## Thursday, 8 February 2018

### Theories of Surplus Value, Part II, Chapter 13 - Part 4

If Region A is settled and cultivated, the colonists will seek out the most fertile land in that region. No rent will arise, because settlers will cultivate freely available land. Only at the point where all of the most fertile land, in this region, is being cultivated, and where additional cultivation must move on to less fertile land would differential rent arise.

It may not be that this differential rent means an actual payment of rent by a tenant. If 1,000 ha. of land type I becomes settled and cultivated, the colonists are owners of this land. If 1,000 ha. of land type II is then cultivated, a surplus profit on I arises, because II determines the market value. The differential rent exists in this economic sense of a surplus profit. The farmer, as land owner, pockets this rent themselves as surplus profit. It may result in an actual payment of rent, if, for example, a farmer decided that it is beneficial to actually lease a portion of land I from an existing owner of that land, rather than cultivate an area of rent free land II.

Suppose an area of land exists in Region B, whose fertility is greater than that of land type I in Region A. We might call this land I'. It will not have been cultivated first because its superior fertility was more than offset by its less advantageous location. If this land begins to be cultivated, whether a rent exists on AI then depends on whether the locational disadvantages of B continues to outweigh the advantage of the higher fertility of land I'. In Capital II, Marx argues that transport costs add to the value of commodities, because it is only when the commodity is in the market that it is actually available for purchase and consumption.

Suppose Region B is 200 miles away from the main markets in Region A. The cost of transporting wheat from Region B to A is £10 per tonne. In Region B, £1,000 of capital produces 100 tonnes of wheat. The wheat has an individual value of £20,000, or £200 per tonne. In Region A, £1,000 of capital produces 50 tonnes of wheat, with an individual value of £20,000, which is equal to £400 per tonne. Even allowing for the £10 per tonne cost of transporting B wheat to A, therefore, B wheat would undercut A wheat. If A's wheat continued to be needed, alongside B's wheat, A would determine the market value at £400 per tonne. Producers in B would sell their wheat in A's market at £400 per tonne, and after covering the transport cost of £10 per tonne, would then make a surplus profit of £190 per tonne, which would constitute differential rent.

I argued that Marx's argument in Capital II was wrong, and that what consumers were buying was two commodities, a) the actual commodity, and b) the transport of that commodity. The situation above would seem to support Marx's argument, but I think further consideration shows that it does not. The line of argument that would support Marx's argument would be this. Suppose that B's production is necessary, but that, instead of £1,000 of capital producing 100 tonnes of wheat it only produces 50 tonnes, the same as in A. In that case, the value per tonne would be £400. But, in order for consumers to buy this wheat they must also pay for the transport cost of £10 per tonne. The market value would then be £410 per tonne. Producers in A would then sell their wheat also at £410 per tonne, creating a surplus profit/rent of £10 per tonne.

The market value of wheat, here, of £410 per tonne, which gives rise to the rent of £10 per tonne, includes the £10 per tonne cost of transporting wheat to Region A's markets, and this would then seem to confirm Marx's argument. However, I still believe this is wrong. Suppose, as above, A and B produce wheat with an individual value of £400 per tonne, but that now A can sell all its output in its own region, and the same for B. In that case, the market value of wheat will be £400 per tonne. If B wants to break into A's market, they will have to cover the £10 per tonne cost of transport out of their own profit, and the same applies were A to try to break into B's market.

In the same way, if a consumer in Region A wanted to buy several tonnes of B wheat rather than A wheat, they would negotiate that sale with a producer in B, who would sell at £400 per tonne, and would then negotiate with a transport company to ship that wheat at a cost of £10 per tonne. The fact that this consumer had thereby paid a total of £410 per tonne would not change the fact that the market value of wheat, sold in the markets of A and B remains £400 per tonne. In other words, it would remain the case that the market value of wheat was £400 per tonne, and that the only question would be whether, in the particular case, the additional commodity – transport – was bought by the producer or the consumer.

“But the “situation” is a circumstance which changes historically, according to the economic development, and must continually improve with the installation of means of communication, the building of towns, etc., and the growth of the population. Hence it is clear that by and by, the product produced in region II will be brought on to the market at a price which will lower the rent in region I again (for the same product), and that in time it will emerge as the more fertile soil in the measure in which the disadvantage of situation disappears.” (p 312-3)

If Region B's output is required, in addition to that of A, to meet the demand in A, then, if the value of B's production, plus the value of transport of the commodity from B to A, is higher than that of A, B will determine the market value. In that case, producers in A will obtain rent. If the cost of transport falls, as happened with the opening up of the St. Lawrence seaway, or the construction of the transcontinental railway, that will reduce the market value, and potential for rent of producers in A.

Similarly, as the settlement of region B proceeds, and its population and markets grow, producers in B are able to sell their output in B, rather than having to ship it to A. If the value of production in B is £400 per tonne, consumers in B will not agree to pay the £410 per tonne, the market value in A. including the £10 per tonne cost of transport. Competition amongst B producers will force the market value, in B, down to £400 per tonne, because by selling to B consumers, they will not have to bear the £10 per tonne transport cost.

There are other situations that Marx describes, in Capital III, where the progression is from less fertile to more fertile land, rather than vice versa, as Ricardo assumes. Some land may be more fertile, but requires the investment of large amounts of fixed capital for drainage or conversely for irrigation, before it can be cultivated; some land will require clearing before it can be used; some land may become more fertile as a result of progressive cultivation and the use of fertilisers; some land may become more fertile as newer technologies are developed that facilitate the turning over of deeper soil layers etc.

Ricardo's assumption is also simply historically wrong, when it comes to the progression of agriculture in the United States, which led to the criticism levelled by Carey. Ricardo, sensing a problem, with the formulation reverses out of it partially, by adding in the further qualification about “most favourably situated”, but his formulation tends to conflate the two conditions. The most favourably situated land may well not be the most fertile, and vice versa.

“Ricardo proves his arbitrary presupposition by an example in which that which is to be proved, is postulated, namely, the transition from the best to increasingly worse land,

that, finally (it is true, already with an eye to the explanation of the tendency of the general rate of profit to fall) he presupposes this, because he could not otherwise account for differential rent, although the latter in no way depends on whether there is a transition from I to II, III, IV or from IV to III, II, I.” (p 313)

Ricardo, like Malthus and other catastrophists, has a theory of crisis based on a law of a falling rate of profit, and this falling rate of profit is itself premised on some variety of diminishing returns. For Ricardo, as industry and population expands, the demand for agricultural production expands, but this means having to introduce less fertile land – the same applies to mining etc. - so that productivity declines. The consequence is that food prices rise, wages rise to cover it, and that causes a squeeze on profits. The same process causes raw material prices to rise, and with it rents, which also squeezes profits. Ricardo feared that, at a certain point, this process of the squeeze on profits leads to a crisis, and when profits are squeezed even further, the system itself must collapse. Marx sets out later why this theory is wrong.