Sunday, 21 February 2016

Rent

In discussing rent, it is necessary to distinguish between capitalist rent, and pre-capitalist forms of rent. In fact, this is a good illustration of Marx's historical materialist method, which demonstrates that things which appear the same are, in fact, completely different, when their true nature, determined by the social context in which they exist, is examined. A piece of equipment, for example, may be an element of capital in one social context, but is merely a commodity, a use value, or means of production in another. Commercial profit is completely different under capitalism to what it is under pre-capitalist modes of production, and the same applies to interest.

In pre-capitalist formations, rent is the form of surplus value. Even in slave owning societies, the majority of production is undertaken by peasant producers, and the social surplus largely takes the form of their surplus production. It is only, because such societies also develop commodity production and exchange, and money that the surplus product appropriated by slave owners can become also a surplus value. See:- Labour-power v Horse-power.

The rent of the landlord, in these pre-capitalist formations, has nothing to do with it being a payment for the use of their land. In fact, in these pre-capitalist formations, the land is not seen as belonging to the landlord. If the land belongs to anyone, it is often seen as belonging to God, and the Sovereign being their appointed representative, with the various ranks and gradations beneath them. The land is collectively owned by the clan or tribe, and rather than the land belonging to the people it is as much the people who belong to the land.

The rent paid to the landlord in such societies, therefore, arises initially as tribute. A clan or tribal chieftain is rewarded, for example, for some victory in battle with the payment of tribute, and over time this payment becomes regularised, as an entitlement. But, as Marx points out, just as slavery cannot arise until such time as social productivity has risen to a level whereby the individual labourer can produce more in a day than is required for the reproduction of their own labour-power, so too the amount that can be paid in such tribute to the landlord is limited by the amount of surplus product, that can be produced by the peasant.

The development of rent, therefore, is an illustration of the way it is changes in the productive forces, which drive social change, because it is again only when social productivity has risen to a sufficient level that such tribute can become a regular payment of rent to the landlord, whilst allowing the peasant producers to reproduce their labour-power.

This pre-capitalist rent goes through a number of historical stages. The first form is of Labour-Rent. That is the peasant producer agrees to spend a given number of days labour working on the land of the landlord. This makes clear both the nature of the exploitation, but also the material basis and limitation of that exploitation. The peasant producer must spend a given and known amount of time working their own land, in order to ensure the reproduction of their labour-power. It is only the amount of time left over, after this period, during the week, that the peasant has as surplus labour-time, which can be spent working on the land of the lord of the manor.

But, as Marx sets out in Capital I, it is clear that this payment of labour rent to the landlord, is thereby a payment of value to the landlord, because labour is value, and the quantity of labour-time given to the landlord by such activity, is the quantity of value handed over to the landlord. The limit of the labour-time that can be handed over is objectively determined by the necessary labour the peasant must perform to reproduce their labour-power, and the length of time they can work in total during the week.

“Here the particular and natural form of labour, and not, as in a society based on production of commodities, its general abstract form is the immediate social form of labour. Compulsory labour is just as properly measured by time, as commodity-producing labour; but every serf knows that what he expends in the service of his lord, is a definite quantity of his own personal labour power.”

(Capital I, Chapter 1)

In a society where commodity production and exchange is expanding, therefore, it becomes apparent that the landlord can just as easily obtain this same amount of value in the form of commodities produced by the peasant producer, rather than in labour-time spent working his land. The landlord is thereby enabled to use these commodities to provide for their own consumption and the consumption of their retainers, as well as, if desired, to sell these commodities, or exchange them in the market, including foreign markets, for other commodities, which may not be locally available.  On this basis arises Rent in Kind.

If the level of rent is established as a fixed amount, or even a fixed proportion of the peasant's output, this creates the potential for the peasant to also accumulate. Suppose, the peasant produces 100 kg of corn, which we will take as representing all production. The peasant may require 50 kg of corn for their own reproduction, and is equal to 3 days labour. If rent is fixed at a level of 50%, then just as the landlord would previously have been entitled to 3 days labour on their land, now they are entitled to 50 kg. of corn.

If the level of social productivity rises, the peasant may now produce 120 kg of corn. If the rent is set at a fixed 50 kg. then the peasant will now be able to reproduce their labour-power, pay the rent, and will still have a surplus 20 kg of corn left over, which they can accumulate. But, even if the rent is set at a fixed proportion of output – as was often the case, for example with tithes – the rise in social productivity still opens the possibility of accumulation. Although the rent rises to 60 kg. of corn, the peasant now can still reproduce their labour-power, and have a further 10 kg of corn left over, which they can accumulate.

This potential rises even more, when rents take the form of Money Rent. Instead of the landlord taking the rent in the form of commodities, they now set a money rent, of an equivalent value to the commodities they would previously have obtained. The peasant producer provides the landlord with a fixed money rent, but as productivity rises, and their sale of commodities – which includes the product of their domestic industry in the production of cloth etc. - rises, so the peasant is enabled to accumulate money, which can then be transformed into capital.

As Marx points out, therefore, this money rent under feudalism, represents its final stage, the stage of its dissolution, before it is transformed into capitalist rent, as capitalist production begins to take place.

“By money-rent — as distinct from industrial and commercial ground-rent based upon the capitalist mode of production, which is but an excess over average profit — we here mean the ground-rent which arises from a mere change in form of rent in kind, just as the latter in turn is but a modification of labour rent. The direct producer here turns over instead of the product, its price to the landlord (who may be either the state or a private individual). An excess of products in their natural form no longer suffices; it must be converted from its natural form into money-form. Although the direct producer still continues to produce at least the greater part of his means of subsistence himself, a certain portion of this product must now be converted into commodities, must be produced as commodities. The character of the entire mode of production is thus more or less changed... However, the basis of this type of rent, although approaching its dissolution, remains the same as that of rent in kind, which constitutes its point of departure. The direct producer as before is still possessor of the land either through inheritance or some other traditional right, and must perform for his lord, as owner of his most essential condition of production, excess corvée-labour, that is, unpaid labour for which no equivalent is returned, in the form of a surplus-product transformed into money...

Money-rent, as a transmuted form of rent in kind, and in antithesis to it, is, nevertheless, the final form, and simultaneously the form of dissolution of the type of ground-rent which we have heretofore considered, namely ground-rent as the normal form of surplus-value and of the unpaid surplus-labour to be performed for the owner of the conditions of production. In its pure form, this rent, like labour rent and rent in kind, represents no excess over profit. It absorbs the profit, as it is understood. In so far as profit arises beside it practically as a separate portion of excess labour, money-rent like rent in its earlier forms still constitutes the normal limit of such embryonic profit, which can only develop in relation to the possibilities of exploitation, be it of one’s own excess labour or that of another, which remains after the performance of the surplus-labour represented by money-rent. Should any profit actually arise along with this rent, then this profit does not constitute the limit of rent, but rather conversely, the rent is the limit of the profit. However, as already indicated, money-rent is simultaneously the form of dissolution of the ground-rent considered thus far, coinciding prima facie with surplus-value and surplus-labour, i.e., ground-rent as the normal and dominant form of surplus-value.”

(Capital III, Chapter 47) 

This is a distinguishing feature between pre-capitalist rent and capitalist rent. Feudal rent is the primary form of surplus value, it is only whatever portion of their production over and above what was required for the reproduction of their labour-power, and the payment of rent, which could constitute profit for the peasant producer. Under capitalism, profit is the dominant form of surplus value, and rent is only possible where a surplus profit, over the average rate of profit, arises.

One reason that feudal money rent represents a process of dissolution for feudal rent, is that it opens the door for land itself to be bought and sold as a commodity. If land is no longer owned by feudal landlords, then the claim to rent as of right, arising from the right to such tribute, disappears along with it. But, the buyer of such land, who does not seek to utilise it themselves, but seeks to rent it to a capitalist farmer, will treat it as with any other such loan of capital. That is they will seek to obtain from it, a yield at least equal to that which they could have obtained from loaning that capital in some other form, for example, in the purchase of government bonds. The price of land, therefore, becomes determined on the basis of the capitalised rent.

At the same time, in just the same way that the demand for money-capital rises or falls according to rises and falls in demand for commodities that create the potential for rising masses of profit, so too the demand for land by capitalist farmers rises or falls according to the demand for agricultural products, and the mass of profit that can be obtained from such production. So too then, this demand for land, driven by the potential to make additional profit, drives rent. On the one hand, the level of rents may remain constant, but the absolute amount of rent may increase, because more rentable land is brought into cultivation. On the other hand, higher agricultural product prices, may result in agricultural profits rising, so that surplus profits rise, which drives an increase in rent levels.

In Capital III, Marx and Engels set out at great length the basis of this capitalist rent. Capitalist rent becomes possible because of the existence of this surplus profit. But, the existence of the surplus profit is not sufficient to generate rent. Rent only becomes possible here, because land itself is fixed in supply, and its ownership is monopolised. That means that the owners of that land can demand the payment of rent, up to the level of the surplus profit, because it will always then be worthwhile a capitalist farmer paying that rent, because they will still make at least the average rate of profit on their capital. I have some disagreement with Marx's theory of rent, which I have written about in the past. I will be setting out my views on that in more detail at a future date.

Marx and Engels discuss capitalist rent in a number of forms. I will take the last form, Absolute Ground Rent, first. Ricardo did not believe that absolute ground rent was possible. Ricardo believed that only Differential Rent, or what is termed today in orthodox economics, Economic Rent was possible. The basis of this Differential Rent, was that different pieces of land had different levels of fertility. Land with higher fertility, would produce a higher level of output for any given investment of capital, and because this output would be sold at a market price determined by the least fertile land, this would mean that capitals employed on these more fertile lands would, make above average rates of profit.  The basis of this is that the individual value of the output from the more fertile land is lower than the price of production of total output, and so a surplus profit arises as the difference between the two.

The reason that the market price of agricultural products would be determined by the fertility of the least fertile land, was that capitalist farmers would not invest their capital on this land, unless they could sell their output at prices, which guaranteed them the average rate of profit. Consequently, capital invested on more fertile lands would make more than the average rate of profit, and the landlord would then charge a rent, which absorbed the surplus profit.

But, Marx shows that, essentially for this same reason, an absolute ground rent is charged on all land. In fact, there is no reason why a landlord would allow a capitalist to use their land for free, any more than a money-capitalist would allow a productive-capitalist to use their money-capital for free, without paying interest on it. The question is how it is possible for such a ground rent to be payable on land, with the lowest fertility, and which provides no additional facility, for the capitalist farmer.

The answer Marx demonstrates is that because the landlord will not allow use of their land without a rent being paid for it, no capitalist farmer will invest capital in such land, unless the return they obtain on that capital, after the payment of rent, provides them with the average rate of profit. It is not that the rent constitutes an additional cost, which increases the value of output, but that the land will only be brought into cultivation, when the demand for agricultural products, and the market prices of those commodities has risen to a level whereby all capitalist farmers are enabled to make an above average rate of profit. The absolute ground rent, absorbs this surplus profit made on the least fertile land.

This absolute ground rent also thereby forms the basic rent on all land. An additional Differential Rent then arises on top of this absolute ground rent, for all those capitals invested in the more fertile lands. This Differential Rent is divided into two types. Differential Rent I arises on the basis of different levels of fertility of land. Differential Rent II arises on the back of additional amounts of capital invested on the same piece of land, and different levels of productivity of the capital employed. In orthodox economics terms, this equates to the marginal productivity of land, and the marginal productivity of capital. Indeed, the marginalist analysis that Marx undertakes here, building on the work of Ricardo, who himself took his theory from Anderson, essentially forms the basis of the development of marginalist analysis by the neo-classical economists. Its unfortunate that Marx did not have the mathematical tools that the later marginalist school developed, because if he had, it would have avoided some of the weakness in the conclusions he develops out of his examples, in terms of resultant market prices.

The basis of Differential Rent I can be seen in the following example. The average rate of profit is determined in industry. An average rate of profit of 25% is assumed.

Land Type
Cost of Production
£
Output
Price of Production
£
Income
£
Profit
£
Rate of Profit
Surplus Profit/
Rent
£
A
4,000
4,000
1.25
5,000
1,000
25%
0
B
4,000
5,000
1.25
6,250
2,250
56.25%
1,250
C
4,000
6,000
1.25
7,500
3,500
87.5%
2,500

12,000
15,000
1.25
18,750
6,750
56.25%
3,750

Unless capitals invested in land A can make the average rate of profit of 25%, they will not undertake production. That requires a market price of £1.25 per unit. At that price, however, capital invested on land type B, makes a surplus profit of £1,250, and on land type C a surplus profit of £2,500. These surplus profits are absorbed as Differential Rent I, by the landlords who own land type B and C.

Ricardo believed that it must be the case that capitals use the most fertile lands first. It was this belief that underlay his and Malthus belief that the cost of producing food to feed a growing working population would continually rise, as less and less fertile land had to be brought into cultivation. It was the basis of Ricardo's faulty theory about the tendency for the rate of profit to fall, as wages had to rise to cover this higher cost of food.

Marx demonstrates, at length, that this view is false. There are numerous reasons why it is not the most fertile land, which is first brought into cultivation. The most fertile land may be distant from population centres, or means of transport; land may be fundamentally very fertile, but currently unused, because it requires large amounts of capital to first provide drainage etc. The development of technology may make possible the cultivation of land that was not previously cultivable. For example, the development of powerful steam engines was able to drive ploughs that were able to turn over much deeper, more fertile layers of soil.

Marx and Engels provide numerous examples of situations where it is first the least fertile soil to be developed, and only then the more fertile soil; then examples of where it is the most fertile cultivated first, moving to the least fertile; and then examples where a combined process may take place with first the more fertile soil cultivated, followed by a less fertile soil, followed by a more fertile soil, and so on.

Differential Rent II arises when, instead of additional capital being invested on additional types of land, the same land is cultivated, but increasing increments of capital are applied to it. Differential Rent I remains at the root of this form of rent, but the changes in the amounts of surplus profits obtained result from the marginal productivity of the capital employed.

Land Type
Cost of Production
£
Output
Price of Production
£
Income
£
Profit
£
Rate of Profit
Surplus Profit/
Rent
£
A
4,000
4,000
1.25
5,000
1,000
25%
0
B
8,000
15,000
1.25
18,750
10,750
134.38%
8,750
C
4,000
6,000
1.25
7,500
3,500
87.5%
2,500

16,000
25,000
1.25
31,250
15,250
95.3%
11,250

As a result of a rising marginal productivity of capital, it now becomes land type B which produces the highest surplus profit and rent. The capital employed has doubled, but the output has trebled, causing the rise in the rate of profit.

In their analysis of rent, Marx and Engels give numerous examples of these multifarious changes in the amount of rent produced by different marginal productivities of land and capital, and under conditions where the marginal productivity may be rising or falling. The reason for such rising marginal productivity of capital, has been alluded to previously. Production on a larger scale makes possible the use of more effective capital, for instance. The continued use of fertiliser, and working of the land, can being about more permanent changes in fertility etc.

Another aspect of Marx's analysis of rent is the difference between the rate of rent and rent per hectare, and again, this is affected by whether the rent is a consequence of Differential Rent I or II. Where cultivation is more extensive than intensive, additional areas of land are brought into cultivation to satisfy the increased demand for agricultural products. The consequence is that more rent is levied, in total, but the amount of rent per hectare may be unchanged, because more hectares are cultivated. If however, the increased output is achieved by a more intensive cultivation, by applying more capital, this may result in an absolute rise in rents, as Differential Rent II rises, but as no additional land is brought into cultivation, the rent per hectare rises. 

The rate of rent is the rent measured against the capital employed. So, for example, the rate of rent for land type B in the first example is 1250/4000 = 31.25%, whereas in the second example it is 8750/8000 = 109.375%. In terms of the total capital it is 31.25% in the first example, and 70.3125%, in the second example.

The basis of this rent is the fact that land is limited in supply and under monopoly ownership. But, neo-classical economy took the marginal analysis described here, and applied it to all factors of production, even though that same condition of limited supply and monopoly ownership does not exist for those other factors. Neo-classical theory also follows Ricardo in assuming that current production is undertaken using the most advantageous conditions, so that any additional supply must involve a move to a lower level of efficiency, and so higher costs, i.e. falling marginal productivity. That is why, its standard supply and demand graphs show the supply curve sloping upwards from left to right. Yet, all experience suggests the opposite is the case. Increasing levels of output usually bring economies of scale, and falling marginal costs of production.

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