Thursday, 17 November 2016

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

The rental per hectare then is determined by the interaction of supply and demand, and the bounds for this rental will be that required to sustain the owners of landed property on the one hand, and the ability to continue to produce the average profits on the other. If rentals fall below the lower bound, land will be taken out of supply. Large landowners may use their land for other purposes, or simply leave it unused; smaller landowners may turn themselves into capitalist farmers obtaining their revenue from profits rather than rent, or else become involved in share-cropping, effectively obtaining their revenue as interest on loaned capital. As land is taken out of supply, agricultural production will fall, and agricultural prices rise, raising the rate of profit on agricultural production, and thereby making possible higher rents.

If rents are too high, so that they prevent capital from producing the average rate of profit, capital will leave agriculture, so the supply of agricultural products will fall pushing agricultural prices and profits higher, whilst the demand for land will fall, pushing rents lower. Similarly, high levels of rents will cause landowners to make more of it available, increasing supply and reducing rents.

So, although the price of land/rental is not objectively determined, as with the price of production of other commodities, nor is it arbitrary, but is determined by these objective constraints.

We can then also take into account the fact that the use value of land is not homogeneous. Some land has greater use value deriving from its higher fertility. What the capitalist buys in renting land type B rather than land type A, is this greater use value. As Marx demonstrates in all of his examples of Differential Rent, this higher use value is manifest in the fact that a given amount of capital produces a greater quantity of output, which thereby results in a lower individual price of production per unit of output.

On this basis then we can follow Marx in determining the price of land as this capitalised rent. If the average rate of interest is 10%, and the rental on a hectare of land is £1,000, its market price will be £10,000. If land is being sold for less than that, capital will move from other areas to buy land. If land is being sold for £8,000, for example, the owners of bonds, will sell them, and use the proceeds to buy land. That will cause the price of land to rise, and of bonds to fall.

The level of income that is sought as rent, therefore, is no longer simply a matter of what is required to sustain the living standards of landlords, but is what level of income can be derived from other revenue producing assets. Suppose I own land that is currently valued at £10,000, and which produces £1,000 of rent. If a £10,000 bond would provide me with £1,200 of interest, I might seek to obtain an increase in rental, to similarly provide £1,200 of rent. Unless I could obtain it, I might withdraw my land from supply, or I might seek to simply sell the land rather than leasing it. I would then obtain, its £10,000 capital value, which could be used to buy a £10,000 bond. The consequence would be to increase the supply of land, reducing land prices, and increase the demand for bonds, causing a rise in bond prices. The further consequence is to bring about a variation and equalisation of yields between the different asset classes.

But, all of these relations of demand and supply, which determine the market prices of these various revenue producing assets, are ultimately a function of the rate of profit. Rises in the rate of profit, on the one hand cause an increase in demand for money-capital, but on the other create an additional supply of money-capital, as the mass of realised profits rises. Falls in interest rates lead to higher capitalised values of revenue producing assets. But, if interest rates fall below a certain level, the owners of interest-bearing capital, withdraw it, use it unproductively or convert themselves into industrial capitalists. Rises in the rate of profit in agriculture increase the demand for agricultural land, and the same applies for mineral extraction, the demand for land for industrial and commercial development etc. That rise in demand leads to a rise in rents, which also thereby feeds through into the capitalised value of land. Finally, each of these types of asset class come into competition with each other, as revenue producing assets, with capital moving from one to another in search of the highest risk adjusted yield, which thereby brings about changes in the market prices of these assets, and a risk adjusted equalisation of yields.

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