Differential and Absolute Ground Rent
Encyclopedia
Differential ground rent and absolute ground rent are concepts used by Karl Marx
in the third volume of Das Kapital
to explain how the capitalist mode of production
would operate in agricultural production, under the condition where most agricultural land was owned by a social class
of land-owners who obtained rent
income from those who farmed the land. Rent as an economic category is regarded as one form of surplus value
just like interest, production taxes and industrial profits.
's Law of rent
, and it examines with detailed numerical examples how the relative profitability
of capital investments in agriculture is affected by the productivity, fertility, and location of farmland, as well as by capital expenditure on land improvements. Marx aims to show that capitalism turns agriculture into a business like any other, operated for purely commercial motives; and that the ground rents appropriated by landowners are a burden for the industrial bourgeoisie
both because they imply an additional production-cost and because they raise the prices of agricultural output. The peculiarity of capitalism in agriculture is that commerce has to adapt to physical factors such as climate and soil quality, the relative inelasticity of agricultural supply, and the impact of bad harvests on international prices for farm products. Eventually, however, the production of farm products is completely reorganized according to the exchange-value of farm output – foodstuffs are produced only according to their cash-value in the market.
and the formation of prices of production
was modified in capitalist agriculture, because prices for farm output were co-determined by land yields and land ownership-rents quite independently of labor-productivity. For example, a poor harvest in a major agricultural region due to adverse weather conditions, or the monopolization of the supply of farmland, could have a big effect on world market prices for farm products. Marx extends his theory of agricultural rents to building rents and mine rents, and considers the effect of rent income on land prices.
who interpreted late capitalism
as a form of increasingly parasitic rentier capitalism
in which surplus profits
are obtained by capitalists from monopolising the access to resources, assets and technologies under conditions of imperfect competition
. Marxist writers such as Cyrus Bina have extended the concept of rents to oil rents http://cda.morris.umn.edu/~binac/index.htm.
, no separate data is provided on the amounts of land rents and subsoil rents charged and earned, because they are not officially regarded as part of value-added, and consequently are not included in the calculation of GDP. The underlying conceptual argument in national accounts is, simply put, that such rents do not reflect earnings generated by production and are unrelated to production, and consequently that such earnings do not make a net addition to the value of new output. Implicitly, therefore, many land rents are regarded as a transfer of income. Typically only the annual value of expenditure on land improvements and the value of leases of productive equipment are recorded as "productive", value-adding earnings. In Marx's theory, however, land rents do not simply reflect a property income gained from the ownership of an asset, but are a real element of surplus value
and consequently of the value product
, insofar as those rents are a flow of earnings which must be paid out of the new value created by current production of primary products.
That situation is the basis of what Marx calls differential rent I – the investor who produces wheat on the more productive lands reaps an extra-profit or rent, which varies according to the total supply and demand of wheat and the ruling market price for wheat. However, the income from wheat production will also depend not just on soil quality but on the number of hectares of each kind of soil being cultivated. Thus the supply of wheat and the wheat price, and consequently the rents obtained from their fluctuation, will also be influenced by e.g. whether the expansion of wheat production in response to growing demand occurs on better or worse soils. In addition, the profitability of wheat production may also be influenced by the ‘’actual amount of capital invested per hectare’’. Marx calls this differential rent II and he examines what would be the effect of more capital-intensive agriculture when the production price
remains stable and when it falls while the extra yield from additional capital investments varies.
To summarise, the theory of differential rent I shows how extra profit is transformed into rent by equal quantities of capital being invested on different lands of unequal productivity, while the theory of Differential Rent II refers to the difference in profitability resulting from unequal amounts of capital being invested successively and intensively on different plots of land of the same type. Differential rent II implies the appropriation of surplus profits
created by temporary differences in yield which are due to the application of unequal capitals to the same type of lands.
of output in agriculture, because of a lower than average organic composition of capital
in agriculture as compared with industry. According to Marx's own concept, absolute rent cannot exist when the organic composition of capital in agriculture becomes higher than the social average. Marx envisaged that labour productivity would be higher in manufacturing than in agriculture, for the longer term, reflecting the fact that the organic composition of capital (the ratio C/V) was higher in manufacturing than in agriculture. This implied, that in agriculture the value of output produced was persistently higher than the production price of that output.
. They sought to bring logical analysis to bear on governmental questions. They arrived at the conclusion that "ground rents" should be the source of most or all taxes. They defined ground rent as that portion of all rent which is attributable only to the size and location of the parcel. For instance, say you own a parcel of land. If everything you grew or built on that land burned . . . then you could still lease it out for its ground rent (its locational value). The Physiocrats noted that the owner is in no way responsible for any increase in the "locational" value of his parcel. A particular location is only made more valuable because more people come to live around it. Since it is society as a whole which gives ground rent its value . . . they reasoned that society should regain part of that value in tax revenue.
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
in the third volume of Das Kapital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
to explain how the capitalist mode of production
Capitalist mode of production
In Marx's critique of political economy, the capitalist mode of production is the production system of capitalist societies, which began in Europe in the 16th century, grew rapidly in Western Europe from the end of the 18th century, and later extended to most of the world...
would operate in agricultural production, under the condition where most agricultural land was owned by a social class
Social class
Social classes are economic or cultural arrangements of groups in society. Class is an essential object of analysis for sociologists, political scientists, economists, anthropologists and social historians. In the social sciences, social class is often discussed in terms of 'social stratification'...
of land-owners who obtained rent
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
income from those who farmed the land. Rent as an economic category is regarded as one form of surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
just like interest, production taxes and industrial profits.
Aim of the theory
In good part, Marx's theory is a critique of David RicardoDavid Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
's Law of rent
Law of Rent
The law of rent was formulated by David Ricardo around 1809, and this is the origin of the term Ricardian rent. Ricardo's formulation of the law was the first clear exposition of the source and magnitude of land rents, and is among the most important and firmly established principles of economics. ...
, and it examines with detailed numerical examples how the relative profitability
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
of capital investments in agriculture is affected by the productivity, fertility, and location of farmland, as well as by capital expenditure on land improvements. Marx aims to show that capitalism turns agriculture into a business like any other, operated for purely commercial motives; and that the ground rents appropriated by landowners are a burden for the industrial bourgeoisie
Bourgeoisie
In sociology and political science, bourgeoisie describes a range of groups across history. In the Western world, between the late 18th century and the present day, the bourgeoisie is a social class "characterized by their ownership of capital and their related culture." A member of the...
both because they imply an additional production-cost and because they raise the prices of agricultural output. The peculiarity of capitalism in agriculture is that commerce has to adapt to physical factors such as climate and soil quality, the relative inelasticity of agricultural supply, and the impact of bad harvests on international prices for farm products. Eventually, however, the production of farm products is completely reorganized according to the exchange-value of farm output – foodstuffs are produced only according to their cash-value in the market.
Law of value
According to Marx, the operation of the law of valueLaw of value
-General:The law of value is a central concept in Karl Marx's critique of political economy, first expounded in his polemic The Poverty of Philosophy against Pierre-Joseph Proudhon, with reference to David Ricardo's economics...
and the formation of prices of production
Prices of production
Prices of production refers to a concept in Karl Marx's critique of political economy. It is introduced in the third volume of Das Kapital, where Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money and...
was modified in capitalist agriculture, because prices for farm output were co-determined by land yields and land ownership-rents quite independently of labor-productivity. For example, a poor harvest in a major agricultural region due to adverse weather conditions, or the monopolization of the supply of farmland, could have a big effect on world market prices for farm products. Marx extends his theory of agricultural rents to building rents and mine rents, and considers the effect of rent income on land prices.
Theoretical significance
This theory is the least known part of Marx's economic writings, and among the more difficult ones, because earnings from farm work can be affected by many different variables, even at a highly abstract level. However the theory became very important to neo-Marxists such as Ernest MandelErnest Mandel
Ernest Ezra Mandel, also known by various pseudonyms such as Ernest Germain, Pierre Gousset, Henri Vallin, Walter , was a revolutionary Marxist theorist.-Life:...
who interpreted late capitalism
Late capitalism
"Late capitalism" is a term used by neo-Marxists to refer to capitalism from about 1945 onwards, with the implication that it is a historically limited stage rather than an eternal feature of all future human society. Postwar German sociologists needed a term to describe contemporary society...
as a form of increasingly parasitic rentier capitalism
Rentier capitalism
Rentier capitalism is a term used in Marxism and sociology which refers to a type of capitalism where a large amount of profit-income generated takes the form of property income, received as interest, intellectual property rights, rents, dividends, fees, or capital gains.The beneficiaries of this...
in which surplus profits
Superprofit
Superprofit , is a concept in Karl Marx's critique of political economy, subsequently elaborated by Lenin and other Marxist thinkers.-The origin of the concept in Marx's Capital:...
are obtained by capitalists from monopolising the access to resources, assets and technologies under conditions of imperfect competition
Imperfect competition
In economic theory, imperfect competition is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied...
. Marxist writers such as Cyrus Bina have extended the concept of rents to oil rents http://cda.morris.umn.edu/~binac/index.htm.
Rent in macro-economics
Another possible reason for the relative obscurity of the theory is that in modern macro-economic statistics and national accountsNational accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
, no separate data is provided on the amounts of land rents and subsoil rents charged and earned, because they are not officially regarded as part of value-added, and consequently are not included in the calculation of GDP. The underlying conceptual argument in national accounts is, simply put, that such rents do not reflect earnings generated by production and are unrelated to production, and consequently that such earnings do not make a net addition to the value of new output. Implicitly, therefore, many land rents are regarded as a transfer of income. Typically only the annual value of expenditure on land improvements and the value of leases of productive equipment are recorded as "productive", value-adding earnings. In Marx's theory, however, land rents do not simply reflect a property income gained from the ownership of an asset, but are a real element of surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
and consequently of the value product
Value product
The value product is an economic concept formulated by Karl Marx in his critique of political economy during the 1860s, and used in Marxian social accounting theory for capitalist economies...
, insofar as those rents are a flow of earnings which must be paid out of the new value created by current production of primary products.
Differential ground rent
Suppose for example that the ruling world market price for quality wheat is US$170 per ton f.o.b. Even if two investors have the exactly same amount of capital to invest in wheat production, the economics of producing wheat at that price are going to be quite different, depending on the actual yields (the productivity) of the land they use. The same amount of money invested in wheat production on area A yields a bigger crop of wheat and more profit than on area B, if A is more productive, fertile, better situated etc. than B. But not only that – given a known yield per hectare and a known price per ton of wheat, it may be either economic or uneconomic to produce wheat on particular soils. There exists a “hierarchy of soil types”, and if market demand and prices rise, more of the less productive (or marginal) land may be cultivated; if demand and prices fall, less of the marginal land may be cultivated.That situation is the basis of what Marx calls differential rent I – the investor who produces wheat on the more productive lands reaps an extra-profit or rent, which varies according to the total supply and demand of wheat and the ruling market price for wheat. However, the income from wheat production will also depend not just on soil quality but on the number of hectares of each kind of soil being cultivated. Thus the supply of wheat and the wheat price, and consequently the rents obtained from their fluctuation, will also be influenced by e.g. whether the expansion of wheat production in response to growing demand occurs on better or worse soils. In addition, the profitability of wheat production may also be influenced by the ‘’actual amount of capital invested per hectare’’. Marx calls this differential rent II and he examines what would be the effect of more capital-intensive agriculture when the production price
Prices of production
Prices of production refers to a concept in Karl Marx's critique of political economy. It is introduced in the third volume of Das Kapital, where Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money and...
remains stable and when it falls while the extra yield from additional capital investments varies.
To summarise, the theory of differential rent I shows how extra profit is transformed into rent by equal quantities of capital being invested on different lands of unequal productivity, while the theory of Differential Rent II refers to the difference in profitability resulting from unequal amounts of capital being invested successively and intensively on different plots of land of the same type. Differential rent II implies the appropriation of surplus profits
Superprofit
Superprofit , is a concept in Karl Marx's critique of political economy, subsequently elaborated by Lenin and other Marxist thinkers.-The origin of the concept in Marx's Capital:...
created by temporary differences in yield which are due to the application of unequal capitals to the same type of lands.
Absolute ground rent
The absolute ground rent is sometimes explained as the rent which landowners can extract because they monopolise the access to or supply of land, and sometimes as the rent which arises due to the difference between the product-values and prices of productionPrices of production
Prices of production refers to a concept in Karl Marx's critique of political economy. It is introduced in the third volume of Das Kapital, where Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money and...
of output in agriculture, because of a lower than average organic composition of capital
Organic composition of capital
The organic composition of capital is a concept created by Karl Marx in his critique of political economy and used in Marxian economics as a theoretical alternative to neo-classical concepts of factors of production, production functions, capital productivity and capital-output ratios. Marx first...
in agriculture as compared with industry. According to Marx's own concept, absolute rent cannot exist when the organic composition of capital in agriculture becomes higher than the social average. Marx envisaged that labour productivity would be higher in manufacturing than in agriculture, for the longer term, reflecting the fact that the organic composition of capital (the ratio C/V) was higher in manufacturing than in agriculture. This implied, that in agriculture the value of output produced was persistently higher than the production price of that output.
Physiocratic school
Another definition for ground rent or absolute ground rent originates from the 18th-century French school of political economy called the PhysiocratsPhysiocrats
Physiocracy is an economic theory developed by the Physiocrats, a group of economists who believed that the wealth of nations was derived solely from the value of "land agriculture" or "land development." Their theories originated in France and were most popular during the second half of the 18th...
. They sought to bring logical analysis to bear on governmental questions. They arrived at the conclusion that "ground rents" should be the source of most or all taxes. They defined ground rent as that portion of all rent which is attributable only to the size and location of the parcel. For instance, say you own a parcel of land. If everything you grew or built on that land burned . . . then you could still lease it out for its ground rent (its locational value). The Physiocrats noted that the owner is in no way responsible for any increase in the "locational" value of his parcel. A particular location is only made more valuable because more people come to live around it. Since it is society as a whole which gives ground rent its value . . . they reasoned that society should regain part of that value in tax revenue.
External links
- Capitalist ground rent http://www.era.anthropology.ac.uk/Era_Resources/Era/Peasants/differential_rent.html
See also
- Economic rentEconomic rentEconomic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
- Law of RentLaw of RentThe law of rent was formulated by David Ricardo around 1809, and this is the origin of the term Ricardian rent. Ricardo's formulation of the law was the first clear exposition of the source and magnitude of land rents, and is among the most important and firmly established principles of economics. ...
- SuperprofitSuperprofitSuperprofit , is a concept in Karl Marx's critique of political economy, subsequently elaborated by Lenin and other Marxist thinkers.-The origin of the concept in Marx's Capital:...
- Surplus valueSurplus valueSurplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
- Value productValue productThe value product is an economic concept formulated by Karl Marx in his critique of political economy during the 1860s, and used in Marxian social accounting theory for capitalist economies...
- Rentier stateRentier stateA rentier state is a term in political science and international relations theory used to classify those states which derive all or a substantial portion of their national revenues from the rent of indigenous resources to external clients.- Usage :...
- Rentier capitalismRentier capitalismRentier capitalism is a term used in Marxism and sociology which refers to a type of capitalism where a large amount of profit-income generated takes the form of property income, received as interest, intellectual property rights, rents, dividends, fees, or capital gains.The beneficiaries of this...