On the basis of the existence of landed property, therefore, then, contrary to Ricardo, there will be absolute rent. The owner of land will not allow its use, unless such an absolute rent is paid. Part of the reason for Ricardo's belief that there is no absolute rent is his assumption that production must always commence on the most fertile land. It only proceeds to less fertile land when there is no more of the more fertile land available for cultivation. This assumption of diminishing returns also lies behind the erroneous theory of a falling rate of profit put forward by Ricardo, Malthus and others. Marx demolishes those theories in subsequent chapters.
As soon as the assumption of the non-existence of landed property is dropped, then the existence of absolute rent must follow. There is no reason why the owner of land will allow its use without the payment of such rent, any more than the owner of money-capital will allow its use without the payment of interest.
Marx argues that, so long as the organic composition of capital is lower in agriculture than industry, the basis of the absolute rent exists. However, I believe this is wrong too, or at least the economic basis of absolute rent becomes a monopoly price, which creates surplus profits. Suppose the average rate of profit is 10%, and the average composition of capital is 50:50, but, in agriculture is 60:40. On this basis, the rate of surplus value is 20%. In industry, we have c 50 + v 50 + s 10, and in agriculture c 60 + v 40 + s 8. The rate of profit in agriculture would then be 8%, leading to capital migrating to industry. The supply of industrial commodities would rise, and their prices would fall, reducing the rate of profit, and agricultural prices would rise, raising the rate of profit. Marx's argument is that the absolute rent is payable due to agricultural commodities selling at their exchange-value, rather than their price of production.
If the organic composition of capital is higher than the average, the price of production, as here, will be higher than the value, and so there is no surplus profit from which to pay the absolute rent. But, for the reasons Marx also sets out, its clear why this argument does not hold. Marx later goes on to explain that, although absolute rent does not contribute to the value of commodities, it does cause the price of agricultural commodities to be higher than they would have been. The reason is that capital will only enter production if it is able not just to obtain the average rate of profit, but also to cover the absolute rent demanded by the landlord. Suppose wheat sells for £1 per kilo, that £0.80 of capital is employed to produce it, and the rate of profit is 25%. The farmer could then make the average profit on their capital. However, if the landlord demands £0.10 per kilo of absolute rent, the farmer will not make the average profit, and so will not enter production. Only if the price of wheat rises to £1.10 per kilo will the farmer be able to enter production, pay the absolute rent, and still make the average profit.
The existence of absolute rent, therefore, caused the price of wheat to be £1.10 rather than £1 per kilo, because without the price rising to that level, the farmer would not engage in production. But, this remains true whatever the organic composition of the agricultural capital. Taken, at the extreme here, if no agricultural production took place, the price of agricultural commodities would rise uncontrollably. Any farmer would be able to make huge profits on any production they undertook. The market price of agricultural commodities would rise, not just above their price of production, but above their value, as a consequence of supply substantially failing to meet demand.
Suppose that the landowner demands £0.20 per kilo as absolute rent. In the example, above, provided the price of wheat is at least £1.20 per kilo, the farmer will will be able to pay this absolute rent, and still make the average 25% rate of profit, on the capital they have advanced. All that is required here, again, is that the existence of the absolute rent restricts supply sufficiently, so that it only meets demand at this higher price.
“But in this case also the transitions from one type of land to another—be it ascending: I, II, III, IV or descending IV, III, II, I—work out differently than they did under Ricardo’s assumption. For the employment of capital meets with the resistance of landed property both in category I and in II, III, IV; and similarly, in the reverse process, when the transition is from IV to III etc. In the transition from IV to III etc., it is not sufficient for the price of IV to rise high enough to enable the capital to be employed in III with an average profit. The price must rise to such an extent that rent can be paid on III. If the transition is made from I to II etc., then it is self-evident that the price which paid a rent for I, must not only pay this rent for II, but a differential rent besides. By postulating the non-existence of landed property, Ricardo has not, of course, eliminated the law that arises with the existence and from the existence of landed property.” (p 310)
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