit their capital to production.

However, this raises the question what causes the landlord to demand £200 in rent, rather than £300, or £50, or £10? The answer Marx says, is that it again comes down to competition, and objective limits set by the rate of profit. As with the loaning of money-capital, the owner of landed property, like the owner of money-capital, has an incentive to lend it, because it is only by doing so that they obtain revenue, rent in one case, interest in the other. This is the pressure on one side creating supply. But, precisely because they undertake this action in order to obtain revenue, they will not supply either money-capital, nor land for free.

On the other side, the demand for land, will rise as the rate of profit in agriculture rises, because capitalist farmers will seek to expand their production, so as to make more profit. The greater the difference between agricultural profits and industrial profits, the more capital will want to enter agriculture, increasing the demand for land, and so pushing up rents. But, it will only do so to the extent that the rents charged do not reduce those profits below the average annual rate of profit in industry. So, as with the rate of interest, although land, like capital, has no value, and so no objective basis for determining its price of production, or natural price, objective constraints exist that determine the conditions for the demand and supply of land, and the limits within which rent can be levied.

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