Tuesday, 8 November 2016

Profit, Rent, Interest and Asset Prices - Part 16 of 19

If we take an industrial commodity such as yarn, its market price is determined by the interaction of demand and supply, but if demand exceeds supply to an extent that the market price rises above the price of production, so that surplus profits exist, capital will enter yarn production, increasing supply so that market prices then fall to the price of production. But, as seen earlier, if the demand for agricultural commodities exceeds demand, so that market prices exceed the price of production, capital can only enter this production, so as to raise supply, if it is able to still make at least the average profit, after it has covered the Absolute Rent. Supply will always, therefore, lag behind demand so that market prices are maintained at this higher level that covers both rent and average profit.

If we consider the situation, as Marx describes, of the inception of capitalist agriculture, it arises in conditions where the majority of agricultural production is undertaken by peasant farmers providing for their own needs, and not for the market. Indeed, as Marx says, because capitalist production from the outset is mass production, it cannot get started until there exists a sizeable market for commodities. This market grows, as the towns develop, and this provides the basis for capitalist farmers to satisfy this demand. In other words, we have a situation, where initially, little of this agricultural production is destined for the market, thereby limiting supply, whilst the growth of the towns creates a rapidly expanding demand, which leads to the potential for high market prices. The high market prices provides the basis for capitalist farmers to rent land, to advance capital, and to make surplus profits.

It may not be the case that the owners of this land extract all of the surplus profit as rent. For example, the capitalist farmer is able to pay a higher rent to the landlord than is the peasant farmer who only seeks to meet their own domestic needs. So long as the land that landlords seek to rent out to capitalist farmers exceeds the amount of land that capitalist farmers seek to rent, so that supply exceeds demand, the landlord can obtain higher rents than previously obtained from peasant farmers, whilst still allowing the capitalist farmers to enjoy surplus profits. But, that very fact means that capital will continue to seek out those surplus profits by entering agricultural production, thereby increasing the demand for land to rent, and so pushing rents, as the market price for that land, higher. This is why landowners increasingly sought to replace peasant farmers with capitalist farmers as tenants on their land, why, for several centuries, they undertook a process of land thefts, and enclosures, culminating in the Great Enclosure Act of 1801, and also sought to appropriate common land, which they could then rent to capitalist tenant farmers.

Initially, agricultural prices are high, because capitalist agriculture is limited by the availability of capital, and so supply is restricted, at a time when the rapid growth of population and of the towns causes the demand for agricultural commodities to rise sharply. Landlords, are able to siphon off some of this surplus profit as rent, but the excess supply of rentable land relative to demand from capitalist farmers limits the level of rents. Surplus profits lead to a further investment of capital in agriculture, which raises the demand for rentable land, causing rents to rise. The expansion of capitalist production, in agriculture, meanwhile raises agricultural productivity, reduces agricultural costs of production, and also then reduces agricultural prices. But, any fall in agricultural prices is then limited by the requirement to be able to cover Absolute Rent.

If agricultural prices fall so that capitalist farmers cannot make average profits, and still pay the level of Absolute Rent, either capital will tend to leave agriculture, reducing agricultural supply and raising agricultural prices, whilst also reducing demand for land, or else landlords will have to reduce the level of rents. If capital leaves agricultural production, so that the demand for land declines, landlords will, in any case, be led to reduce rents, as the supply of land begins to exceed demand.

However, if rents fall to a low level, landowners may decide to withdraw land, thereby reducing supply, and causing rents to rise. That is only the same as seen previously in the case of the owners of loanable money-capital, who below some low level of interest, decide to use their money hoards for consumption, or speculation or some other usage. The landowner, if agricultural rents are low, might turn over their land to hunting, recreational usage, and so on, or simply allow it to lie fallow.

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