The Marxist Theory of Ground Rent (Pt 1)

Mike Treen, a good friend and an editor of this blog who lives in New Zealand, suggested during a visit to the U.S. last May that I examine the question of real estate and house rents. I promised him that I would try to get to it. I couldn’t do it immediately because the 100th anniversary of World War I was fast approaching and demanded the blog’s immediate attention. But with no anniversary of similar importance approaching over the next few months, I now have some time to examine the question of real estate, rents and landed property in general.

I will begin with an examination of Marx’s theory of ground rent that he develops in Volume III of “Capital.” I will then examine how Marx’s theory relates to the related but different question of house rents, prices and mortgages, which Marx gave relatively little attention to.

After that, I hope to examine the latest developments in the world economy, which I have neglected recently because of the needs arising from the World War I anniversary. While much has been written over the years on the theme of the “decline of the dollar,” we now have the opposite phenomenon of the “strong dollar.”

The strong dollar refers to the U.S. dollar’s current rise against gold, the money commodity, and other currencies. These developments raise important theoretical questions on the nature and function of money, as well as a series of practical questions. For example, what does the current strong dollar imply for the evolution of the world economic situation, the new war in the Middle East, and the war danger in general?

Finally, another important anniversary is approaching early next year. Next March will mark the 30th anniversary of the election of Mikhail Gorbachev to the post of general secretary of the Central Committee of the Communist Party of the Soviet Union. Long before the Gorbachev election, a debate had been raging within the socialist countries around these questions: If and too what extent are the products of socialist industry commodities? How relevant, if at all, is the law of value and commodity-money relationships to the construction of socialism? What are the historical limits to the law of value?

With the election of Gorbachev, the economists who strongly defended the view that commodity-money relations and the law of value either do or rather should prevail during the construction of socialism won the day. The consequences of their victory are all too obvious today.

The famed Argentinian-Cuban revolutionary Che Guevara, who was killed by the CIA in 1967, many years before the election of Gorbachev, defended what even then was the minority opinion among economists in the socialist countries on this matter.

Che Guevara needs no introduction here. His image appears on many T-shirts, and his portrait is present at virtually every progressive demonstration that occurs anywhere in the world, even when the images of Marx, Engels and Lenin are absent. Che is above all remembered as the “heroic guerrilla,” as he is called in Cuba, and properly so. He was a man who after rising to a position of great power in Cuba, returned to the trenches first in Africa and then in Bolivia, where he met his death at the hands of CIA assassins. Today, however, Che is honored by the government of Bolivia. Times have indeed changed.

History offers many examples of revolutionaries who fought heroically in their youth and then rose to positions of great power. But it offers few examples of revolutionaries who voluntarily give up their hard-won positions of power and return to the ranks to meet their end at the hands of the enemy. Che today is primarily remembered for this. It is for this that he is beloved worldwide by the oppressed and their allies throughout the world.

But there was another side of Che that is not so well known. Che, the ultimate man of action, had a great interest in theory, particularly economic theory. He strongly opposed the view that the products of socialist industry should be commodities and that the law of value should prevail in the construction of socialism. Che’s views—he was not a professional economist—on these questions are often dismissed as idealist and naive at best.

Instead, the views of his opponents prevailed. The policies long advocated by these “learned” and “realistic” economists were to be adopted by the new Gorbachev leadership. They went on to produce the greatest economic disaster that the world has ever seen. Exactly who was naive and who were the true realists in the debate between Che and his opponents? The 30th anniversary of the Gorbachev election provides an opportunity to examine the questions that were raised by Che on the role of commodity-money relations and the law of value in the construction of socialism.

Role of landed property under capitalism

Now on to landed property. Here I am interested in exploring the role of landed property within the capitalist mode of production. I am not interested in exploring landed property under feudal or other pre-capitalist societies.

In economics, land refers to those elements of wealth and means of production that are the products of nature rather than human labor. Since land is not produced by human labor, it has by definition no value. Since capital is made up of commodity values—most importantly the commodity labor power and money, which is also in the final analysis a commodity—unimproved land is not capital.

Landed property is therefore a social relationship of production—in legal language a form of property mediated by unimproved land—different from capital. A person who owns land, as opposed to a capitalist, is a landowner.

However, improvements in land that are the result of human labor applied to land do have value and function as commodities and capital. In the real world, the improvements in land are bound up with its natural properties and can be difficult to separate. But in economics, we must use abstraction to separate those things that in the real world are bound up with each other. Therefore, the category of unimproved land as opposed to landed property is extremely important in economics.

Historically, in Europe landowners were often the descendants of feudal lords. The largest landowners were often titled aristocrats, who under feudal laws enjoyed special privileges. Vestiges of these relations still exist in many West European countries. Examples are the House of Lords in Great Britain as well as the constitutional monarchies in Britain and other West European countries. Even today, the surviving West European monarchs function as the heads of the aristocratic caste and still own vast landed estates.

In contrast, in the capitalist countries without a feudal past, such as the United States, Australia, New Zealand, and Canada, the wealthy own both land and capital. The situation is similar in France. While France was once a feudal country, feudalism was thoroughly uprooted during the Great Revolution at the end of the 18th century.

The same is true of the former Soviet Union and former socialist countries of Eastern Europe. Thanks to the October 1917 revolution, feudal relations in land were thoroughly uprooted, not only in the former Soviet Union proper but later in Eastern Europe as well. (1)

In the earlier stages of capitalism, the landowners often formed a class separate and distinct from the capitalist class. Even then in practice, the landlords owned some capital—often landed capital—and the capitalists owned some land. The income from ownership of unimproved land is called ground rent and represents a part of the surplus value produced by the working class.

As capitalism develops and the remains of feudal and other pre-capitalist relationships are dissolved, the tendency is for the same persons who play the economic role of capitalists to also play the economic role of landlords. Feudal property gives way to capitalist real estate (2). Today, for example, Queen Elizabeth 11 as head of the British nobility is not only a very large landowner but a very wealthy capitalist. And the same is true on a smaller scale of the lesser titled aristocrats.

Landed property as the foundation of capitalist production

The capitalist mode of production is based on the separation of the direct producers from the means of production they work with. In pre-capitalist times, the main means of production was the land, and land remains an important means of production today. The transition from feudal and other pre-capitalist forms of landed property to capitalist production necessarily involved the establishment of landed property forms that are characteristic of capitalism.

Under feudal property relations, the serfs were bound to the land. That is, they could not leave the land without the express permission of the lord who was the serfs’ superior in the feudal hierarchy. Though not a free person, the serfs had certain rights that slaves did not have—the most important of these being that the serf had a right to work a strip of land. Under feudal law, the lord could not refuse the serf this right. Therefore, the access of the serfs to their most important means of production—the land—was guaranteed under the feudal system. In contrast, the modern-day wage worker has no such right.

This is why the enclosure movement in Britain was so important to the establishment of capitalism. (3) As feudal property in land gave way to modern bourgeois property in land, peasants gained the right to leave the land if they chose without the landowners’ permission.

At the same time, however, the landlords gained the right to expel the peasants from the land, and they began to do just that. And the process of ending the peasants’ historic rights to use the land was by no means always peaceful. It often involved the direct use of violence, often state violence.

Marx’s theory of ground rent

The theory of differential ground rent was developed by classical bourgeois political economy and perfected by Marx. Marx also added the concept of absolute rent, which I will examine below. The theory of rent, both in the form that it was developed by the classical economists and in the perfected form developed by Marx, was influenced by the conditions that prevailed in Great Britain during the 19th century. Before I go into the details of Marx’s theory of ground rent, we should take a look at the concrete conditions in Britain that inspired both the classical and Marxist theory of ground rent.

In England, the word “farmer”—in contrast to the North American usage—meant capitalist farmer. By the 18th century, the capitalist farmer working with wage labor had largely replaced the peasant who utilized his own labor and the labor of his family. The English farmer was therefore an early example of an industrial capitalist.

In Britain, the capitalist farmer generally did not own the land. The land was owned by a separate person—often a hereditary nobleman descended from old feudal families who rented his land to capitalist farmers.

The theory of rent developed by the classical economists and perfected by Marx reflects these relationships. It assumes that unimproved land is owned by a distinct landlord class, the capital used in farming is owned by capitalist farmers, while the labor power utilized in agriculture is owned by a separate class of wage workers who sell their labor power to the capitalist farmers in order to live.

Adam Smith in analyzing 18th-century British capitalism divided society into three—not two—economic classes. These were the landlords, who lived off the rent of land; the capitalists, who lived off the profit on capital; and the working class, which earned the wages of labor. As far as analyzing the classes of capitalist society is concerned, despite the many advances over Smith that he made, Marx remained a student of Smith.

Though British capitalist farmers used wage labor and were therefore industrial capitalists, the industrial revolution that began in Britain during the latter part of the 18th century was slow to spread to agriculture. Marx, therefore, assumed in his analysis of ground rent that the organic composition of capital invested—the ratio of constant to variable capital—was lower in agriculture than it was in most other branches of industry.

As a consequence, if commodities sell at prices that directly reflect their values—as opposed to at prices of production that equalize the rate of profit among branches of industry that work with capitals of different organic compositions—the rate of profit will be higher than average in agriculture.

Finally, following the classical economists, Marx took his examples of ground rent from agriculture. Marx, however, indicated in Volume III of “Capital,” where he developed his theory of ground rent, that the laws he developed for ground rent in agricultural land applied to mining as well.

Marx assumed that the organic composition of capital in mining was, like he assumed in agriculture, lower than the overall average. The reason he gave was that in mining there is no raw material that functions as capital. The ore in the ground before it absorbs human labor has by definition no value. In the economic sense, ore in the ground is a form of unimproved land, not capital. Since raw material is part of the constant capital—circulating capital—in industry, Marx reasoned that the lack of raw material as capital in mining implied that capital invested in mining would as a general rule have a lower-than-average organic composition.

Ground rent and lease money not identical

Marx only made a few passing remarks about house rent, and neither he nor the classical economists gave much attention to this question that is so vital in our own personal lives. Marx did indicate that not all money collected by leasing out of land is ground rent in the economic sense of the word. The distinction between lease money and rent becomes clear once we examine Marx’s theory of ground rent.

Marx’s assumptions in analyzing ground rent

To review, Marx’s analysis of ground rent makes the following assumptions: First, he assumes that production is purely capitalist both in agriculture and the rest of the economy. There are no longer any peasants or working farmers. Agricultural production is carried out by capitalist farmers—industrial capitalists—who employee wage labor. Like all industrial (and commercial) capitalists, capitalist farmers will not settle for less than the average rate of profit on their advanced total capital

To fully understand Marx’s theory of ground rent, it is necessary to grasp both Volume I of “Capital,” especially the theory of surplus value and the transformation of values—or direct prices—into prices of production, which Marx develops only in Volume III. Readers, therefore, must be familiar with these concepts before they can expect to fully understand Marx’s theory of ground rent. Once these concepts are mastered, however, Marx’s theory of ground rent presents no special difficulties.

Differential rent and its two forms

First, let’s examine Marx’s first form of differential rent. Before we go any further, we should be clear that Marx ignores the fluctuations of the industrial cycle and all other economic fluctuations like he did with his analysis of expanded capitalist reproduction in Volume II. As far as Marx’s analysis of rent is concerned, there are no economic fluctuations of market prices around the prices of production.

As we explained above, Marx assumed that capital invested in agriculture had a lower-than-average organic composition of capital. If a branch of industry—not an individual capital—with a below-average organic composition of capital can sell its commodities at their value, or direct price, it will make a higher-than-average rate of profit.

However, assuming free competition, unless special factors are at play, this situation will not be maintained. The reason is that capital will flow into a branch that is making an above-average rate of profit until the profit is reduced to the average rate. In this way, prices that directly reflect values are transformed into prices of production. In agriculture, if ground rent did not exist, the price of production would, accepting Marx’s assumption that capital invested in agriculture has a below-average composition of capital, be below the direct price.

In agriculture, there is a special factor that prevents this process from occurring. Some land is more fertile than other land. The most fertile grades of land are in short supply. This enables owners of the more fertile grades of land to realize a monopoly. Such persons are in a position to realize a super-profit that competition cannot eliminate. A super-profit that competition does not tend to eliminate is economic rent.

A monetary income that flows from the leasing out of land is only ground rent in the strict sense of the word if it is indeed such a super-profit. If it is not, the money income realized by renting out of land is not economic rent but lease-money.

Now, because we assume that the more fertile grades of land are in short supply, capitalist farmers farming this land cannot increase the production of produce to the point that the market price of the produce falls to its individual price of production.

Remember, competition ensures that all produce of a specific type and quality sells at the same price. Here is where landed property—the landlord—steps in and reduces the profit of the capitalist farmer farming on such fertile land to the average rate of profit. The landowner performs this economic function by collecting rent.

However, landowners cannot collect a rent that will reduce the farmers’ profit to below the average rate of profit. If that were the case, the farmers would invest their capital elsewhere. The most fertile land will bear its owner the highest rent while less fertile lands that are still in short supply will bear its owner a lower rent.

The marginal grade of land that yields no differential rent

Let’s assume that the land instead of being owned by private persons is owned by the state. The state as a landlord collects the differential rent as a tax. Nothing is changed here when we replace the private landlords by the state except that unlike private landlords who will not rent out their land unless they expect some income—and remember, so far we know only differential rent. However, let’s assume the government is willing to let capitalist farmers use the marginal land for free. (4)

The marginal—or worst—grade of land that yields no rent is the grade of land that is plentiful enough under the prevailing conditions of production that collectively the capitalist farmers will be able to increase production to the point that the market price will fall to their individual price of production. The worst, or marginal, land is the land that is not scarce. The individual price of production of the capitalist farmers working with the worst—or marginal—land will therefore determine the market price.

However, since the capitalist farmers using this marginal land can realize only the average rate of profit, the capitalist farmer will not be willing to pay any rent. For the marginal land to be fully leased out, we have to assume state ownership of the land, since no separate private landowner will be able to collect any rent on it. Notice, however, that the state ownership of the land is fully compatible with capitalist production. Indeed, state ownership of land is actually necessary if capitalist production is to reach the highest point possible within the limits of the capitalist mode of production.

The second form of differential rent

The second form of differential rent involves repeated investments of a given quantity of capital on the same land. You cannot invest an infinite amount of capital on a finite quantity of land. At some point, repeat investments of capital on a given quantity of land will mean a decline in the rate of profit on each successive investment. Eventually, the rate of profit will fall to the average rate of profit. In other words, there will be an economic margin that bears a zero differential rent. To ensure that the farmers invest their capital out to the “economic margin” that bears no rent, we also need state ownership of land.

Ricardo’s struggle against differential rent

Ricardo and his followers waged a struggle against differential rent. He pointed out that the higher the differential rent was—that is, the scarcer the fertile land was—the more of what Ricardo called the net product, what Marx was to call surplus value, would go to differential rent—the only form of ground rent that Ricardo knew—as opposed to profit.

Using Marx’s terminology, since the quantity of surplus value is finite, the more of it that goes to differential rent the less will be left over for profit. Ricardo assumed that as the population grew, poorer grades of land would have to be cultivated. This would result in higher differential rents and a fall in the rate of profit on capital.

Eventually, the great bulk of the surplus value would consist of differential rent collected by the landowners, and the rate of profit would be so low it would no longer be sufficient to provide an incentive for further accumulation of capital. The progress of society—Ricardo couldn’t imagine a society other than capitalism—would then cease. This is the Ricardian version of the falling rate of profit.

To postpone this situation as long as possible, Ricardo urged that Britain remove its protective tariffs on agricultural commodities known as the “Corn Laws.” In effect, the land available for the formation of differential rent in Britain would be all the agricultural land on earth. Differential rents would fall radically—ruining many landlords in Britain. But the rate of profit would rise stimulating capitalist production, postponing to the distant future the time when the rate of profit would fall so low that capitalist accumulation would cease.

For Britain, the part of surplus value that was appropriated in the form of profit by the capitalists as opposed to that portion appropriated by the landlords in the form of rent would radically increase. The era of capitalist progress for Britain would therefore be tremendously extended. In 1846, with the repeal of the Corn Laws, the British government finally followed the advice of Ricardo—who had died in 1823.

The danger of the Ricardian policy was that it made Britain extremely vulnerable to blockade in the event of war. The solution as far as Britain was concerned was to build up its naval power to make Britain militarily invulnerable to blockade. For Ricardo’s policies to work without undermining Britain’s “national security,” it was necessary for Britain to be and remain the world’s leading naval power. For Britain, the army—land power—was of lesser importance.

The demand for the nationalization of the land as a demand of the bourgeois revolution

Some of Ricardo’s more radical followers demanded the nationalization of the land—the conversion of all land into state property. This would put all the differential rent into the hands of the state, which would largely eliminate the need to tax the capitalists. The expenses of the state would be met instead by ground rent that would accrue to the state in its role as the universal landlord. The result would be a considerable increase in the after-tax rate of profit of the capitalists and consequently a more vigorous development of capitalism.

Lenin, who perhaps paid more attention to Marx’s theory of ground rent than any other Marxist, pointed out that the demand for nationalization of the land is not as such a socialist demand but rather a condition for the fastest possible development of capitalism. Therefore, it is a bourgeois demand. Lenin and the Bolsheviks therefore put forward the nationalization of the land as part of their program for a bourgeois-democratic, and not the socialist, revolution in Russia. (5)

Absolute ground rent

While classical political economy developed the theory of differential rent, Marx introduced the category of absolute rent. As we saw above, the individual price of production of the capitalist farmer on the poorest land—the margin—determines the market price of that produce. But since the poorest land yields no super-profit, there is no rent for the landowner. However, what will happen if the landlords rent out only part of the poorest land?

In that case, there will not be enough produce on the market to lower the price of produce all the way down to the individual price of production of the produce produced on the worst land. Instead, Marx assumes that it will only lower it to the value—or direct price—of the produce produced on the worst land. Remember, Marx assumed that the organic composition of capital invested in agriculture has a lower organic composition than average. Consequently, its price of production is lower than the price that directly expresses its value.

Market value

If the landlords by holding back some of their worst lands can raise the price of the produce to the point where the market price is equal to the price that directly expresses the individual value of the produce produced on the worst land, that individual value will rule the market value. Therefore, the individual direct price of the produce produced on the worst land will determine the market price of all the produce of a given type and quality under the given conditions of production.

Absolute rent defined

Marx defined absolute rent as the difference between the individual value, or more strictly the direct price of produce produced on the worst land (6), and its individual price of production. This absolute rent is then collected by the landlord, which once again reduces the rate of profit of the capitalists using the worst land to the average rate of profit.

Unlike the case with differential rent, absolute rent can be abolished if ownership the land is transferred to the capitalist state—which is not the same thing as ownership of land by the community. If the state takes over ownership of the land, the government if it wishes can rent the poorest land to capitalist farmers for nothing. If it does so, this will lower the price of produce to the individual price of production on the poorest land. Absolute rent then disappears.

The ‘price’ of land

Since unimproved land is not a commodity, how can land have a price? Remember, price is the form that the value of a commodity takes. How can something that is not a product of human labor have a price? Actually, the price of land is not really a price but is rather a form of rent. But how is rent transformed into what appears as the “price of land”?

Fictitious capital

Profit—whether profit of enterprise or interest—appears as a flow of income in the form of money. Under capitalism, the rent of land also presents itself as a flow of money, which as we have seen is actually, just like profit, part of the surplus value produced by the unpaid labor of the working class. (7) If a person with money wants to obtain some of this surplus value and doesn’t want to take on the risks of becoming an industrial or commercial capitalist, that person has two choices. He or she can lend out the money to industrial or commercial capitalists either directly or through the banking system, or that person can buy land—again for reasons of simplification not realism, we assume the land is unimproved.

The person after the purchase of the land will not be a capitalist because the asset purchased does not have value. Capital is made up of commodities and money. Land is neither. However, the person who bought the land, like a capitalist, has legal title to a portion of the unpaid labor produced by the working class. We call such a person a landowner.

Under the capitalist mode of production, land can be bought and sold as though it is a commodity. When individuals invest in land, they therefore expect the same rate of return that they would get if they lent the money to an industrial or commercial capitalist. (8) In their minds, they will imagine that the land they have bought is capital—since we can assume they are not deep into the study of Marx’s critique of political economy and are really not interested in the “technicalities.” They have made an investment in land. They will therefore expect the same rate of return on their investment that they would get if they lent the money out on interest. (9) This process of forming an imaginary or fictitious capital is called “capitalization.”

Assuming the actual rent remains unchanged, the price of land therefore moves inversely to the rate of interest. If interest rates rise, the price of land—or the “value” of the imaginary capital—will fall. If the rate of interest falls, the “value” of the imaginary capital or the price of land will rise.

Let’s assume that an acre of land sells for $100 and the interest is 5 percent. The price of land will be 100/.05 or $2,000. If the rate of interest rises to 10 percent, the price of an acre of land will fall to $1,000. If the rate of interest falls to 2.5 percent, the price of and will rise to $4,000 per acre.

I should mention here that the neo-classical marginalist economists use the laws that determine the price of fictitious capital to value real capital. In reality, fictitious capital presupposes the existence of real capital.

Next month we examine house rent and modern capitalist real estate.

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1 A century ago, the remnants of feudal relationships in land in Europe were still quite strong. Today, thanks to the October revolution of 1917 and its extension into Eastern Europe with the defeat of Nazi Germany, these semi-feudal relations were swept away. While the bourgeois counterrevolutions that swept these regions beginning in the 1980s liquidated the socialist beginnings, it did not restore the old semi-feudal relations on the land.

These conquests of the October revolution and its post-1945 extension into Eastern Europe remain. For example, in Germany under the Wiemar Republic, the Junkers—semi-feudal landowners who were largely located in what was to become the GDR—East Germany—after World War II were still a powerful force in politics. However, the capitalist counterrevolution of 1989, though it restored capitalism in what had been the GDR, did not restore the power of Junkers and other semi-feudal landowners, who therefore play no role in the politics of present-day Germany. (back)

2 Real estate is defined as land plus all improvements to the land and buildings attached to the land. It therefore combines both landed property, landed capital, and capital in the form of buildings. The term real estate itself, however, harks back to feudal times when the ruling feudal landlords looked down on the property that existed in the form of capital, which was considered inferior to property in land. Property in capital was considered not quite “real,” hence the term “real” estate. If your estate consisted largely of land, it was “real” and therefore you were a gentleman and not an upstart bourgeois. (back)

3 As the early capitalist textile industry began to develop, demand rose for wool as raw material for the production of textiles. The landowners who were making the transition from feudal relations to modern capitalist relations began to evict their peasant tenants—serfdom had been abolished for some time—and enclosed the lands, thereby separating the peasants from their means of production. The evicted tenants were thus transformed into proletarians who were forced to sell their labor power to the capitalists. (back)

4 Notice that we (and the classical economists and Marx) are using a marginalist method to analyze differential rent. It is correct to do so in this case because we are analyzing scarcity of fertile land. The marginalist school of economics improperly generalizes this idea. Indeed, it is no exaggeration to say that neo-classical marginalist economics is little more than the classical theory of differential ground rent improperly applied to capital.  (back)

5 With the triumph of the bourgeois counterrevolution in the Soviet Union and Eastern Europe, there has been a considerable decline in interest in what used to be called “Marxism-Leninism.” As a result, there has been a decreased interest in studying the works of Lenin even among Marxists.

One result has been a growing tendency to confuse the tasks of the bourgeois-democratic revolution with the tasks of the socialist revolution. However, the growth of reaction and counterrevolution has made this distinction no less important; indeed, it has made it even more important. Marx’s theory of ground rent plays a crucial role in this distinction, as any serious student of Lenin will realize, and if only for this reason alone is worthy of careful study. (back)

6 Marx generally simply defined absolute rent as the difference between the individual value of the produce produced on the worst land and its individual price of production. This is actually a short-hand expression, since price—exchange value—is the form that value must take.

However, I have stressed in my critique of crisis theory the difference between value and its form price. Value is defined as abstract human labor measured in some unit of time, while price is measured in terms of gold—assuming gold functions as money material—measured in terms of some unit of weight.

We cannot actually subtract value—units of abstract human labor measured in time—from units of precious metal measured in terms of weight, any more than we can subtract oranges from apples. Therefore, to be strictly consistent we have to subtract weights of gold—price—from one another. Therefore, absolute rent is the difference between the weight of gold that directly expresses the individual value of a unit of produce of a given quality and quantity produced on the worst land and the weight of gold that equals the price of production of the same produce. (back)

7 The vulgar economists, including the present-day “neo-classical” economists, confuse capitalist ground rent—a flow of monetary value—with use value produced by the land itself, which is then somehow “earned” by the landlord who personifies the land. In reality, capitalist ground rent is simply a portion of the unpaid labor performed by the working class free of charge, not for the capitalists, but for the landlords. (back)

8 I leave out that our fellow could also lend the money to a consumer. This is not an oversight but a consequence of this fact: Marx’s analysis of ground rent assumes purely capitalist relationships that abstract away consumer credit since that involves a secondary form of exploitation. (back)

9 In his “General Theory,” John Maynard Keynes calls the money capitalists “rentiers,” a French word that implies that the renters of land and the money lenders are identical. For a modern capitalist who both loans money and purchases real estate, it quite natural to confuse these two categories. But as Marx’s analysis of ground rent shows, they are really two different relationships, though both involve a person living off the unpaid labor of other persons. (back)

4 Responses to “The Marxist Theory of Ground Rent (Pt 1)”

  1. Boffy Says:

    I look forward to reading the rest of your views on Marx’s theory of ground-rent. About ten years ago, I wrote that I was not happy with Marx’s theory, or several reasons. Having had time to read it and think about it several more times alongside deepening my own analysis, I have consolidated my own views about what is wrong with it. A careful examination of what Marx says later about land ownership, as urban capitalists come in to buy land, also confirms another element of my view about what a modern theory of rent, and land prices should look like.

    I will myself be setting out a new theory of rent in coming months, based on Marx’s analysis, and these later comments he makes about capitalist land ownership.

    You are, of course, also correct that these questions remain very important today, as the financial crisis of 2008 demonstrated, because land continues to be one of those assets that forms a significant element of financial speculation – more so in countries such as the US, UK, Ireland, Spain where home ownership is usual, as opposed to countries like Germany where it is more usual for people to rent their homes – and this speculation also sits on bank balance sheets as a large element of their fictitious capital.

    As I have set out in my book Marx and Engels’ Theories of Crisis: Understanding The Coming Storm the build up of this fictitious capital was a direct result of the conditions that arose out of the 1980’s, and 90’s.

    Firstly, during that period the global rate of profit rose sharply. It meant that the supply of potential loanable capital rose far more quickly than the demand for it. Those are the conditions Marx sets out for interest rates to fall, during such a period. Global interest rates fell in a secular trend from 1982 to around last year.

    From the start of the new global long wave boom in 1999, the growth of the rate of profit was combined with the sharp increase in economic activity to sharply increase the mass of this potential loanable-capital even further. Hence we have a situation similar to that described by Marx and Engels in the long wave boom that ran from 1842-1865. Although there is substantial investment in productive-capital during the boom, the mass of profit is so great that it cannot all be used productively immediately. Interest rates drop, and the excess loanable money-capital gets used for speculation. Then it was in the Railway Mania, whose bubble burst in 1847, for example.

    A basis of the rise in the rate of profit from the late 1980’s was the sharp rise in productivity as a range of new technologies based on the microchip were introduced. Together with the shift of production to Asia, this slashed the value of many commodities, which is the basis of the current persistent deflation. It could only be prevented by bringing about an at least equally large devaluation of money tokens, which is why huge amounts of money printing was undertaken. But, its important to realise that as Marx says this money printing is not and cannot be the reason for low interest rates. devaluing the currency affects both sides of the equation for the demand and supply of loanable money-capital equally. It is the surge in the rate and mass of profit that is the cause of low interest rates.

    But, the devaluation of money tokens whilst it mirrored the fall in the value of commodities, so that the prices of these commodities did not collapse, at the same time, had to cause a rise in the market price of all those things that were not the product of labour, and whose “value” therefore, could not have been reduced by the rise in productivity. In other words, all those “commodities” whose price is solely determined in the market by supply and demand – because as Marx illustrated they have no value around which that price can pivot – necessarily had to rocket in price.

    Hence the price of land shot up. The value of the products of labour built on that land should actually have fallen along with the value of all other products. The price of shares, bonds and other forms of fictitious capital also shot up, creating the potential for almost immediate and huge capital gains, which means – as with the railway mania – there is an incentive to engage in this speculation rather than productive-investment, even when the rate of profit itself is very high.

    So we, see Apple currently selling a bond to raise huge amounts of money not to use for productive investment, but to buy back its own stock, thereby ramping up its share price, and flattering its earnings per share figure.

    In the US and UK particularly, the conservative governments in the 1980’s adopted policies in the interests of their petit-bourgeois base. Low wages were supplemented by large scale private debt to sustain living standards and aggregate demand. The debt itself was based upon that same continual inflation of the amount of fictitious capital in the shape of property values, 401k’s, mutual funds and so on, and the similar ballooning of bank balance sheets.

    It was this that created the conditions for the 2008 financial crisis. Private debt can only expand so far. property prices can only rise so far, as a basis for further private debt. Interest rates must start to rise when the long wave conjuncture shifts so that the conditions that created a sharply rising rate and mass of profit from the late 1980’s to around 2012 begin to reverse, and global interest rates start to rise, as the demand for loanable money-capital exceeds the supply.

    A basic element of Marx’s theory of ground-rent and land prices is that land prices are capitalised rent, so that any given rent causes land prices to rise as interest rates fall. £1000 p.a. rent with 5% interest rates gives a capitalised price for the land of £20,000, but with 2% interest rates the capitalised value is £50,000. Likewise the opposite arises as interest rates rise, the capitalised value falls.

    Global interest rates are rising, and the current falls in the US are just a backwash of money leaving the emerging markets where the start of that process has already begun. Whatever central bankers do, interest rates will continue to rise, including in the US and Europe. The causes of the 2008 financial crisis were not addressed. On the contrary, they were made worse by all the money printing undertaken since then, which means that the ocean of fictitious capital has not been drained, the trebling of the S&P 500 in the last 5 years and more than doubling of the DOW illustrates that the measures have continued to create conditions whereby money-capital is drawn into speculation rather the productive investment.

    It is then only a matter of time, and probably a very short time, before that results in a new financial crisis far greater than that of 2008, and one that this time will not be reversd by yet more money printing.

  2. Zulu Says:

    Gorby has nothing to do with the prevalence of the view that the law of value must remain operational during socialism. It prevailed long before him. The whole point of Stalin’s last theoretical work “The Economic Problems of Socialism int the USSR” was to combat that view which he (to his unpleasant surprise perhaps) found already rampant among the Soviet economists in the post WW2 period. Unfortunately, Stalin was not such a great theoretician himself, and died soon after anyway… Then there was that “sincere fool” Khruschev, and then the creeping counterrevolution won completely in 1965 with the Kosygin-Liberman reform, which essentially restored capitalism in the USSR (in the form of state monopoly capitalism, but nevertheless…) And Guevara returned to the jungle because of what he saw in the Soviet Union.

    Ironically enough, the operation law of value was phased out by the chief imperialists in 1971, when they abolished money. And that happened precisely for the reason of the overdevelopment of the productive forces, which could not be constrained by the law of value any longer. (Can’t wait for your explanation of this new twist with the stronger dollar after all those QE’s and the continued trend of the gold price to fall).

    As for the ground rent, there is an unsolved contradiction in Marx’s theory of it (see: http://www.jstor.org/discover/10.2307/3146367).

    What Marx could not grasp (but which would fit perfectly in his materialistic political economy, although through partial rehabilitation of Physiocrats and even Malthus) is that “land” serves as the natural source of the productivity of labor (and its increase) as it provides physical energy which puts in motion the means of production and the laborers themselves, in the form of food and fuel. That’s why the coal mining capitalists in his day seemed to draw a rent on their property which wasn’t really capital, just like the landlords. And the same thing goes to the entire energy sector these days and more than ever, of course, due to the ever rising energy requirements of industry. The manufacturing sector in general is willing to pay that “power rent” to the energy sector, as energy is what amplifies the productivity of labor.

  3. Boffy Says:

    Marx pointed out long, long ago that the Law of Value is a law of nature, and so cannot be abolished. It simply assumes a different form in each mode of production. As he put it in describing the Law of Value, and his theory of value, in his latter to Kugelmann,

    ““Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish. And every child knows, too, that the amounts of products corresponding to the differing amounts of needs demand differing and quantitatively determined amounts of society’s aggregate labour. It is self-evident that this necessity of the distribution of social labour in specific proportions is certainly not abolished by the specific form of social production; it can only change its form of manifestation. Natural laws cannot be abolished at all. The only thing that can change, under historically differing conditions, is the form in which those laws assert themselves. And the form in which this proportional distribution of labour asserts itself in a state of society in which the interconnection of social labour expresses itself as the private exchange of the individual products of labour, is precisely the exchange value of these products.”

    And, in Capital III, in the Critique of the Gotha Programme, and elsewhere, he makes clear that this Law of Value must continue, therefore, to operate after Capitalism has been replaced by Socialism, precisely because it is a law of nature, precisely because human beings will continue to be constrained to have to produce the use values they require using a limited quantity of available social labour-time. Engels repeats the point in Anti-Duhring. Here is Marx in Capital III, making the point clearly,

    “Secondly, after the abolition of the capitalist mode of production, but still retaining social production, the determination of value continues to prevail in the sense that the regulation of labour-time and the distribution of social labour among the various production groups, ultimately the book-keeping encompassing all this, become more essential than ever.”

  4. Vidyasagarsriadibhaatla Says:

    In India still the land is being cultivated by peasant proprietors though the majority of peasants leaving the profession. On the other hand small players coming into lease market.in this scenario can we apply Marx theory of ground rent in India.please clarify

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