So, taking land as an asset whose price has been inflated, as a result of liquidity that has flowed into it speculatively, out of the real economy, how could this liquidity flow back into the real economy, as land prices fell? Firstly, we could take Marx's example of the farmer who finds that they, now only have to pay £1 million for land, rather than £2 million.
From their perspective, they had a £1 million release of capital, which can now be used for additional capital accumulation, and all of that capital accumulation itself feeds into the real economy, also producing surplus value, and, thereby, making possible further capital accumulation and an expansion of the economy, employment and so on. It should be noted that this also contradicts the notions concerning the so called wealth effect, whereby, rising asset prices cause households to feel “wealthier”, and so spend more, the converse of which also underpins the Federal Reserve's current thinking that moderately falling asset prices, will create a moderate negative wealth effect, causing households to slow spending, which the Fed hopes will cause inflation to fall – a hope that is forlorn on so many counts.
Its only in the conditions of inflating asset prices, as discussed earlier, where this does not happen. In other words, the farmer does not, now, use the released capital to buy additional land, speculatively, in the expectation of a capital gain from higher land prices. They would only buy additional land if it was necessary for increased production, but, in the expectation of further falls in land prices, they would tend to delay that purchase, and instead attempt to cultivate their existing land more intensively, thereby, employing more capital on it to obtain higher levels of output. That, in itself, would further depress land prices. This is a significant difference between behaviour driven by the logic of real capital, and the production of surplus value, as against behaviour driven by the logic of fictitious capital, and speculation to produce capital gains.
What drives the rent/price of this agricultural land higher, as Marx sets out, is, in fact, the ability of the landlord to sit on it, or rent it/sell it for other purposes. The ability to extract rent depends upon the ability to obtain surplus profits from the use of the land, which depends upon the market prices of the commodities produced using the land. The prices of agricultural products may not be high enough to produce such surplus profits (especially if those prices are depressed by cheap imports of food), but, if the available land is not cultivated, or is used for, say, cattle rearing, grouse moors, or, indeed, house building, the prices that can be charged for these commodities may indeed, produce surplus profits, and so rent. By making this land unavailable for agricultural production, it reduces the level of agricultural output, and so as supply is reduced, relative to demand, the market prices of agricultural products, themselves, rise to a level at which, surplus profits exist, and so make possible the payment of absolute rent, without which the landlord would not make the land available to farmers. This is the pernicious role that rent plays in preventing the fall in food prices, Marx explains.
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