Rent Theory

A New Contribution to an Old Debate: the Case of Marxian Theory of Value and Ground Rent

 

I. INTRODUCTION

Whenever limited use-values–whether they are commodities or not– are monopolized by certain persons, the use of these monopoly objects by other than their proprietors requires a tribute payment for the right of their use which can generally be called rent. Accordingly, the basis of the (absolute) ground-rent is the monopoly landed property, and the rent itself is a tribute exacted by the landlord (from the source of surplus-value) for making the land at all accessible to cultivation. This is a common element which applies to all forms of rent: rent in feudalism, in slave society, in Asiatic society or in capitalism.

This common element in various forms of rent–namely, that of being economic realization of landed property–was not the focus of Marx’s analysis of ground rent. It was rather the investigation of the form of rent which is taken under the capitalist mode of production that he set himself the task of analyzing. However, as Matthew Edel has pointed out, this task for Marx was “less critical than grasping the contradiction between capital and labor, and the extraction of surplus value in the sale and use of labor power. He discussed rent as a secondary issue, more for the purpose of elucidating problems in the labor theory of value than for the sake of analyzing strategies for labor’s relations to landlords” ( Edel, 1977, p. 5).

Marx takes the case of capitalist agriculture restricted by non-capitalist private ownership of land. It is only within this historical framework where we have all three classes–agricultural wage-laborers, capitalist-tenant farmers, and landowners–that Marx’s theory of capitalist rent (as surplus over average profit on capital) is meaningful. For if land is privately owned but it is not leased out (e.g., small farming or early colonial farming where the land was relatively unlimited for cultivation), there will be no rent. Lenin, in his elaboration of Marx’s theory of rent, explained this point in the following words:

 

Of course, the existence of small landed property, or, more correctly, of small farming, introduces certain changes in the general proposition of the theory of capitalist rent, but it does not destroy that theory. For example Marx points out that the absolute rent as such does not usually exist under small farming, which is carried out mainly to meet the needs of the farmer himself. But the more commonly production develops, the more all the propositions of economic theory become applicable to peasant farming also, since it has come under the conditions of the capitalist world (Lenin, 1960-64, p. 317).

 

Abstracting from small-scale peasant production, Marx’s theory distinguishes two forms of capitalist rent: differential rent and absolute rent.

 

II. DIFFERENTIAL RENT

Differential rent springs from the limited nature and particular character of land as a condition of capitalist farming. The limited nature of land, of course, simply means that its area is naturally limited and that in every country there is a certain amount of good, average and poor land. The particular character of land as a capitalist farming condition arises from the fact that it differs from other means of production in that it is not the product of labor and therefore cannot be increased at will. In manufacturing industry, whenever a superior technique is introduced, its innovator enjoys only a temporary super profit. For this superior technique will sooner or later become a universal technique and the concomitant super profit will disappear.

But in agriculture neither the limited quantity of the rich land (compared with the superior technique in industry) can at all be increased, nor can its quality be sufficiently increased so as to meet the social demand. For the essence of monopoly of the land as the object of capitalist farming is that the other capitalists cannot enter this sector of production unhindered by creating an unlimited number of new agricultural undertakings on rich or average land.[1]  They can only draw poor, as yet uncultivated land into production. Capitalists will invest in the cultivation of such land only if the prices of agricultural products make it possible for them to cover production costs and receive average profits. Since, however, identical commodities are sold all at the same price on the market, the prices of products from the poorest land also apply to products produced on average and rich land.

The social price of production of agricultural products, therefore, unlike the products of the manufacturing industry, is determined not by average conditions of production, but by the conditions of production on the poorest cultivated land. If agricultural products were sold at the prices of production on the average land, the capital invested in poor land would not bring in an average profit to the capitalists and its cultivation would become impossible. But such a situation would lead to a shortage of agricultural produce and a rise in prices. This makes it profitable to cultivate the poor land as well.

Differential rent differs with differential profit on three major ground: (a) it is not a temporary but a constant phenomenon; (b) it is appropriated not by the capitalist but by the landlord; and (c) it is formed not on the basis of average production conditions, but on the basis of the poorest ones. But differential rent and differential profit are similar in two respects: (a) they are both pre-conditioned by the existence of an average profitability (i.e., by the dominance of capitalist economy); and (b) they are both based on a difference; in the case of rent this is either a difference in location relative to market, or a difference in fertility, natural fertility or fertility resulting from capital investment in land.

In essence, the causes  of the formation of differential rent are first, the limited nature of land, and second, its occupation by capitalist economies, quite irrespective of whether private ownership of land exists, or what the form of land ownership is.[2] The ownership of land only causes it to be transferred from the capitalist tenant-farmer to the landowner.

 

But differential rent presupposes the existence of a monopoly in landownership, landed property as a limitation to capital, for without it surplus profit would not be transformed into ground rent nor fall to the share of the landlord instead of the farmer….Differential rent has the peculiarity that landed property here merely intercepts the surplus-profit which would otherwise flow into the pocket of the farmer, and which the latter may actually pocket under certain circumstances during the period of his lease. Landed property is here merely the cause for transferring  a portion of the commodity price which arises without the property having anything to do with it…from the capitalist to the landlord. But landed property is not the cause  which creates this portion of the price, or the rise in price upon which this portion of the price is premised (Marx, 1967, pp. 751-55).

 

Marx’s treatment of differential rent differs from that of Ricardo in that it relates rent more clearly to scientific and technological progress than to progressive deterioration of soil fertility (i.e., more to the social fertility of the land than to its natural fertility): “Fertility, although an objective property of the soil, always implies an economic relation, a relation to the existing chemical and mechanical level of development in agriculture, and therefore changes with this level of development” (Ibid., p. 636).

Ricardo’s prime concern in attributing differential rent to constant diminishing returns of the soil was the support of his labor theory of value, and the explanation of the phenomenon of the falling rate of profit in conformity with this theory. In order to defend his labor theory of value, he was forced to claim that no rent is paid on marginal land (because if there were rent from the marginal land, it would mean that agricultural products were constantly being sold at prices above their values, i.e., in violation of his labor theory of value).[3]  Rent only accrued to soils with higher fertilities: it was only differential rent. And, as such, it did not contribute to agricultural price formation: “Corn is not high because a rent is paid, but a rent is paid because corn is high.”

Because Ricardo confused the two composing elements of capital (i.e., constant and variable capital), he could not explain the phenomenon of the falling rate of profit in terms of these internal elements of capitalist development. Therefore, in order to explain this phenomenon in conformity with his labor theory of value, he appealed to external elements like population and nature (i.e., fertility of the soil). He argued that the rising demand for higher agricultural output as a result of population growth brings about the need for cultivation of poorer and poorer kinds of land, or the application of further capital to the already cultivated land. But neither the poorer and poorer land resorted to nor the same amount of capital applied successively to the same land yields the same produce. In other words, the soil deteriorates in the same measure that the population is obliged to demand from it. This diminishing fertility of the soil lowers agricultural labor productivity, raising the price of its products, thereby providing the source of the rent. But, since the rent is a deduction from value produced elsewhere in the economy, therefore, given the wages, an increase in rent would imply a decrease in profit.

Against this theory of Ricardo, Marx wrote:

 

The main point in all this is to square the law of rent with the progress of the fertility of agriculture in general…Relatively the one piece of land remains just as infertile compared with the other as before. But the general fertility has increased…This would on the one hand make it possible to explain the historical facts and on the other hand it would put an end to Malthus’ theory of the deterioration not only of the “hands” but also of the land (Marx-Engels, 1975, pp. 48-49).

 

It was on the basis of this fact (i.e., the fact that the general fertility of the soil increases as society develops), that Marx made the following points against Ricardo’s theory:

a) rent can increase without requiring diminishing fertility of the soil and, hence, without requiring agricultural price increase. Not only rent increase does not require agricultural price increase, but it could in fact be associated with agricultural price fall. What the law of rent requires is “different degrees of fertility of different pieces of land, or different results from the successive investment of capital in the same land” (Ibid., p. 49).

b) rent can increase without requiring a fall in the rate of profits or wages. Not only this, but it is quite possible to have both rising profits and rent. For the increase in the relative differences between different plots (i.e., the increase in differential rent) as the result of the overall fertility improvement is not a deduction from the value created in other sectors of the economy, but it is “derived from an increase in the difference between the value of production on the individual plots and the value on the marginal plot which governed the commensuration of agricultural labor to labor in the rest of the economy” (Murray, 1977, p. 103).

 

III. ABSOLUTE RENT

Absolute rent was the outcome of Marx’s discovery of Ricardo’s theoretical error that there was no rent on the poorest cultivated land. As pointed out earlier, Ricardo’s assertion was based on the assumption that if there were rent from marginal land, it would mean that the agricultural products were constantly being sold at prices above their values (i.e., in violation of the law of value). Ricardo’s error was the result of his confusion over the transformation of values into prices, on the one hand, and his confusion of constant and variable parts of capital, on the other.

On the basis of his theory of transformation of values into prices and on the basis of the assumption of agricultural lower organic composition of capital, Marx showed that the existence of absolute rent did not disprove the law of value. By virtue of monopoly of private property in land, the capital invested in the agricultural sector can withhold its relatively higher surplus-value from intersectoral distribution (i.e., from the process of profit equalization) and, therefore, not only enjoy an average profit but also pay absolute rent. The result is that agricultural market prices reflect their values–unlike the sectors participating in the profit-equalization process whose market prices reflect their prices of production. Therefore, according to Marx, the cause  of absolute rent is monopoly of private property in land, and its normal source  is the excess of surplus value over average profit, formed as a consequence of the lower organic composition of capital in agriculture than in manufacturing industry.

There has been a lot of confusion about Marx’s concept of absolute rent. There have also been a number of objections to this concept. The commonest objection has been directed at the assumption of lower composition of agricultural capital. That is, the critics argue,  what if the organic composition of capital in agriculture rises to social average or above it?

 

IV. MARX’S THEORY OF ABSOLUTE RENT AND THE COMPOSITION OF AGRICULTURAL CAPITAL 

While some Marxists have viewed this question as a legitimate objection, others have dismissed it as a misunderstanding or distortion of Marx’s theory of absolute rent. For example, Lenin, representing the latter view, strongly rejected the assertion that according to Marx the concept of absolute rent is dependent on low agricultural composition of capital–although he did not deny that the role of organic composition of capital was not accidental but structural/ historical to Marx’s theory:

 

It is not true to say that according to Marx absolute rent results from the low composition of agricultural capital…Absolute rent arises not from the low composition of capital in agriculture, but from the monopoly created by the private ownership of land, which prevents competition from levelling the profits of low composition of capital (lenin, 1960-64, pp. 301-302).

 

But, as was just mentioned, there are other Marxists have not questioned the assertion that according to Marx absolute rent is dependent on low composition of capital; they have rather attempted to respond to it as a valid objection. Furthermore, they believe that Marx himself did not deal with this objection, and have therefore attempted some theoretical innovations in dealing with this objection. For instance, Robin Murray, in agreement with Samir Amin, points out:

 

Marx certainly foresaw the possibility of agriculture’s organic composition rising in this way, and thus liquidating absolute rent. But he did not deal with the resulting objection that marginal land would not be given gratis. The conundrum is easily answered once we understand the material basis for rent of any kind. The existence of differential and absolute rent is dependent on capital’s inability to reproduce the conditions of production. Rising organic composition reflects, as Amin acknowledges, capital’s subordination of the soil. Output increasingly varies with the inputs of capital rather than the inputs of land. The material basis for rent of all kinds is thus dissolved.  The marginal plot will tend to disappear along with absolute rent, and the conundrum (Murray, 1977, p. 112).

 

In order to see which of these two interpretations better represents Marx’s concept of absolute rent, let us see what Marx himself has to say:

 

Whether the composition of agricultural capital is lower than that of the average social capital in a particular country where capitalist production prevails, for instance, England, is a question which can only be decided statistically, and for our purpose it is superfluous to go into it in detail. In any case, it is theoretically established that the value of agricultural products can be higher than their price of production only on this assumption…This assumption, then, suffices for that form of rent which we are analyzing here, and which can obtain only so long as this assumption holds good. Wherever this assumption no longer holds, the corresponding form of rent likewise no longer holds (Marx, 1967, p. 760).

 

Much of the misunderstanding and confusion concerning the relation between Marx’s theory of absolute rent and the agricultural composition of capital arises from the passages just quoted, particularly from the statement that “the corresponding form of rent likewise no longer holds.” But in the next paragraph of the same page (and the pages that follow these paragraphs) Marx leaves no doubt that “the corresponding form of rent” does not mean absolute rent as such  but that form of absolute rent which is based upon the difference between the agricultural value and the social price of production. That is, the form of absolute rent which is limited by agricultural mass of surplus value over and above normal profit, or the form which Marx called “the normal form of absolute rent,” and not the form of absolute rent which is based on a monopoly price.[4]

 

However, the mere existence of an excess in the value of agricultural products over their price of production would not in itself suffice to explain the existence of a ground-rent which is independent of differences in fertility of various soil types and in successive investments of capital on the same land–a rent, in short, which is to be clearly distinguished in concept from differential rent and which we may therefore call absolute rent…If the average composition of agricultural capital were equal to, or higher than, that of the average social capital, then absolute rent– again in the sense just described–would disappear; i.e., rent which differs equally from differential rent as well as that based upon an actual monopoly price…It seems to be a contradiction, at first glance, to assume that, on the one hand, the composition of agricultural capital rises, in other words, that its constant component increases with respect to its variable, and, on the other hand, that the price of agricultural product should rise high enough to permit rent to be yielded by new and worse soil than that previously cultivated, a rent which in this case originates only from an excess of market price, over the value and price of production, in short, a rent  derived solely from a monopoly price of the product (Marx, 1967, pp. 760-765).

 

The conclusion one can derive from these passages is that, as Lenin put it, “It is not true to say that according to Marx absolute rent results from the composition of agricultural capital,” and that if the average composition of agricultural capital were equal to (or higher than) that of the average social capital, then, as Marx himself put it, “the price of agricultural product should rise high enough to permit rent to be yielded by new and worse soil than that previously cultivated, a rent which in this case could originate only from an excess of market-price over the value and price of production, in short, a rent derived solely from a monopoly price of the product.”

But this very conclusion, drawn as the result of responding to the objections directed at the assumption of agricultural low composition of capital, has itself been the basis for another set of objections to Marx’s concept of absolute rent. For example, Arghiri Emmanuel, in his criticism of Marx’s theory of absolute rent, argues that if it is the case that Marx’s theory of absolute rent does not result from agricultural low composition of capital, but arises from the monopoly created by private landed property, then why should not this monopoly be treated as monopoly in the usual sense (i.e., as monopoly in any other sector of the economy)? And, therefore, why should not absolute rent be treated in terms of monopoly prices rather than values?

 

V. WHY NOT MONOPOLY IN THE USUAL SENSE?

The answer to the question, “why shouldn’t the monopoly in agriculture be treated as monopoly in any other branches of the economy?” is that in a capitalist economy with private property right in land the monopoly created by this right is a structural and/or permanent phenomenon, while monopoly in other sectors of the economy is a conjunctural and/or temporary phenomenon. Due to this distinct nature of monopoly in landed property (and the resulting constant tribute accruing to it, as absolute rent) two distinct characteristics of the prices of agricultural products follow.

a) All agricultural prices contain an element of monopoly. That is, not only agricultural prices which are above their values (in a situation where agricultural composition of capital is equal to or higher than that of the average social capital) but also those which are below or equal to their values but above their price of production (in a situation where the agricultural composition of capital is still lower than that of the average social capital) are monopoly prices. In the first case this is true because they withdraw part of the surplus-value from the common aggregate pool of surplus-value; and in the second case because they withhold part or all of the value created in the agricultural sector from intersectoral distribution–in both cases due to monopoly created by landed property.

 

The agricultural products will always be sold at a monopoly price , not because their price exceeds their value, but because it equals their value, or because their price is lower than their value but higher than their price of production. Their monopoly would consist in the fact that, unlike other products of industry whose value is higher than the general price of production, they are not levelled out to the price of production (Ibid., p. 762).

 

b) Although all agricultural prices are monopoly prices, they are not monopoly prices in the usual sense. The reason is that agricultural prices are monopoly prices as the result of absolute rent, i.e., because absolute rent has to be paid and it therefore contributes to the formation of agricultural prices. In other word, absolute rent enters into the agricultural prices as a tribute, or as a tax.[5] Monopoly prices in the usual sense, by contrast, are the cause, not the effect, of a monopoly rent, or a monopoly profit.

 

It must be distinguished, whether the rent springs from a monopoly price, because a monopoly price of the product for the land exists independently of it, or whether the products are sold at a monopoly price, because a rent exists. When we refer to a monopoly price, we mean in general a price determined only by the purchasers’ eagerness to buy and ability to pay, independent of the price determined by the general price of production, as well as by the value of the products….Here, then, the monopoly price creates the rent. On the other hand, the rent would create a monopoly price if grain were sold not merely above its price of production, but also above its value,  owing to the limits set by landed property  to the investment of capital in uncultivated land without payment of rent (Marx, 1967, p. 775).

 

Of course, the distinction between agricultural monopoly prices and monopoly prices in general does not exclude the possibility of agricultural prices being monopoly prices in the usual sense. But the “usual sense” of monopoly prices would, in fact, be an unusual sense of monopoly for agricultural prices. For the usual sense of monopoly for agricultural price is their being constant/permanent, while for non-agricultural prices lt is their being accidental/temporary.

To summarize, we can distinguish two possible forms of monopoly prices for agricultural products: (a) monopoly prices above their social price of production but below or equal to their values (where agricultural composition of capital is lower than that of average social capital); and (b) monopoly prices not only above their social price of production but also above their values (where agricultural composition of capital is higher than or equal to that of average social capital).

Now, if for the sake of clarity, we call these two types of monopoly prices MP1 and MP2, respectively, and the corresponding forms of absolute rent AR1 and AR2, then we can say that, according to Marx, Wherever/whenever the assumption of lower composition of capital holds–usually at a lower stage of capitalist development–AR1, the “normal” form of absolute rent, is the dominant form of absolute rent. And if this assumption no longer holds–probably, but not necessarily, at a higher stage of capitalist development–“the corresponding form of rent,” AR1, likewise no longer holds, and AR2, absolute rent based on a monopoly price, becomes the dominant form of absolute rent.

It is true that Marx did not discuss the abnormal form of absolute rent (i.e., AR2) in depth. But this was not oversight. It was rather because, he thought, this form of rent did not require any particular analysis other than the theory of competition, “where the actual movement of market-prices is considered.”

 

These two forms of rent are the only normal ones. Apart from them the rent can be based only upon an actual monopoly price, which is determined neither by price of production nor by value of commodities, but by buyers’ needs and ability to pay. Its analysis belongs under the theory of competition where the actual movement of market-prices is considered (Marx, 1967, p.764).

 

On the basis of these theoretical insights Marx to strongly criticized his contemporaries, like Buchanan and Hopkins, who tried to treat all absolute rent as monopoly rent “in the usual sense.” He argued that as long as the monopoly of private landed property exists, absolute rent remains a permanent/constant economic category, and therefore should be treated in terms of inner-organizational/structural categories of capitalist economy rather than by its accidental/conjunctural phenomena. This means that, he further argued, it must be treated in terms of value (and its long-run movements) rather than supply and demand.

 

REFERENCES

Ball, M., 1976, “Marx’s Theory of Rent and the Role of Landed Property,” Mimeo.

Buchanan, D. H., 1929, “The Historical Approach to Rent and Price Theory,” Economica , reprinted in W. Fellner and B. Haley, Readings in the Theory of Income Distribution , 1946.

Cutler, A., 1975, “Ground Rent and Capitalism,”  Critique of Anthropology , 4 & 5, Autumn.

Denman, D.R. and Stewart, V.F., 1959, Farm Rents , Allen and Unwin.

Edel, Matthew., 1977,  “Rent Theory and Labor Strategy: Marx, George and the Urban Crisis,” Review of Radical Political Economy , Winter,  PP. 1-15.

Engels, Frederick., 1935 The Hosing Question , New York: International Publishers.

Fetter, F.A., 1901,  “The Passing of the Old Rent Concept,” Quarterly Journal of Economics , May.

Harvey, David., 1974,  “Class-Monopoly Rent, Finance Capital and Urban Revolution,” Regional Studies  8.

Harvey, David and Lata, Chatterjee., 1974, “Absolute Rent and the Structuring of Space by Commercial and Financial Institutions, Antipode  6:1, pp.  22-36.

 

Lenin, V. I., 1960-64,  “The Agrarian Program of Social Democracy in the First Russian Revolution, 1905-1907,” Collected Works  (in 45 volumes), Vol. 13, Moscow: Progress Publishers.

Marx, Karl., 1967, Capital, Vol. III, Moscow: Progress Publishers.

Murray Robin., 1977, “Value and the Theory of Rent,” Capital and Class, Autumn, pp. 100-122.

Ricardo, David., 1951, On the Principles of Political Economy and Taxation , Cambridge: Cambridge University Press.

Ricci, D.M., 1969, “Fabian Socialism: a Theory of rent and Exploitation,” Journal of British Studies , Vol. 9.

Walker, R. A., 1974, “Urban Ground Rent: Building a New Conceptual theory” Antipode ,Vol. 6, No. 1, April.

________ , 1975, Contentious Issues in Marxian Value and Rent Theory: A Second and Longer Look,” Antipode , Vol. 7, No. 1, February.

 

NOTES

[1]. This Monopoly (i.e., monopoly of land as the object of capitalist farming) is different from the monopoly of large private property in land. Whereas the former type of monopoly is the cause of differential rent, the latter is the cause of absolute rent.

[2]. Each of these two causes play a different role in the formation of differential rent. The real cause of the formation of differential rent is the capitalist character of agricultural production, which means the formation of an average rate of profit in agriculture, hence differential profit and differential rent. What the the second cause (i.e., the limited nature of land), does is not creating/forming the differential rent but making it (a) permanent, and (b) based on marginal land. This means that if land was not limited and (like other factors of production that are products of labor) could be increased at will, then differential profit in agriculture (like differential profit in any other branch of production) would be (a) temporary, and (b) based upon the average conditions of production (i.e., average land), not the marginal ones.

[3]. Because in Ricardo’s theory it is assumed that price of production (i.e., regulating price is proportional to (marginal) value.

[4]. In light of Murray’s rather excellent work on the subject of “Value and the Theory of Rent” it is somewhat surprising that he is here unable to see that as long as there is monopoly private land ownership, ground rent (at least, absolute rent) will continue to exist–in any of its possible forms. The error seems to have crept in from a perception that the rise in agricultural composition of capital is tantamount to capital’s ability of reproduce the conditions of agricultural reproduction. It is true that if capital is able to reproduce the conditions of agricultural production unhindered, then the role of land “as the material basis for rent of all kind is dissolved.” But the problem is that the rise in the agricultural composition of capital to social average, or even above it, is not tantamount to capital’s ability to reproduce the conditions of agricultural production. It is unrealistic to assume that in the presence of monopoly landownership there can be independent reproduction conditions of agricultural production by capital. Murray’s contention cannot be valid unless capital’s penetration in agriculture goes hand in hand with the dissolution of an independent landowning class (i.e., the capitalists themselves come to own the land as more capital is invested in agriculture.

[5]. “Differential rent do not, like absolute rent, enter into the determination of the prices of agricultural produce. The former derived from prices of production, the latter from the margin between market prices and prices of production” (Kautsky, “The Agrarian Question,” as quoted in Banaji, 1976, p. 21).