The economic basis of rent is surplus profit. Total Rent divides into Absolute Rent and Differential Rent. Absolute Rent arises, because of a surplus profit in agriculture, compared to industry, and this surplus profit exists, because the organic composition of capital, in agriculture, is lower than in industry. As Marx describes, in Volume III, in discussing the formulation of prices of production, and the general annual rate of profit, surplus profits exist across all industries, but, the existence of this multiplicity of annual rates of profit causes capital to move from low profit areas to high profit areas. The consequence is that the supply of commodities in the latter areas increases reducing market prices until they reach the price of production, whereas the supply of commodities in the former areas declines, causing market prices to rise until they reach the price of production.
Marx describes it as follows.
Industry
c 80 + v 20 + s 10 = 110, r' = 10%.
Agriculture
c 60 + v 40 + s 20 = 120, r' = 20%.
If agriculture were like other industries, capital would flow into it, in search of this higher rate of profit. Agricultural prices would fall and industrial prices rise until both settled at the price of production of 115, where both sectors would make an annual rate of profit of 15%. But, landed property prevents such a free flow of capital. The landlord says, to the capitalist farmer, you have invested 100 of capital, and like other capitalists you are entitled to a 10% annual rate of profit. But, the market value of your output is 120, so I will take 10 as an absolute rent, which means you will still make that average annual rate of profit.
On this basis, the general annual rate of profit is that set in industry of 10%. Both industrial and agricultural capitalist obtain this same average rate, whilst the landlord appropriates the surplus profit of 10, as Absolute Rent. The basis of the Absolute Rent then is the difference between the market value of output (120) and the price of production of that output (110).
If the organic composition of capital in agriculture were then to rise, on average, above that in industry, this economic basis of absolute rent would disappear, Marx says. However, that does not mean that Absolute Rent itself would disappear. Surplus profits can exist for reasons other than the organic composition of capital being lower in one sphere than the average. For one thing, as Marx sets out in Capital III, and in Theories of Surplus Value, where the rate of turnover of capital is higher than the average rate of turnover, the annual rate of profit will be higher than the general annual rate of profit. That, however, is also unlikely to apply in agriculture, where the production time exceeds the working period, because, for example, crops must grow, before they can be harvested, animals must be fattened before they can be slaughtered. It may be the case in mining, where large scale, fixed capital investment may result in large quantities of output being produced in shorter and shorter time periods, and sent to market.
But, surplus profits can also arise as a consequence of monopoly prices. For example, a work of art may obtain a market price way above its value, simply on the basis that it cannot be reproduced; wine produced in a specific region may obtain a higher market price, for the same reason that the specific land on which it is produced is also limited in supply. Because of the existence of landed property, and because landowners will demand some minimum level of Absolute Rent, therefore, even if the organic composition of capital were to become higher in agriculture than in industry, agricultural surplus profits would continue to exist, and Absolute Rent, would absorb it.
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 rise 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.
But, now we have the problem that Marx wanted to avoid. If Absolute Rent is objectively determinable as the difference between market value and price of production, the question of why the Absolute Rent is £10 rather than £20, is itself resolved, as previously the question of why the average annual rate of profit was 10%, rather than 20%, was resolved. The annual rate of profit was seen to be 10% rather than 20%, because the objectively determined mass of surplus value, as a proportion of the objectively determined value of advanced constant and variable capital was 10%. Similarly, the Absolute Rent is £10 rather than £20, because the objectively determined market value of agricultural products, is £10 more than the objectively determined price of production of those products.
But, what happens when the organic composition of capital is higher in agriculture than in industry? In that case, the market value of agricultural output will be lower than the price of production of that output. Yet, the landowners will still demand an absolute rent, and will, as shown above be able to extract it, simply on the basis of being able to withhold land from the market, and thereby driving up agricultural prices until they reach a level whereby they produce a surplus profit out of which the absolute rent is paid.
The basis of such an Absolute Rent, arising from surplus profits resulting from a monopoly price is then clear, but there is no longer any objective basis for determining what the level of this Absolute Rent should be. It then comes down, to a subjective decision by the owners of landed property, as with the owners of loanable money-capital, of what minimum level of revenue they are prepared to accept in order to supply their particular asset. Below a particular rate of interest, the owners of money-capital may decide to use their money hoards for consumption or speculation, and similarly, below a particular level of rent, the owners of land may decide to leave it uncultivated, to use it for recreational purposes and so on rather than to make it available for rent or purchase.
Moreover, if the owners of landed property are able to levy an Absolute Rent on the basis of such monopoly prices, where the organic composition of capital in agriculture is higher than in industry, they can also do so where the organic composition of capital in agriculture is lower than in industry. In other words, the actual Absolute Rent levied by the landowner might then comprise an amount of surplus profit arising from the lower organic composition of capital in agriculture, and an amount of surplus profit arising from monopoly prices. In that case, the actual amount of Absolute Rent becomes no more objectively determined than is the case for the rate of interest.
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