Wednesday, 28 February 2018

Its Not Inflation Driving Interest Rates Higher (9/10) - Rising Wage Share and Rising Profits

Rising Wage Share and Rising Profits 

In Part 6, I described the rise in the wage share that occurred in the 1960's, and 70's that led to a squeeze on profits, as set out by Glyn and Sutcliffe et al. King and Regan also say 

“Their conclusions are supported by a careful reworking of the data by Burgess & Webb.” (See: The Profits of British Industry, Lloyds Bank Review (April 1974)) 

They go on to cite further confirmation in the work of Thirlwall, Heidensohn, and Zygmant, “according to whom “a steady rise of the wage income ratio since 1950 appears to accelerate in the 1960’s.”. 

(See Thirlwall, “Changes in Industrial Composition in The UK and the US and Labour's Share of National Income 1948-69”, Bulletin of the Oxford University Institute of Economics and Statistics (Nov 1972); Heidensohn and Zygmant, “On Some Common Fallacies in Interpreting Aggregate Pay Share Figures” Zeitschrift fur die Gesamte Staatswissenchaft (Apr 1974)) 

King & Regan conclude the chapter by saying, 

“Glyn and Sutcliffe suggest that the profits squeeze is an international phenomenon, although some of their evidence for other Western economies is rather weak… Convincing evidence of a recent shift to labour in the United States is provided by Thirlwall, and also by Nordhaus. For Germany, on the other hand, Heidensohn and Zygmant show that the wage income ratio has been constant, with perhaps a slight downward tendency since 1956.” (p 27) 

(See also W.D. Nordhaus, “The Falling Share of Profits”, Brookings Papers on Economic Activity (1974)) 

The rise in US annual and hourly wages are given here, based on BEA data. In 1960 average wages stood at $4817, and rose to $7711 in 1970, a rise of 60%. By 1974, the start of the crisis phase of the post-war long wave, they had risen to $9994, a rise of 107.47%. 

The same site gives data for the growth of profits, which rose from $48.5 billion in 1960 to $71.5 billion in 1970, a rise of 47%. And by 1974, this had risen to $132.1 billion, a rise since 1960 of 172.37%. This latter figure would then seem to contradict the previous data about rising wages causing a squeeze on profits, but this is a misreading of the data, and illustrates the problem referred to in Part 5. The data for profits is for total profits, whereas the figures for wages are wages per worker. As described in Part 5, therefore, it is quite possible for the rate of surplus value to be falling as a rising demand for labour-power causes wages per worker to be rising, whilst, as a result of that very same rising demand for labour-power, and an increase in the number of workers employed, the amount of surplus value produced is rising. In 1960, there were 69 million people employed in the US, rising to over 91 million in 1974. 

Taking the average annual wage in 1960 of $4817, and multiplying by the workforce we get $332,373,000,000 ($332.4 billion), and taking the figure for 1974 of $9994 and multiplying by the workforce of 91 million, we get $909,454,000,000 ($909.4 billion). That is a rise of 173.80%. But, even this underestimates the growth of the wage share, because between 1960 and 1974, the same processes led to other non-wage improvements in workers conditions, for example, in relation to paid holidays, shorter working week, and so on. 

But, this distinction between the percentage increase in wages, and the proportional share of wages and profits is important, because it also illustrates the error of financial pundits. The speculation news channels repeatedly talk about the expected increases in company earnings. They speak about company earnings (profits) being up by say 10% over the previous year. This is then supposed to provide a justification for the share prices of such companies rising, especially where this increase in profits is more than the increase in the previous year, or than was expected for the current earnings period – which they usually are because earnings expectations are always revised down ahead of earnings season, and the earnings are essentially manipulated, via things such as share buy backs and so on, to ensure that earnings per share figures are higher than had been expected. 

But, as the above illustrates, this figure for increased profits is meaningless on its own. The profits could rise by 100%, but if that rise in the absolute amount of profit is achieved by employing three times as many workers, the fact remains that the rate of surplus value will have fallen, and the rate of profit will have been squeezed as a consequence. As described in Part 5

“If the rate of surplus value is 100%, and 10 workers are employed each on wages of £10, the mass of surplus value is £100, but if the number of workers employed rises from 10 to 20, and this increased demand for labour-power leads to a rise in wages to £12, so that the rate of surplus value falls to 66.6%, with each worker now producing only £8 of surplus value, that does not stop the mass of surplus value rising from £100 to £160, a rise of 60%!” 

Beast From The East?

So where was it?  For a week, the media have been filling column inches, and our screens with dire warnings, reminiscent of "The Day After Tomorrow", about impending disaster as an unheard of icy blast hit the country rolling in from Siberia.  I've been preparing for it, just in case, but it turns out correctly with a measure of skepticism, because every year, such warnings have usually turned out to be false.  So it appears to be the case again that after days of the media launching into gyrations of Trumpian hyperbole, the Beast From The East, has amounted to some pretty cold weather, of the kind you would expect during the Winter, and some flurries of snow that hardly amounted to anything.

In fact, looking out of my window this morning, there is a bright blue sky, and glorious sunshine.  The odd few flakes of snow that speckled the ground, and other surfaces, in places, have already melted into mere memories.  Perhaps some parts of the country have experienced worse, but looking at the TV pictures and reports, it doesn't really seem so.  Even the weather data talking about potential snow falls of 50-10 centimetres amount to the kind of routine weather that in previous decades would not even have warranted a mention on the news.

The closest I've seen to the kind of Winter weather we used to get in the 1950's and 60's, was in 2009/10, but even that would not have been seen as particularly out of the ordinary.  Look at the archive film of the Winter of 1947, or the Winter of 1962/3, and you can see the difference.  Is it that today people have become wusses who complain over the slightest inconvenience?  Maybe, but its more to do with the change in society, and in the media.

In the 1950's, most workers lived close enough to their place of work that if the snow stopped buses from running (virtually no one had cars to travel to work in), it was possible to simply walk.  My father before the war, when he worked at Rolls Royce in Crewe, used to walk the ten miles from work to home, after a late shift, when the buses were not running.  Even in the 1970's, I used to walk the three miles to work every day, and the same back home again, including in some much worse falls of snow than the Beast From the East has so far inflicted.  In the 1950's and 60's, before all of the mass school closures of the 1970's and 80's, even a small village like the one I lived in had several schools, which meant that I never lost a day due to bad weather, because many of the teachers also lived in the village, or nearby.

Its the fact that today everyone takes for granted that they will work miles and miles away from where they live, that many of the schools have been closed and centralised, along with other facilities such as shops and hospitals, which means that travel becomes more significant, and any disruption to travel becomes more significant with it.  Given also that everyone insists on having their own individual private transport, which not only clogs the roads at the best of times, but also slows traffic so as to allow the snow to settle, when it comes, especially as few people have snow tyres or snow chains, and little ability to drive in winter conditions, and even the slightest snow fall causes disruption, which the media are happy to turn into a drama, so as to attract readers and viewers.

And, that  is the other change.  With 24 hour news channels they have to have something to fill in their rotating bulletins every 15 minutes, and something sensational or sensationalised does the job better than having to spend money and effort on providing more in depth analysis of actual news and current events.  The newspapers, already in their death agony, as they have to compete with 24 hours TV news, and with social media, have to sensationalise every story even more.  And, given the youth of many of those involved, a similar thing as happens with the speculation news occurs.  No one has seen the kinds of Winter weather that was normal 50 or 60 years ago, and so they have nothing to compare with, other than what they have seen in the last 10, 20, or at best 30 years.  The same is true with the speculation news, where the pundits frequently base their analysis of what is "normal", on what has happened at most over the last 30 years, a period that has, in fact, been far from normal.

What constitutes for you a Beast from the East, as opposed to a spot of normal Winter Weather, just as what constitutes for you a Black Swan event, as opposed to being a normal reversion to the mean, depends only on your duration of experience, and time horizon.

Theories of Surplus Value, Part II, Chapter 13 - Part 23

Where Ricardo does consider movement in the other direction, towards more fertile soil, he assumes that this lower cost production forces out the least fertile land. But, again, this is not necessarily the case, as Marx sets out. If lower cost production results in a lower market value, and market prices, this will lead to a rise in demand. It may be the case, therefore, that the output from the least fertile land is still required to meet this additional demand. All that happens here then is that the output of the least fertile sells at this new market value, which is below its own individual value. In that case, this land could not sustain the full amount of absolute rent.

“The same happens in the descending line. Whether, and to what extent, the worse land yields rent, if the additional supply can only by provided at the old market-value, depends on how much this market-value stands above the cost-price of the product of the new, worse land. In both cases its rent is determined by the absolute fertility, not the relative fertility. It depends on the absolute fertility of the new land how far the market-value of the produce of better lands stands above its own real, individual value.” (p 338) 

Adam Smith is quite correct, Marx says, in distinguishing between land and mines, because Smith assumes that “there is never a transition to worse sorts—always to better ones—and that they always provide more than the necessary additional supply.” (p 338) A look at the history of coal mines in Britain shows this to be true, as the movement was always to new, larger, more profitable mines. But, this is not just a matter of finding these more fertile mines, it is also a question of technological improvements that make exploitation of new supplies more profitable. The same is true with other minerals, and oil and gas.

The development of new drilling technologies, platform technologies, and so on made the extraction of North Sea oil and gas possible, in the 1960's. In the case of North Sea gas that was markedly cheaper than the existing town gas. Similarly, the development of fracking technology has meant that large amounts of oil and gas can be produced from shale, at lower cost than for North Sea and other deep water production.

Ricardo is wrong then when he says,

““After Adam Smith has declared that there are some mines which can only be worked by the owners, as they will afford only sufficient to defray the expense of working, together with the ordinary profits of the capital employed, we should expect that he would admit that it was these particular mines which regulated the price of the produce from all mines. If the old mines are insufficient to supply the quantity of coal required, the price of coal will rise, and will continue rising till the owner of a new and inferior mine finds that he can obtain the usual profits of stock by working his mine… It appears, then, that it is always the least fertile mine which regulates the price of coal.” (p 338) 

Tuesday, 27 February 2018

Its Not Inflation Driving Interest Rates Higher (8/10) - The Financial Crash of 1962

The Financial Crash of 1962 

This point that the laws governing the price of fictitious capital, are different to those governing the real economy is illustrated by the Financial Crash of 1962, but it can be seen in most other financial crises, as opposed to economic crises. For example, in Marx's analysis of the 1847 financial crash, he notes that although the basis of the crash was again massive financial speculation on the stock market, at that time the Railwaymania that blew up the prices of railway shares in a similar fashion to the Tech Bubble of 2000, the spark for it, was a credit crunch caused by the operation of the 1844 Bank Act, which limited the issuance of currency to gold reserves. It was this credit crunch, and the fact that private capitalists who had tied up capital in this speculation had to resort to selling other assets, and commodities at knock down prices, to get cash, which led to an economic crisis in which output fell by over 30%. But, Marx notes that when the Bank Act was suspended, and the credit crunch relieved, the economic boom that had previously been underway resumed. He relates a similar story in relation to the financial crisis of 1857. 

In the financial crisis of 2000, the NASDAQ technology Index fell by 75%, and other indices fell by large amounts, and yet even that fall had little impact on the real economy, and certainly not in the growth of the technology sector, thereafter. On the contrary, the new long wave boom that began in 1999, continued apace across the globe, until it was hit once more by the financial crisis of 2008. But, here again, despite the 2008 financial crisis being the worst in history, its main impact on the real economy came as a result of a credit crunch. Once the credit crunch was resolved, via the introduction of liquidity by central banks, and by the state taking over a number of banks to ensure that the payments systems continued to function, the economy itself rebounded in a traditional “V” shaped manner. 

A lot has been made of the fact that since 2009, the recovery has been very sluggish, leading to talk of a “Long Depression”, “The Great Recession”, or “Secular Stagnation”. However, the fact is that in many parts of the globe, economic growth continued at rates only slightly below their 2008 levels. The fact is that, for the global economy, as a whole, there was no depression, recession, or stagnation, although individual economies fared better or worse during this period depending upon their particular circumstances. Despite some doom mongers forecasting that the Chinese economy was headed for “only” 4.5% p.a. growth, the world's second largest economy has continued to grow since 2009 at rates between 6 and 8%. 

The reason that economic growth has been sluggish in the main capitalist heartlands of North America and Europe, is not the direct consequence of the 2008 financial crisis, nor any underlying economic crisis, but is the direct consequence of conservative governments in those economies deliberately imposing measures of austerity to restrict economic growth! 

The financial crash of 1962 is consistent with that process whereby economic growth begins to result in a rise in the demand for labour-power, relative to supply, which begins to cause wages to rise, and squeeze profits. The rising demand for labour-power is consistent with the expanding economy at that point, and rising wages creates a demand for an expansion of the production of wage goods. In such conditions, no individual capital wants to miss out on the possibility of an increased market share, and so each capital is forced, by competition, to expand at a faster rate, even as the profit margin on this additional output is squeezed. Hence the demand for money-capital rises, at a time when the supply of money-capital is relatively constrained. In other words, the requirement to expand creates a demand for additional money-capital, but squeezed profits reduces the amount of new money-capital available from those realised profits. 

This is also the point that Marx makes in Capital III, examining the interest rate cycle, and its relation to real capital accumulation. In other words, as described previously, in the stagnation phase, the supply of money-capital exceeds the demand, causing interest rates to fall. In the succeeding prosperity phase (Spring Phase of the long wave) as economic activity rises, the higher rate of surplus value, and profit, established in the previous phase, enables this increased activity to be turned into much larger masses of profits, because the previously accumulated reserves of labour-power continue to be available so that wages do not rise rapidly. As Bob Sutcliffe points out that was the condition between 1945 and the early 1960's, and it is supplemented by bringing more women workers, and immigrants into the workforce. Although the demand for money-capital rises, as a result of increased activity, the increase in the mass of profits means that the supply of money-capital rises with it, so that although interest rates do not continue to fall, nor do they rise. 

Its when this prosperity phase transitions into the boom phase (Summer Phase of the long wave) that the demand for additional money-capital begins to outstrip the supply, because growth accelerates, whilst profits are squeezed, as wages begin to rise. That is what happened in 1962. The financial crash, as with the situation in 1847, 1857, and similarly with 2000, and 2008, was clearly not provoked by any underlying economic crisis. The economy in all these cases was growing at a rapid, and increasing pace, and profits were high. The financial crisis is provoked rather by a conjunctural shift, which results in a rise in interest rates, which thereby reverses the previous conditions whereby interest rates were falling, or low and flat, which had caused asset prices to be inflated. 

In fact, as I have written previously, there is a discernible 12-13 year cycle of financial crashes, which can be connected to these conjunctural shifts, with financial crashes in 1962, 1974, 1987. 2000. The crash of 2008 is an anomaly, therefore. The source of that anomaly, I suspect is attributable to the Greenspan Put. In other words, I suspect that the increasing resort to money printing by central banks, particularly in the US, and the reduction of official interest rates, as a means of increasing liquidity, so as to prevent asset price deflation, led to the kind of hyperinflation of asset prices that have been seen in the last 40 years. That caused the inflation of those asset prices to rise far more than would have been the case purely on the basis of a natural fall in interest rates driven by the factors described above. After the crash of 2000, and particularly following the effects on markets that followed shortly afterwards, as a result of 9/11, central banks deliberately increased liquidity, so as to reflate asset prices. Global economic growth increased significantly in the period after 1999, but for the reasons described earlier, by central banks diverting potential money-capital into speculation in assets, that global growth, and of profit, was actually less during that period than it would have been had all available savings flowed into real capital accumulation, rather than a large part of it flowing into speculation in stock, bond and property markets. 

It created the conditions that have been discussed extensively, and depicted, for example, in the film The Big Short, that meant that these asset price bubbles were inflated in a way that destabilised the financial system, and made them even more susceptible to any change in interest rates. Otherwise, real capital accumulation during that period would have been greater, creating a much larger mass of surplus value, available for distribution as profit, interest and rents, which would have more sustainably supported asset prices, especially asset prices that had not been so astronomically inflated, which led to ultra-low yields on those assets. Even the hint of higher interest rates in 2008, as wages started to rise, opening up, as in 1962, the potential of a squeeze on profits, was enough to cause asset prices to start to fall, and as asset prices began to fall, eventually, no amount of deceit about the condition of financial institutions, and the myriad of derivative financial products, could prevent the web from unravelling, and for credit to dry up, leading to the series of defaults that led to the financial meltdown of 2008. 

On the basis of previous cycles, it would not have been expected that accumulation would have proceeded sufficiently until around 2012-13, before that profits squeeze, and conjunctural shift in interest rates would have occurred. The actions of central banks in the preceding 20 years, brought forward the crash to 2008. But, the doubling down of that programme of injecting ever more liquidity, together with the programme of austerity to limit the extent of economic growth, and thereby limit the demand for money-capital, so as to keep interest rates low, has meant that, in reality, the conjunctural shift has merely been spread over a longer period. In the same way that the crash was brought forward from 2012-3 to 2008, so the completion of that crash has been pushed back to 2018/19. The coming crash will be simply the continuation, and culmination of the 2008 crash. This hiatus in the conjuncture is why I also now believe that the current phase of the long wave will be extended to 2030, from 2025, before the onset of the next crisis phase. 

Trump's Verbal Diarrhoea On Guns

Donald Trump has let rip with another blast of verbal shit.  His comments over the Florida school shooting illustrate that not only does he have shit for brains, but he simply can't stop that shit from pouring from his mouth like someone suffering from a bad case of verbal norovirus.

Trump's ridiculous answer to school shootings is to arm teachers!  A lot can be learned about the sewer that is Trump's brain from his comments.  Having explained the actions of the shooter, as being those of someone suffering mental health problems (as always seems to be the case when the terrorist is a white supremacist) Trump's response is not to consider the needs of such a person for the US state to provide its citizen's with adequate mental healthcare and support, but was that armed teachers could have "shot the hell out of him"!

If all the teachers had guns, Trump reasons, and the NRA make the same argument, no gunman entering a school would know who was going to be able to take them down.  Neither Trump nor the NRA seem to have considered what then happens if the gunman is themself a teacher, who might be suffering mental health problems, or just having a bad day, and so on.  Then, of course, such a teacher would find all the students sitting at their desks in the classroom easy targets like shooting fish in a barrel.  The only answer would clearly be that all of the school students, including those in the kindergarten would need to be equally heavily armed to protect themselves against rogue teachers, and students!

Its easy to laugh, because otherwise you would have to cry, at the lunacy of Trump and the conservatives in the US when it comes to guns, but liberals in the US and in Europe themselves on the basis of that lunacy have settled for easy and inadequate solutions to the question.  The fact, is that the US Second Amendment does give citizens the right to bear arms as part of a well regulated militia, and does so for very good reasons, given the revolutionary history of America as it fought to overthrow the monarchical rule of George III, and to defend their freedom and the Republic guns in hand.

I heard some liberals in recent days, talk about the fact that now is not 1776, and its not necessary for the citizenry to defend themselves against home invasions by the forces of the state.  Really?  Tell that to many of the black citizens of the US, and all those involved in the Black Lives Matter movement.  Moreover, given the number of neo-nazis, white supremacists, who are already armed to the teeth, if I was a worker in the US, I would also want to be able to fight back, and not rely on the forces of the US state, who time and again, have sided with the reactionaries.

And, that too is the answer to all those liberals who have tried to turn the argument into one about citizens only needing hand guns, rather than semi-automatic weapons.  The Second Amendment was not passed simply to allow US citizens to go on hunting trips, or to defend themselves against individuals; it was intended to allow them to defend themselves against a state tyranny.  It was designed, as with Engels argument in relation to Prussian Military Policy, that an armed populace can enforce its decisions, arrived at by universal suffrage.  As Engels puts it, universal military conscription is the necessary corollary of universal suffrage, for just that reason.

But, the whole point about Engels' argument, and a similar argument was put forward a century later by Trotsky is that the holding of such weapons is undertaken on precisely this organised, collective and democratic basis.  The wording of the Second Amendment includes precisely that point, that the right to bear arms is a right within the context of sustaining "a well regulated militia".  We should indeed adopt the idea of developing a well regulated militia, organised and run on democratic principles, with each community meeting, and acting to self-police and self-govern itself.  On that basis there is no reason for any citizen to be able to acquire arms outside the constraints set by the militia.  There is no basis for any citizen bearing arms outside their activities as part of such a militia, and on that basis anyone dealing in arms, or possessing arms outside those constraints could then be subject to the severest sanctions.

Theories of Surplus Value, Part II, Chapter 13 - Part 22

Ricardo criticises Smith for arguing that absolute rent is possible on agricultural land. In relation to Smith's analysis of rent on mines, Ricardo says,

““The whole principle of rent is here admirably and perspicuously explained, but every word is as applicable to land as it is to mines; yet he affirms that ‘it is otherwise in estates above ground…’” (l.c., p. 392).” (p 336) 

Smith, Marx says, senses that under certain conditions, landed property can come into play against capital to demand an absolute rent, but those conditions do not always exist,

“... that in particular however the production of food establishes the law of rent, whereas in other applications of capital to land, the rent is determined by the agricultural rent.” (p 336)

In his response to Smith, Ricardo comes close to providing a correct concept of rent. Suppose there was no land that did not produce rent, Ricardo says. In that case, he goes on, the rent of the worst land would be equal to the amount by which the “value” of the output exceeded the “the expenditure of capital and the ordinary profits of stock” (p 336), i.e. the price of production. Ricardo sets out the correct principle here, but his conclusions are wrong, because the terms he uses are ill-defined. So, for example, Ricardo believes that absolute rent is not possible because he believes that value and price of production are the same thing, as did Adam Smith. But, of course, as Marx has described, they are not. They vary according to the organic composition of capital, and the rate of turnover of capital.

Ricardo has then set out the principle that lies behind absolute rent, but rejected its possibility by defining value and price of production as identical. Ricardo then goes on to correctly identify that if an absolute rent existed, on this worst land, a differential rent would then arise on all superior lands, because for these lands, the excess would be greater than on the worst land.

But, there is a further error arising from Ricardo's failure to properly determine terms, in particular the differences between individual value and market value. If we take the output of the worst land, for example, its individual value might also be equal to the market value, which is the basis of the market price. In that case, it will determine the market price at which the output of all the different lands is sold. If the market value is say £100, the price of production of land type A is £100, B £90, C £80 and so on. For Ricardo then, A would produce no rent, whilst B would produce £10 of differential rent, and C £20.

But, it may be the case that the output of A does not determine the market value. It may instead be set by B. In that case, A and C would also sell their output for £90 not £100. In that case, A would make £10 less than the average profit, B would make average profit, and C would now produce only £10 of surplus profit rather than £20.

“For the actual amount of rent paid by the worst land depends not, as Ricardo thinks, on the excess of the value of its own produce over its cost-price, but on the excess of the market-value over its cost-price.” (p 337) 

Marx had described previously the situation where such conditions are created according to the actual relations of supply and demand. Ricardo, as with the marginalists, assumes diminishing returns. In other words, there is a presumption that existing production is taking place on the most favourable terms. It is a rise in demand that then calls forth additional supply, but in order to create this additional supply, resort must be had to less fertile soil etc. This assumption has been shown to be completely false. Marx has indicated the various reasons that agriculture, mining etc. may first take place on less favourable land, and which enables a movement to more favourable land, as demand rises, and additional capital can be employed. This is the basis also of the economies of scale. In the case of industry, as Marx points out, it is never the case that firms introduce less efficient, less profitable machines, or processes.

Monday, 26 February 2018

Its Not Inflation Driving Interest Rates Higher (7/10) - Accumulation and The Rate of Interest

Accumulation and The Rate of Interest 

The rate at which capital can accumulate, is determined by the capital that must be advanced, not by the capital that is laid out during the year. In other words, it is determined by the rate of turnover of the circulating capital, comprising the materials, labour-power, and wear and tear of fixed capital, because, having been advanced, once it turns over, as the output is sold, say after a month, this capital is available again to produce the output for the following month, and so on. No additional capital is required. The higher the level of productivity, and so of the rate of turnover, the less capital must be advanced to produce a given level of output, so a given mass of profit, will thereby accumulate a larger mass of capital to be advanced, and so lead to a larger increase in the mass of profit, and output it produces. 

In a period of stagnation, therefore, the mass of profit rises, and this rise in the mass of realised profits creates the additional money-capital available to be used either directly by each firm to accumulate capital, or else is deposited by each firm in the money markets, thereby becoming available to be loaned out at interest. The consequence is that the supply of loanable money-capital increases, whilst the demand for this money-capital increases more slowly, or even declines, because output increases only sluggishly, causing the demand for additional productive-capital to rise only slowly, and in the meantime, the rise in productivity causes the rate of turnover to rise so that proportionately less capital must be advanced to produce any given level of output, whilst the technological development means that physically less fixed capital is required for any given level of output (as one new machine replaces several older machines), whilst the unit value of materials falls, as do wages

The result is that during such times, the rate of interest falls to its lowest level. This fall in the rate of interest is also the basis, during such periods, of a rise in asset prices, because the price of revenue producing assets is the capitalised value of the revenue they produce. As interest rates fall, so capitalised values rise, because a lower rate of interest means that a larger capital value is required to produce any given amount of interest. So, it's no surprise that during the stagnation phase (1987-99) of the last long wave, we saw interest rates progressively decline, and during this phase, we also witnessed a phenomenal rise in asset prices with the Dow Jones rising 2300%, (between 1980-2000), or about 7 times the growth of US GDP, and property prices going through the roof across the globe. By comparison, in the period between 1950 and 1980, the Dow Jones rose by only about half the rise in US GDP.

Moreover, during the period identified by Glyn and Sutcliffe as corresponding to the profits squeeze as wages rose, and the rate of surplus value declined, the Dow Jones, actually fell in inflation adjusted terms. This illustrates Marx's point that the movement in the price of fictitious capital is governed by completely different laws to those that determine the movements in the real economy. 

Theories of Surplus Value, Part II, Chapter 13 - Part 21

Considering the capitalist farmer then who has this additional £1,000 of capital to invest, but who faces a lower than average rate of profit from its use on their existing land, what is he to do? As Marx says, he could use the £1,000 to lease additional land, but capitalist agriculture favours more intensive rather than extensive production.

“Moreover, if no land could be leased in the immediate vicinity of the old land, two farms would split up the farmer’s work of super-intending them to a much greater extent, than six factories would split up the work of one capitalist in manufacture.” (p 335)

Instead, the farmer could put the £1,000 on deposit in the bank, or use it to buy bonds or shares, so as to obtain interest on it.

“Then, from the outset, he forgoes at least a half or a third of the usual profit. Hence, if he can invest it as additional capital on the old farm, even below the average rate of profit, say at 10 per cent, if his profit was 12, then, he will still be gaining 100 per cent if the rate of interest is 5 per cent. To invest the additional £1,000 in the old farm is, therefore, still a profitable speculation for him.” (p 335) 

So, Marx says, its quite wrong for Ricardo to assume that the investment of this additional £1,000 of capital on the farmer's existing land is determined by the same considerations that determine the investment of capital on new land. The same might be said about incremental accumulations of circulating capital, and, in some conditions, fixed capital, for an industrial firm.

A manufacturer, faced with advancing a large amount of capital to establish a new factory, and all the attendant equipment etc. may only be prepared to do so if they have the prospect of obtaining, at least, the average rate of profit. If not, they might decide to use that capital to advance in some other line of production, where the average profit is obtainable. But, the same manufacturer may be prepared to advance a smaller amount of capital to make modifications to their existing factory, to obtain more space, to employ additional machines, or to invest in newer, more effective machines to replace existing equipment, even if this does not offer the average rate of profit. Similarly, they may be prepared, where possible, to use existing fixed capital more effectively, where it is underutilised, or where new working methods might be introduced, so as to accumulate additional circulating capital, again even though this additional capital does not produce the average profit.

“In the first case, the product does not have to yield the usual profit, even in capitalist production. It must only yield as much above the usual rate of interest as will make worth while the trouble and risk of the farmer to prefer the industrial employment of his spare capital to its employment as money capital.” (p 335)

The marginalist conclusion that Ricardo draws that the price of the commodity is regulated by the return on the marginal increment of capital for which there is no rent, is absurd Marx says, because Ricardo has just proved the opposite. It is rather the market price of the commodities produced on the land which regulates the application of additional capital. In other words, if those market prices are too low, insufficient profit may be generated to justify additional capital advances. But, the market price is not determined by the individual capital, which must accept it as a given.

“That profit is the only regulator for capitalist production is quite true. And it is therefore true that no absolute rent would exist if production were regulated solely by capital. It arises precisely at the point where the conditions of production enable the landowner to set up barriers against the exclusive regulation of production by capital.” (p 336) 

Sunday, 25 February 2018

Its Not Inflation Driving Interest Rates Higher (6/10) - The Profits Squeeze and Interest Rates

The Profits Squeeze and Interest Rates 

As Sutcliffe writes, by the time he wrote his book, in 1983, there was, 

“overwhelming evidence to show that that the decline in profitability, though uneven between capitalist nations, is a worldwide phenomenon.” (p 39) 


“In every major capitalist country there has been a pronounced decline in profitability since 1960, in many cases accelerating over the last decade. Some studies suggest that the USA has been an exception, though the most recent ones show it following the international trend. The cut in the rate of profit has been particularly pronounced in Britain, Italy and West Germany. In the advanced capitalist countries as a whole the profit rate in commerce and industry halved in the fifteen years after 1960.” (p 43) 

That continued most notably in Britain and France throughout the 1970's, as they experienced a prolonged period of crisis and increasingly stagflation. Moreover, as Sutcliffe explains the reason for this fall in the rate of profit was not the so called law of the tendency for the rate of profit to fall, but that which he and Andrew Glyn had described, which is the fall in the rate of surplus value. 

“To revert to the terminology of Marx, it would seem that the rate of exploitation has been falling; and that the organic composition of capital has risen, but not so strikingly.” (p 44) 

Moreover, as Marx describes at length in Theories of Surplus Value, what appears as a rise in the organic composition, can, in fact, only be a rise in its value composition.  In other words, it may not be that the technical composition rises, as a consequence of higher productivity via technological change, but only that the higher demand for raw materials also causes their prices to rise.  So, its not that more material is processed by a given amount of labour, but only that the higher demand for material causes its price to rise, in a similar way to the higher demand for labour-power causes wages to rise.  Marx discusses this process in Capital III, Chapter 6, and the fact that it is a feature of the phases of the cycle where capital accumulation proceeds more rapidly, but on the basis of extensive rather than intensive accumulation.  He describes there, how these spikes in raw material prices can also lead to crises, as the end product cannot be sold at prices that reproduce these inflated material prices.

In their 1976 book, “Relative Income Shares”, John King and Philip Regan note that although Glyn and Sutcliffe's conclusions can be criticised because they focus on wages and profits rather than taking into consideration the portion of surplus value that went to rent and other “property income”, even on this latter basis, the wage share in Britain rose from 73.4% in 1955-59 (itself up from 72.1% in 1950-54) to 75.6% in 1969-73. Property income fell correspondingly from 26.6% to 24.4%.  I'll describe later why King and Regan's objection, is in any case, largely not valid.

But, this difference in the cause of falling profits, i.e. due to a fall in the rate of surplus value, as opposed to a rise in the organic composition of capital is important, not only because in relation to Marx's theory of crisis, the former represents the basic conditions leading to crises of overproduction, whilst the latter represents the means by which capital resolves those crises, but also in relation to interest rates. In Capital III, Marx sets out the basis of the interest rate cycle, as it, in turn, relates to the cycle of capitalism through periods of stagnation, prosperity, boom, crisis, and back to stagnation. In the period of stagnation, capital concentrates on intensive accumulation. The new technologies developed as a result of the period of crisis, and labour shortages, begin to be introduced to replace labour and the old technology, not as a means of rapidly expanding output. Indeed, its that fact that leads to the character of the period as one of stagnation; production increases slowly, but as a result of the new technology does so without the need to increase the workforce by the same proportions as would previously have been the case, so the demand for wage goods from workers does not rise, so much, and may even fall, as the small increase in employment may be offset by the fall in wages per worker. Moreover, the new technologies reduce the value of the existing fixed capital stock, via moral depreciation, and the sluggish demand for inputs causes the prices of raw materials to fall, as well as the new technologies making available new types of materials, and creating efficiencies in the way raw and auxiliary materials are used. 

The consequence is that, as wages are pushed down, the rate of surplus value rises. But, because proportionately less labour is now employed to produce a given amount of output, the proportion of total output value represented by labour (paid and unpaid) falls, whilst the proportion accounted for by raw material rises. The rate of profit, i.e. the profit margin thereby falls, but because the mass of variable-capital laid out rises, even if only slowly, because the rate of surplus value rises, the mass of surplus value also rises. Moreover, this rise in productivity causes the rate of turnover of capital to rise, so that for any given level of output, less capital has to be advanced. That tendency is increased because, the unit value of the raw material also tends to fall, as a result of the rise in productivity. In addition, the new fixed capital introduced does so on the basis that one machine replaces several older machines, and the value of each new machine is less than that of the older machines it replaces. So, although the mass of laid-out capital rises, to produce this increased output, and the profit margin per unit of output falls, the mass of profit itself, rises, whilst the amount of capital advanced for its production tends to fall, which causes the annual rate of profit to rise. It is the annual rate of profit, not the rate of profit/profit margin that is the basis of the average rate of profit, and is also what is determinant for capital accumulation. 

Theories of Surplus Value, Part II, Chapter 13 - Part 20

Once a farmer has signed a lease, say for 14 years, landed property effectively ceases to exist for him. His rent is set for the next 14 years, and is, thereby, unaffected by what happens to agricultural prices, or the farmer's profit, or the average rate of profit. The farmer, seeing agricultural prices rise, will make larger profits, surplus profits, which the landlord cannot appropriate in rent. In fact, as Marx describes in Capital I, this was one means by which primary capital accumulation proceeded. Rents were set in money, fixed over long lease periods, and when the Americas and other parts of the globe were opened up, by Europeans, gold and silver flooded back into European markets. This increased supply of precious metals resulted in a fall in its exchange-value, and as money-commodities, this meant an inflation of commodity prices. The farmers continued to pay the landlords the same nominal money rents, whilst the money prices of all the agricultural products they sold rose, bringing about a rise in profits made by capitalist farmers. Similarly, the landlords, dependent on these fixed nominal money rents, found themselves paying rapidly rising prices, not only for agricultural commodities, but also for industrial commodities, thereby placing them in a squeeze.

The landlords were led to borrow to sustain their lifestyles, and then to sell land to cover these debts. That meant that capitalist farmers were able to buy up the lands they farmed, whilst industrial capitalists from the towns and cities were able to buy up land, in order to obtain a revenue from rents, as an alternative to using their loanable money-capital for the purchase of bonds and other securities. But, as I've described elsewhere, and particularly in relation to the discussion on rent in Capital III, the idea that capital is only invested if it returns at least the average profit, and the requirement to produce the average rate of profit regulates the rental, does not conform to reality. Marx makes precisely these points in the following section.

“In practice matters do not always work out in the Ricardian manner. If the farmer possesses some spare capital or acquires some during the first years of a lease of 14 years, he does not demand the usual profit, unless he has borrowed additional capital. For what is he to do with the spare capital?” (p 335)

As I've pointed out, with any industry there are those capitals that operate at a lower level of efficiency, and obtain lower than average profits, just as the opposite is true. Over time, the less profitable capitals in the sphere go out of business or get swallowed up as part of the process of concentration and centralisation proceeds. But, that is a process not an event. At any one time, this process will not change the fact that some capitals, in each sphere, return lower than average profits. Moreover, there will always be some small capitals that may be large enough to provide employment for their owner, but which would not produce sufficient revenue for the owner if used as loanable money-capital, producing interest or dividends. Even where used to provide employment for the owner, for example, as a shopkeeper, back street mechanic etc., not only may the rate of profit on this capital fall below the average, it may even effectively become negative, thereby eating into the wages of the employed labour, resulting in the self-employed labour enduring longer hours, and worse conditions than wage labour employed by larger more efficient capitals.

Particularly with this capital used to self-employ labour, whether it is some kind of small-scale peasant production, in agriculture, or that of some kind of artisan, the employment is constrained by their concrete labour. A mechanic who has sufficient capital to keep them self employed in such work, cannot, for example, use that capital to set themselves up in employment as a carpenter, just because the rate of profit in that sphere is higher.

Saturday, 24 February 2018

Theories of Surplus Value, Part II, Chapter 13 - Part 19

A farmer with a capital of £10,000, Marx says, first examines the market value of the output that will result from that investment. That market value is something that the farmer has to take as given. The various revenues, such as rent, profit and wages are a consequence not a cause of that value. In other words, the value that the farmer obtains from the sale of the output then resolves itself into the revenues that the farmer pays to the workers as wages, to the landlord as rent, and to themselves as profit. The farmer will only advance their capital, ultimately, if the value they obtain from the sale of their output is sufficient to cover what they have to pay their workers as wages, what they have to pay to cover the constant capital they have consumed in production, what they have to pay in rent, and still leaves sufficient for them to obtain the average profit. This is also the basis of Ricardo's argument in relation to the investment of the additional £1,000. However, in practice, Marx says, things are not that simple.

“If the farmer adds another £1,000, he only considers whether, at the given market-price, it yields him the usual profit. Ricardo therefore seems to think that the cost-price is the determining factor and that profit enters into this cost-price as a regulating element, but rent does not.” (p 333) 

Firstly, as set out above, profit is not a determining element of the price of production. Each capital has to take the average profit as given, which results from the action of capital on capital, via competition. The individual capitalists do not have some subjective notion of a minimum rate of profit below which they will not invest, as Ricardo is led to believe, because he has no objective basis for determining the average rate of profit. This is also a problem with all those theories of crisis that base themselves on the law of falling profits.

Unlike landed property, or interest-bearing capital, which has no objective spur to always lend greater amounts of land or money-capital, productive-capital is always forced to accumulate, because such accumulation is the only way for each capital to beat the competition, and those capitals that do not beat the competition are themselves beaten and die.

Even where additional investment leads to a lower rate of profit, therefore, industrial capitals are led to undertake such investment, in conditions where the market is expanding, because if they do not, their competitors will. As Marx says, if such investment leads to overproduction, each capital will not blame its own investment, but that of its competitors. Ricardo believes that,

“If the capitalist found that the £1,000 did not yield the usual profit, he would not invest it. The production of the additional food would not take place. If it were necessary for the additional demand, then the demand would have to raise the price, i.e., the market-price, until it yielded the profit. Thus profit—in contradistinction to rent—enters as a constituent element, not because it creates the value of the product, but because the product itself would not be created if its price did not rise high enough to pay the usual rate of profit as well as the capital expended. In this case, however, it is not necessary for it to rise so high as to pay rent. Hence, there exists an essential difference between rent and profit, and in a certain sense, it can be said that profit is a constituent element of price, whereas rent is not.” (p 334)

But, Marx says, this is only correct in this specific case, and it is only correct here, “because in this case landed property cannot confront capital as landed property, thus the very combination [of circumstances] under which rent, absolute rent, is formed, is not present—according to the assumption. The additional corn produced with the second investment of £1,000, provided the market-value remains the same, in other words when an additional demand arises only on the assumption that the price remains the same, must be sold below its value at the cost-price. This additional produce of the £1,000 thus occurs under the same circumstances as when new worse land is cultivated, which does not determine the market-value, but can provide the additional supply only on the condition that it supplies it at the previously existing market-value, i.e., at a price determined independently of this new production. (p 334)

In other words, this is a situation, as described previously, in relation to differential value. Existing supply cannot meet demand. A small additional amount of land, or in this case capital, expended on the worst existing land, provides the additional supply. Demand and supply are then in balance, at the existing market price. But, this market price is not sufficient to cover the absolute rent and average profit. For this additional land or capital, it is as though there is a negative differential rent. But, it is manifest in either a reduction, or as here, the negation of the absolute rent.

“Under these circumstances it depends entirely on the relative fertility of the additional soil whether it yields a rent precisely because it does not determine the market-value. It is just the same with the additional £1,000 on the old land. And for this very reason, Ricardo concludes conversely, that the additional land or the additional amount of capital determines the market-value because, with a given, quite independently determined market-value, the price of its product yields not rent, but only profit, and only covers the cost-price but not the value of the product. This is a contradiction in terms.” (p 334)

It is also, at heart, the basis of marginalist theories of value.

Northern Soul Classics - What's Wrong With Me Baby - The Invitations

Friday, 23 February 2018

Friday Night Disco - Jungle Boogie - Kool & The Gang

Theories of Surplus Value, Part II, Chapter 13 - Part 18

Marx gives a long quote from Ricardo (Principles, p 390-91), in which Ricardo discusses a situation where farmers face no rent, because prices only cover the price of production. A farmer, investing £10,000 will only invest an additional £1,000, he says, to meet additional demand, if he can be sure of prices at least able to cover this price of production. In the passage, Marx says, Ricardo admits that even the worst land can pay rent. For the additional £1,000 to be invested, and cover the price of production, grain prices must be rising. On this basis, Marx says, if prices initially covered the price of production, on the £10,000 capital, they must now exceed it, thereby producing a surplus profit on that £10,000. However, Marx says, the price must have risen, on Ricardo's argument, prior to the investment of the additional £1,000, so that the market value exceeded the price of production.

“In fact therefore before the second amount is invested the first amount of capital yields a rent on the worst land, because the market-value is above the cost-price. Thus the only question is whether, for this to happen, the market-value has to be above the value of the worst product, or whether on the contrary its value is above its cost-price, and the rise in price merely enables it to be sold at its value.” (p 332)

The reason that the price of production is sufficient to cover the advanced capital plus the average profit is precisely because of competition.

“That is, as a result of the action of capital upon capital.” (p 332)

If the prices are not high enough in one sphere, capital leaves it. Then supply falls and prices rise. The capital then settles in those spheres whose prices are higher than what is required to cover the price of production. Then those prices fall as this additional capital causes supply to rise. But, this cannot occur in agriculture precisely because of the existence of landed property. It is then not just a question of price being determined by competition, by the action of capital on capital, to produce an average rate of profit, and prices of production, but also of the action of landed property on capital.

“For it is precisely the competition of capitals amongst themselves, which enables the landlord to demand from the individual capitalist that he should be satisfied with “an average profit” and pay over to him the overplus of the value over the price affording this profit.” (p 332) 

In other words, when agricultural prices are high enough to produce surplus profits, over the average rate of profit, in industry, capital wants to obtain those surplus profits. Individual capitals thereby compete to be able to obtain access to land, and that competition enables the landlord to raise rents until that surplus profit is absorbed. As I have set out elsewhere, this also means that even if the organic composition of capital in agriculture/mining is higher than in industry, it is still possible to levy absolute rent, because there is no reason for the landlord to rent out their land for free. In that case, the absolute rent is derived not from an excess of the market value of the output over the price of production, but is the result of a monopoly price.

“If landed property gives the power to sell the product above its cost-price, at its value, why does it not equally well give the power to sell the product above its value, at an arbitrary monopoly price? On a small island, where there is no foreign trade in corn, the corn, food, like every other product, could unquestionably be sold at a monopoly price, that is, at a price only limited by the state of demand, i.e., of demand backed by ability to pay, and according to the price level of the product supplied the magnitude and extent of this effective demand can vary greatly.” (p 332) 

Such a closed, protected economy is an exception, though the Corn Laws attempted to create such conditions. Yet, even in an open economy, where foreign competition in agricultural prices would result in food imports, which undermined such monopoly prices, Marx says, land is frequently withdrawn artificially so as to cause rents, and land prices to rise.

“... even in England a large part of the fertile land is artificially withdrawn from agriculture and from the market in general, in order to raise the value of the other part—landed property can only affect and paralyse the action of capitals, their competition, in so far as the competition of capitals modifies the determination of the values of the commodities. The conversion of values into cost-prices is only the consequence and result of the development of capitalist production. Originally commodities are (on the average) sold at their values. Deviation from this is in agriculture prevented by landed property.” (p 333) 

Thursday, 22 February 2018

Its Not Inflation Driving Interest Rates Higher (5/10) - Wages and The Profits Squeeze

Wages and The Profits Squeeze 

But, as Marx points out, just because Smith is wrong in the longer term, that does not mean that these periods where labour-power is in short supply, causing a squeeze on profits, do not occur in the short and medium term. This is a normal part of the cycle of capital accumulation over the long wave. It's what leads to there being long periods where capital accumulation proceeds on an extensive basis of rolling out more of the existing technologies, followed by other periods of innovation, and the rolling out on an intensive basis of new technologies that replace the old technologies as well as replacing labour. Marx points to the period between 1849 to 1859, as such a period, for example, in agriculture, where wages rose due to labour shortages, which provoked capital to introduce a series of agricultural machines and innovations. 

Glyn and Sutcliffe pointed to a similar phenomenon in the 1960's, of rising wages leading to a squeeze on profits. As Bob Sutcliffe wrote, in his 1983 book, “Hard Times” 

“When some economists began to assert more than ten years ago that a long-term decline of profitability was taking place this fact was heavily contested. 

In the first place it was contested by pro-capitalist economists who wished to deny that any serious defect was showing up in the system they supported. But, secondly, it was also disputed by many socialists. The opposition to the idea came on the one hand from Marxists who had under the impact of the boom developed a semi-Keynesian view of the capitalist economy which led them to believe that it could no longer descend into deep crises characteristic of the pre-Keynesian era. Also opposition came from those whose view of socialism, revolutionary as it sometimes sounded, conceived of the anti-capitalist struggle as basically a moralistic one concerned above all with redistribution from the rich capitalists to the poor workers... 

As the weight of evidence for the fall in profitability mounted, however, the fact came to be more widely accepted apart from the few who preferred the interpretation that it was a capitalist deception to justify economic austerity to workers.” (p 38-9) 

But, this leads to the question of what caused this fall in the rate of profit. There, are in fact, two reasons why the rate of profit might fall, related, as Sutcliffe says, to two fundamental ratios, the rate of surplus value, and the organic composition of capital. The organic composition of capital is the relation of constant capital to variable capital. Because it is only variable-capital that produces surplus value, those capitals that have a high organic composition of capital will have a lower rate of profit, because the rate of profit relates the surplus value to the total capital constant and variable laid out to produce it. The rate of surplus value is the ratio of the surplus value only to the variable-capital. The rate of surplus value may be rising, therefore, whilst the rate of profit falls, and vice versa. In addition, the mass of surplus value produced is not only a function of the rate of surplus value, but also of the mass of labour employed. If the rate of surplus value is 100%, and 10 workers are employed each on wages of £10, the mass of surplus value is £100, but if the number of workers employed rises from 10 to 20, and this increased demand for labour-power leads to a rise in wages to £12, so that the rate of surplus value falls to 66.6%, with each worker now producing only £8 of surplus value, that does not stop the mass of surplus value rising from £100 to £160, a rise of 60%! A failure to understand these differences was what led Ricardo and his followers into a dead end.  As I'll show later, its also what leads current financial pundits into error over rising corporate earnings.

From what has been said earlier, its clear that, at times, the rate of profit can fall because existing technologies are rolled out more extensively, more workers are employed, which causes existing labour supplies to be used up, and thereby for wages to rise squeezing profits, whilst, at other times, in response to this squeeze on profits, capital introduces waves of new labour-saving technology, which removes this limitation of labour supplies, and pushes down wages, raising the rate of surplus value, but which, by raising the level of productivity also thereby raises the organic composition of capital, which in turn causes the rate of profit to fall. It was not the law of the tendency of the rate of profit to fall that causes crises of overproduction, but the overproduction of capital that leads to the excess demand for labour-power, which causes wages to rise, which causes profits to be squeezed, and the rate of profit to fall!  Sutcliffe points out, 

“This is often combined with an implicit suggestion that Marxist theory of economic crisis is basically an extension of what Marx called the law of the tendency of the rate of profit to fall. This is the opposite way round from what Marx himself intended.” (p 42) 

Rather than it being that law which was the basis for the fall in profits of the 1960's, and 70's, which in turn led to the repeated crises of overproduction manifest throughout the 1970's and early 1980's, the falling rate of profit was the result of rising wages. Sutcliffe says, 

“There is very powerful evidence to support the idea that once the vast pool of unemployed and underemployed labour after the war was used up by the major capitalist economies, the low level of the reserve army of labour strengthened the bargaining position of trades unions on wages and other questions to a degree which was unacceptable to the capitalist class and which threatened further profitable accumulation.” (ibid) 

Trades unions, particularly organising large concentrations of workers in the largest enterprises, facilitate this process, but as Engels points out, 

“The history of these Unions is a long series of defeats of the working-men, interrupted by a few isolated victories. All these efforts naturally cannot alter the economic law according to which wages are determined by the relation between supply and demand in the labour market. Hence the Unions remain powerless against all great forces which influence this relation. In a commercial crisis the Union itself must reduce wages or dissolve wholly; and in a time of considerable increase in the demand for labour, it cannot fix the rate of wages higher than would be reached spontaneously by the competition of the capitalists among themselves.” 

Theories of Surplus Value, Part II, Chapter 13 - Part 17

[5. Ricardo’s Criticism of Adam Smith’s and Malthus’s Views on Rent]

Chapter XXIV of Ricardo's “Principles” is, Marx says,

“...of great importance for the difference between Ricardo and Adam Smith.” (p 330)

Ricardo quotes Adam Smith's correct understanding of when agricultural prices result in rent. However, Marx points out, Smith, unlike Ricardo, believed that land used for food production always produces rent.

Marx quotes a passage from Ricardo which is significant because it highlights a number of errors in his theory.

““I believe that as yet in every country, from the rudest to the most refined, there is land of such a quality that it cannot yield a produce more than sufficiently valuable to replace the stock employed upon it, together with the profits ordinary and usual in that country. In America we all know that is the case, and yet no one maintains that the principles which regulate rent, are different in that country and in Europe” (l.c., pp. 389-90).” (p 330) 

Marx points out that the principles are substantially different in the US, where no monopoly of landed property existed, and Europe where it did.

“Where no landed property exists—actual or legal—no absolute rent can exist. It is absolute rent, not differential rent, which is the adequate expression of landed property. To say that the same principles regulate rent, where landed property exists and where it does not exist, means that the economic form of landed property is independent of whether landed property exists or not.” (p 330-1) 

Ricardo's statement about the existence of land unable to produce output “more than sufficiently valuable to replace the stock employed upon it, together with the profits”, is also confused. The value of the output is a function of the labour expended. What changes is the quantity of use values that make up the output, and, consequently, the value of each unit of output. But, whether a rent is paid depends upon the existence of surplus profit, which requires that this value exceeds the price of production for this output. That in turn depends upon the price of production of all other commodities, which determines the average rate of profit.

If the value of cotton produced with £1,000 of capital is £1200, the actual rate of profit for this capital is 20%. Then, if the average value of commodities produced, in total, in industry, is, with £1,000 of capital, £1,100, the general rate of profit is 10%, so that the agricultural capital enjoys a 10% surplus profit, which produces rent. But, if the value of all other commodities is £1200, so that the general rate of profit is 20%, there is no surplus profit, in agriculture, and no basis for absolute rent.