Thursday, 1 February 2018

Theories of Surplus Value, Part II, Chapter 12 - Part 34

If, rather than starting from land type IV, as Ricardo does, we start from I, the least fertile land, its clear that if land type II is introduced alongside it, that can only be possible, because this new land cannot, on its own, satisfy the demand. If demand is 100 units, and is currently satisfied by land I, and then land II enters production, it can only replace land I if it can itself meet the demand for 100 units. If II is only capable of supplying 50 units, it will push out some of the supply from I, but I will still be needed to produce 50 units of output, in addition to the 50 produced by II, so that the 100 units of demand can be satisfied. The capital employed in producing these 50 units on I will then still need to receive the average rate of profit, after having paid the absolute rent. It will be the value of output from I, which will then still determine the unit price for this sphere.

The capital employed on II will then now also sell at the same market value. But, its individual value of output will be lower than that on I. Consequently, after it has paid the absolute rent, it will not just produce the average profit, but also a surplus profit, thereby giving rise to differential rent, for the use of land II as opposed to land I.

There are a number of variations possible, as Marx's tables demonstrate. For example, there may be a shift in the demand curve to the right, so that demand rises at all prices. So, if the market value was £1 per unit, and now demand rises to 150 units at this price, land II supplies 50 units, but, all of land I has to now stay in production, to supply the other 100 units of demand.

Considered from a movement from IV to I, the situation is as follows. If the demand is currently 92.5 tons, and is satisfied by IV, then a rise in demand that cannot be met by IV provides the basis for III to enter production. But, will it? Marx says it will only actually enter production if the deficiency in supply causes the market price to rise to a level equal to the individual value of III, where it makes the average rate of profit. The output from III is 75 tons, but Marx says.

“For the price of IV to rise to £ 1 12s., the individual value of III, the demand would not have to rise by 75 tons. This applies especially to the dominant agricultural product, where an insufficiency in supply will bring about a much greater rise in price than corresponds to the arithmetical deficiency in supply. But if IV had risen to £1 12s., then at this market-value, which is equal to III’s individual value, the latter would pay the absolute rent and IV a differential rent. If there is any additional demand at all, III can sell at its individual value, since it would then dominate the market-value and there would be no reason at all for the landowner to forgo the rent.” (p 304) 

In other words, if demand rises from 92.5 tons to say 120 tons, IV cannot meet the additional demand of 27.5 tons. This additional demand is less than the potential 75 tons of additional supply that III could provide. If III produced to its full potential, there would be an oversupply of 47.5 tons, which would suppress the price. However, there is no necessary reason that III would produce up to its full potential. It may only invest sufficient capital as required to produce the 27.5 tons. Whether this is possible depends on the specific circumstances. For example, if demand rises only from 92.5 tons to 95 tons, demand would exceed supply, but it probably would not be worth capital being invested on III to make up this small difference. As set out in Capital I, production must be undertaken on a minimum scale. Where a large quantity of fixed capital might be a precondition for production – as may be the case with modern mining, oil production, and agriculture – those investments would not be profitable simply to produce small quantities of output, even at high market prices.

In that case, the market price would continue to exceed the market value, and surplus profits would continue, which is a similar condition to that Marx described in relation to monopoly.

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