Marx then deals with Smith's views on house rent. As with the previous comment about rent in a legal sense, as opposed to an economic sense, its necessary to distinguish, in house rent, between what is actually rent, relating to the land on which the house stands, and what is the builder's profit, and what is interest on the loan of money-capital. Smith writes,
““Whatever part of the whole rent of a house is over and above what is sufficient for affording this reasonable profit” (to the builder) “naturally goes to the ground-rent; and where the owner of the ground, and the owner of the building, are two different persons, it is in most cases, completely paid to the former. In country houses, at a distance from any great town, where there is a plentiful choice of ground, the ground-rent is scarcely any thing, or no more than what the space upon which the house stands, would pay employed in agriculture.” (Book V, Chapter II.)” (p 365)
At the time Marx was writing, and even more when Smith was writing, the large majority of houses were privately rented. It was quite common for landlords to retain ownership of the land on which houses were built, on the basis of a 99 year leasehold. Builders could then build houses on this land, and would expect to make the average profit on the capital advanced for that purpose. If the builder sold the house, they would sell it at this price of production, and thereby realise this profit. The buyer would, however, have to pay a rent to the landowner as a result of the house being a leasehold, rather than freehold property. This is something that recent homebuyers have come to realise, as builders have started again selling houses on a leasehold basis, rather than freehold, so as to keep the listed market price for the house lower than it otherwise would have been. Moreover, because the property is sold leasehold, at the expiry of the lease, the landowner takes back ownership of the land, and any property that has been built on it.
If the builder only built the house to rent out, the house rent actually comprises both rent and interest. The rent consists of the ground-rent for the land the house sits on, but the builder, by renting out the house, rather than selling it, has a quantity of capital-value tied up in the property. If the house has a value of £1,000, the builder has £1,000 of capital-value tied up in this form. They would expect to obtain the average rate of interest on it. The house-rent would then actually comprise the ground-rent paid to the landowner, and the amount of interest paid to the builder.
There are a number of variations. The builder might buy the land from the landowner, in which case the price of the land would be equal to the capitalised value of the ground-rent. The builder might then sell the house freehold, realising, thereby, the capitalised ground-rent, plus their profit on the capital employed in building the house. They might sell the house leasehold, thereby realising their profit, but also receiving an annual revenue of ground-rent, or they might sell the house to the landowner, when then rents it to tenants etc.
“In the case of the ground-rent of houses, situation constitutes just as decisive a factor for the differential rent, as fertility (and situation) in the case of agricultural rent.” (p 365)
It was seen earlier that the Physiocrats saw agricultural production as the only kind of productive labour, and that this led them to argue that taxes should be levied on rents and land rather than on profits and industry, so as to reduce the price of industrial commodities. Smith shares this view, writing,
““Both ground-rents, and the ordinary rent of land, are a species of revenue, which the owner in many cases enjoys, without any care or attention of his own. Though a part of this revenue should be taken from him, in order to defray the expenses of the State, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps, the species of revenue, which can best bear to have a peculiar tax imposed upon them” (Book V, Ch. II).” (p 365-6)
Ricardo's considerations, raised against Smith, on the subject, Marx says, are “very philistine”.
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