Landed property and the housing crisis
In its Dec. 5, 2014, editorial, the San José Mercury News commented on the city of San José’s heartless move to close down once and for all a homeless camp. “The dismantling of San Jose’s Story Road homeless encampment known as the Jungle has drawn national attention,” the Mercury News noted. “Once again, it’s those crazy Californians—in the middle of one of the wealthiest regions in the United States, they managed to amass what may well have been the country’s largest homeless encampment, with estimates as high as 300 residents.”
The Mercury News went on to observe: “The ranks of the homeless increased dramatically during and since the recession because so many individuals and families lost jobs and homes. Then, when the economy picked up, rents quickly soared—but many of the jobless had to re-enter the workforce at lower pay.”
The closing of San Jose’s “Jungle” encampment is part of a much larger housing crisis many workers and even middle-class people are feeling. For many workers, the crisis takes the form of rapidly rising apartment rents, which force workers to move to distant suburbs, perhaps a hundred or more kilometers from their places of work. In the worse cases, workers like unfortunate former residents of San José’s “Jungle” are facing complete homelessness.
Nor are the homeless necessarily among the unemployed. Low-wage workers are often unable to afford the rent on even substandard apartments. Some are forced to live in their cars, which end up serving the dual use values as means of transportation and means of shelter. Or low-paid workers are forced to divide up their apartments with other low-paid workers. It’s either that, their automobile—if they have one—or the street. (1)
Frederick Engels on the ‘housing question’
In the early 1870s, articles appeared in the press of the German Social Democratic Party claiming that the relationship between house owners and tenants was analogous to the relationship between industrial workers who sell their labor power and industrial capitalists who buy it. According to these articles, the key to the “social question” was workers’ ownership, whether individual or collective, of their own housing.
Karl Marx’s co-worker Fredrick Engels sounded the alarm and wrote his booklet “The Housing Question” to refute this view. Engels’ basic point was that the key to the “social problem”—the evils caused by the capitalist mode of production including the lack of housing—is to be found not in the ownership of the means of shelter but in the ownership of the means of production.
In his booklet, Engels gave many examples of the housing crisis of the 19th century. A lot of this material is necessarily dated and largely of historical interest. But there is still much in the booklet that is all too familiar for today’s workers. Once again, the housing question is growing acute with rising homelessness, unaffordable house rents and “gentrification.”
Renting land for non-productive purposes
In Marx’s theory of ground rent, found in Volume III of “Capital,” which I examined last month, the renters of the land are assumed to be industrial capitalists—generally capitalist farmers—who demand and receive the average rate of profit on their advanced capital.
If the forces of nature create favorable conditions of production, capitalist farmers—or other industrial capitalists—will be able to make a super-profit above and beyond the average of rate of profit. The landowner, assumed to be a separate person, is in a position to relieve our capitalist farmers of the super-profit in the form of ground rent. This reduces the after-rent profit of our capitalist farmers back to the average rate of profit (See last month’s post for a more-detailed explanation.)
However, not every renter of land is an industrial capitalist. Even if we keep to our—actually Adam Smith’s—three-class model (2), both the capitalists and the workers must rent some land for their personal living space. This is an example of the renting of land for non-productive purposes. By non-productive, I mean for purposes other than the production of surplus value.
Extending Marx’s theory of surplus value, profit and rent to the case of house rent
The starting point in the analysis of house rent must be Marx’s theory of wages and surplus value. Marx explained that the capitalist must pay a wage that not only provides workers with enough money in exchange for their labor power that enables them to purchase the commodities necessary to reproduce their own labor power and raise the next generation of workers. In addition to commodities proper, workers must also rent a small amount of landed property—not itself a product of human labor—if they are to reproduce their labor power and raise the next generation of workers. (3) Remember, workers do this not for purposes of producing surplus value but rather for the purpose of reproducing their labor power—ability to work.
To make this possible, the capitalist must in exchange for the workers’ labor power provide the workers with enough money so they can rent from a landowner the small amount of land they need to reproduce their labor power.
Residential real estate a hybrid form of property
As we saw last month, real estate combines landed property and buildings built on that property. Therefore, real estate is actually a hybrid form of property that combines landed property with capital. The structures built on the land represent capital. With residential real estate, the use value of the structures built on the landed property is to function as means of shelter.
The land and the space above it is in the economic sense of the word “landed property,” because unlike an apartment building or house, the space above is itself a product of nature, not of human labor. In contrast, an apartment building itself is a product of human labor and under capitalism is very much a commodity in the full sense of word. Its value is determined by the quantity of labor necessary to produce it minus the depreciation on the building plus the value that is added to the building by repairs and improvements.
Strictly speaking, the land as such has no value, though it takes on an apparent value through the capitalization of the ground rent. When I refer to the “value of the land” from now on, I am using this expression as shorthand for the capitalization of the ground rent at the prevailing rate of interest.
Of course, the capitalists and in some cases the workers might own rather than rent the land that their homes are built on. But this changes nothing of essence as far as house rent is concerned. As we saw in last month’s post, the price of unimproved land is simply a form of the rent that the owner of the land is entitled to under the capitalist mode of production. (4) However, if a worker becomes a landowner to even a very small degree, even if the land is a tiny lot or even a condo apartment, there are important consequences that I will examine below.
Mortgages a form of ground rent
What if the land is mortgaged? Under capitalist property relations, landowners both big and small are entitled to mortgage their land. That is, they can borrow money with their rent-bearing land as collateral. Mortgage payments are therefore, like the price or “value” of land, a form of rent. The rental payments instead of going to the legal landowner go for a period of time to the holder of the mortgage, generally a financial institution.
By granting mortgages, banks become entitled to a portion of the ground rent for a period of years. The banks become in addition to money capitalists landed proprietors as well. Indeed, in the case of defaults on mortgages, banks become the outright legal owners of land. During the 2007-2009 economic crisis, it was common in the U.S. to see signs in front of houses proclaiming that the house (including the landed property on which it was built) was “bank owned.” The interest that enables the bank to make a profit on a mortgage is paid from the primary income of the mortgagee, whether profit or wages.
Differential house rent, or location, location, location
In analyzing house rent, there are two main cases. One involves the renting of land by surplus value-producing workers in order to reproduce their labor power. The other involves the renting, or more likely the purchasing, of residences by the capitalists for their own personal use.
First, I will examine the question of renting of housing by workers who produce surplus value. Then I will examine the renting, or more generally purchasing, of land by capitalists for their own personal shelter. Finally, I will examine the competition between capitalists and workers for land to live on.
Locating a business in certain areas often means extra profit. For example, if a business is located near a port, the cost of transporting a commodity to its ultimate consumer will be lower, since the value of a commodity includes the value added by the labor involved in transporting it from the point of production to the final consumer. Locating a business near a port will, by minimizing the cost of transporting a commodity, lower its individual value, and therefore tend to raise the rate of profit on the capital invested in the business above and beyond the average rate of profit.
In everyday language, “the cost of housing is high” in these favored areas. And because of high housing costs, the local “cost of living” is higher than in most other areas of the country, even if commodity prices minus housing costs are not. Therefore, as a general rule, the cost of living within a country is higher in coastal areas than in inland areas far from sea ports or navigable rivers.
And it isn’t the houses as such that have higher values. It is the “value of the land” on which the houses are built. Therefore, in areas of high housing costs the buyers of labor power must pay their workers higher wages, which end up as rents in either the form of house rent proper, the profit made when selling the house, or as mortgage payments.
If housing costs begin to eat into the average profits on capitalist enterprises, they will start to move out, the local economy will slump and nominal wages—the money needed by workers to buy the commodities necessary to reproduce their labor power plus ground rent—will level off and even decline. As this point is approached in a given area, the local capitalist press will be full of stories complaining that “high housing costs” are driving businesses out of the area.
In this way, differential ground rent on landed property used for residential real estate plays a role in the distribution of the population in a given country, and in today’s globalized world, even worldwide.
The landowners who appropriate local super-profits in the form of rent are not necessarily large landowners or banks, though they often are. They can also be individual homeowners who own tiny parcels of land or even condo apartments.
For example, assume that businesses headquartered in an imperialist country over a period of time realize higher and higher imperialist super-profits based on the super-exploitation of workers of oppressed countries. The value of residential real estate rises, not because the actual value of the buildings rises but because of the rising differential rent that is actually nothing but the super-profits pocketed by owners of the land and mortgages.
How worker-homeowners can share in imperialist super-profits
The homeowners to the extent that they build up equity in their homes—the difference between the value of the home and the remaining mortgage debt—will benefit in the form of the rising value of their homes. The homeowners in their economic role as (very) petty landowners can realize the rising ground rents on the land their homes are built on in various ways.
For example, they can rent out unused rooms in their homes. (5) They can also realize some of the rising value in money form by taking out so-called home equity loans. (6) The inflated magnitude of such home equity loans played a large role, especially in the United States, in the crisis of 2007-2009.
But more frequently the rising rental value of the land that a home is built on is realized when homeowners sell the homes at much higher prices than they paid for them, perhaps at retirement, and then move to an area of the country where real-estate values are much lower—or to a much smaller apartment—the kids are now grown—to retire and live off the “nest egg” that is realized when their homes are sold.
When large numbers of workers become homeowners—especially in imperialist countries—and build up equity in their homes, even if the homes are condo apartments, there are many undesirable consequences from the point of view of the workers’ movement. First, the workers acquire a certain individual material interest in an imperialist foreign policy that produces super-profits for the monopoly capitalists in the given imperialist country.
To the extent that significant sections of workers come to expect and depend on the rise in the value of their homes, the struggle for social insurance—old-age pensions and universal medical insurance—is weakened. One of the reasons that a national health care system has not been realized in the United States—and is still unrealized under Obamacare—is the widespread home ownership in the United States, which has been strongly encouraged since New Deal days by the ruling Democratic and Republican parties.
Therefore, the widespread home ownership among workers in the U.S.—and a few other imperialist countries—is one of the reasons that since World War II we have seen a tremendous weakening of the U.S. trade union movement, the political degeneration of the old workers’ and labor parties in other imperialist countries, and the general rightward movement of politics in the imperialist countries that has marked the post-World War II era.
Let’s examine this question more closely, because it is of great political importance. In the United States, individual home ownership is called the “American Dream.” In the sense of the “American dream,” the rising value of the homes isn’t a real increase in the value of the house as a commodity but the value of the land on which the house is built.
Why workers should reject the ‘American Dream’
The rising value of homes therefore actually expresses the rising mass of the super-profits that corporate America wrings out the world’s industrial workers, some of which takes the form of “rising home values” in the U.S. To its occupant, the home in addition to its basic use value as a means of shelter becomes the equivalent of corporate stock—which entitles its owner to a portion of the surplus value that is produced by the world working class.
In other words, the “American dream” is simply a form of the sharing of super-profits by the U.S. ruling class with sections of the U.S. working class that are able to afford to buy their own homes. This is why class-conscious workers have to reject the “American Dream” and its counterparts in other imperialist countries.
Widespread working-class “home ownership” under capitalism, especially in imperialist countries, also encourages racism. It is well known that in the U.S. “people of color,” especially African Americans, are paid less than white workers. Ground rents and therefore the “value of homes” is generally lower in areas that are inhabited by African Americans and other workers of color. In the U.S. and other imperialist countries, residential segregation, though not formally the law, remains very much a reality.
A particular neighborhood can flip. That is, it might go from white to black or from white to Latino. Particularly with the scanty system of social insurance in the U.S., white homeowners often count on the rising value of their homes for retirement. They are ever fearful that if one African American family or one Latino family moves into the neighborhood, the neighborhood will not only lose its all-white character, it will then “flip” becoming a black or Latino neighborhood. If that happens, the white homeowners may have to sell their homes at a loss or at least with a considerably smaller gain than they had been counting on for their retirement.
Therefore, white homeowners are given a material incentive to oppose the moving of African Americans or Latinos into their neighborhoods. This breeds racism, creates a voting base for extreme right-wing politicians, and breaks down the solidarity of the working class.
The case of a capitalist renting land for residential purposes
Let’s examine the case of a capitalist renting or buying land for purposes of (luxurious) shelter, not to produce surplus value. This rent is not necessarily rent, strictly speaking; it can be “lease-money.” (See last month’s post for explanation of the difference between rent and lease money.) But the rules that govern the capitalization of lease-money and ground rent proper are identical, so in practice we need not distinguish here between rent in the strict economic sense and lease-money. I will therefore refer to all income from land as rent.
Wealthy capitalists buy—or sometimes rent—land for residential purposes in particular areas for various reasons. Perhaps they like the climate or the scenery, or they want to live in big cities like New York, San Francisco, Paris, or London where the “beautiful people” like themselves congregate.
The capitalists, as every child knows, have vastly larger incomes than workers do. Therefore, in the competition for land for residential purposes, they enjoy a vast advantage over the working class. Since the value of residential real estate depends largely on ground rent, urban-based house owners always hope to attract the wealthy if they possibly can. This is where gentrification comes in.
The owners of residential real estate know that if a previously working-class area becomes “gentrified,” ground-rent—the value of land—is sure to soar. As soon as they sense the bare possibly of gentrification, the landlords will do all they can to drive their working-class tenants out. Sometimes this takes the form of transforming rented apartments into condos. The working-class tenants cannot afford to purchase their apartments—the banks will not grant them mortgages—and they are forced to move out. Or the landlords will wildly raise the house rents so the working-class tenants have no alternative but to leave.
Once this is done, the real estate can be sold to developers at huge profits. Developers then move in, tear down the working-class housing, and replace it with luxury housing that only the very rich—or at least a far more affluent group—can afford. Or, depending on zoning laws, they may replace the working-class housing with commercial projects like shopping malls, theater districts and so on. Through these means, gentrification is accomplished.
The beautiful city of San Francisco, Calif., is an example of a city that is now undergoing this process. San Francisco is very desirable for the rich because of its cultural life, beautiful hills, and spectacular ocean and bay views, combined with a climate that is cool in the summer and mild in the winter.
Unlike the other famous California city, Los Angeles, San Francisco occupies a very small geographical area at the northern end of a peninsula that divides the Pacific Ocean from San Francisco Bay. As a result, land for residential purposes in San Francisco is extremely scarce relative to the demand for it. The city cannot grow in terms of acreage, so it tends to grow upward.
This situation is a dream come true if you are an owner of residential real estate. As a result, the owners of San Francisco’s remaining supply of working-class housing are doing all they can to drive out their current tenants so they can sell their property to gentrification-minded developers at great profit for themselves.
Most of the members of San Francisco’s working class are immigrants from Central America and Mexico, while the city’s growing population of extremely wealthy people are overwhelmingly white. San Francisco’s once significant African American community—overwhelmingly working class—has already largely been forced to leave the city. In San Francisco, as is often the case elsewhere, gentrification has an overwhelmingly racist edge.
Recently, there has been growing tension between the remaining working-class residents of San Francisco and the high-paid engineers who work in the high-tech industry for companies such as Google, the giant search engine monopoly. The engineers who hold these jobs are overwhelmingly white or Asian. Few are dark-skinned Latinos—largely descendants of the native peoples of the Americas or African slaves.
The Latinos employed by way of exception in high tech tend to be largely descendants of white European settlers. However, these engineers, though not among the very rich, can at least up to now still afford to live in San Francisco proper due to their high salaries. This trend has been reinforced by the fact that a portion of the high salaries of engineers is often paid in company stock, whose value has soared since the crisis of 2007-2009.
Many of these engineers, however, work in “Silicon Valley,” located just south of San Francisco. Google, among other high-tech companies, runs special buses that enable engineers to commute from San Francisco to their workplaces in the “Valley.” Recently, these buses have drawn protests from outraged working-class residents of San Francisco. These residents do not have the money to attend the universities that turn out high-tech engineers. And anyway most are dark-skinned Latinos of largely Native heritage who simply do not fit the racist stereotype of a high-tech worker. This situation breeds resentment towards these more fortunate high-salaried engineers. (7)
Therefore, the only jobs that the high-tech industry has to offer them are as low-paid janitors, warehouse workers or bus drivers who drive the high-tech engineers from San Francisco to and from the Silicon Valley work sites. Recently, the drivers who daily bus the engineers to and from the Facebook social media monopoly’s office complex have voted to join the Teamsters union.
Industrial cycle upswing not necessarily good news for Bay Area workers
As the Bay Area high-tech industry has begun to emerge from the long depression that began with the turn of the century dot-com crash and was reinforced by the “Great Recession,” the gentrification process occurring not only in San Francisco proper but the surrounding Bay Area has been accelerating. For many workers in San Francisco—and nearby smaller cities—who managed to hold on to their low-paid jobs during the long tech depression, the cyclical recovery that is at last underway is actually bad news. Unless a new “crash” soon halts the high-tech boom—and such a crash will come sooner or later—they will have to leave communities where many have lived their entire lives.
The limits to gentrification
However, to keep San Francisco a desirable place for the rich to live, the low-wage workers are necessary to keep the city’s restaurants, landmarks, auto repair services, and so forth going. But as housing costs keep rising, these workers are increasingly being driven out of the city proper. They are being forced to move to areas as far away as California’s Central Valley, perhaps a hundred or more kilometers from their workplaces. When they aren’t working to serve the city’s rich residents, or sleeping, they are commuting from “the City,” as San Francisco is called by locals—to their increasingly distant homes. These commutes eat up what is left of their free time to spend with friends and families.
Only when it becomes impossible for “the City’s” workers to live within commuting distance will the gentrification process finally be checked. When this happens, the army of low-wage workers whose labor keeps “the City” a desirable place for the rich to live will begin to dwindle. At that point, some of the rich will begin to sell their homes and condos in the city, and the relentless rise of house rents—and condo prices—will finally level off or even drop.
Similar dynamics have long governed the gentrification process in the U.S.’s largest city, New York. Manhattan, the heart of New York City, is actually a small island whose limited land mass means that residential real estate is now extremely scarce. As a result, housing costs in Manhattan have soared. Increasingly, only the rich who appropriate huge amounts of the surplus value produced by the global working class can afford Manhattan’s housing costs. Indeed, the richest people will often own condos in New York, mansions in Los Angeles, condos San Francisco, condos in London, mansions in Paris or Rome, and so on. They move around from one luxury condo or mansion to another as changing seasons and the social calendar dictate.
Meanwhile, like is the case in the San Francisco Bay Area, the largely low-wage workers whose labor makes Manhattan such a desirable place for the rich to spend part of the year are being forced to move to the outer boroughs or New Jersey with ever longer commute times in an ever increasingly desperate search for affordable housing.
Land speculation and the industrial cycle
Last month I explained that Marx in his analysis of landed property and ground rent ignored the industrial cycle. However, land speculation does play a role in the industrial cycle, though it is by no means the driving force some people believe it to be. As we have seen throughout this blog, the driving force of the industrial cycle is the capitalist competition that inevitably leads to periodic crises of overproduction, not speculation in stocks and real estate, which is only a secondary consequence.
During the rising phase of the industrial cycle, both the rate and mass of profit on capital rise sharply. The cyclical rise in profits—here we are interested only in the cyclical aspect—is driven upward by rising commodity prices and even more by the accelerated turnover of capital due to rising sales. As a result, during the boom phase of the industrial cycle, profits rise above the average rate of profit. (8) Some of these extra boom-time profits can be captured by landlords as market rents—the price of land—rises. Just as speculators drive corporate stocks to ridiculously high levels during booms and are often caught off guard when the boom turns “unexpectedly” for them into crisis, causing stock price to suddenly crash, the same thing happens with landed property. Only here, ground rents play the same role that dividends play in the stock market.
Worker homeownership and the industrial cycle
As part of the “American Dream” propaganda pushed by the media and both Democratic and Republican politicians in the U.S., the cyclical nature of the movement of real-estate prices was largely hidden from U.S. homeowners and would-be homeowners. They were given the impression that the only possible movement of home prices was upward. Especially in the years immediately preceding the “Great Recession,” many U.S. homeowners were encouraged to take out home-equity loans. These loans played a major role in sustaining “consumer demand” and concealing the growing industrial overproduction that both preceded and was indeed the real cause of the Great Recession.
Starting in 2006-2007, just before the Great Recession, home prices began to decline. Homeowners who had mortgaged and re-mortgaged their homes by taking out home-equity loans not only found their source of credit (which for them had increasingly replaced money they actually owned) as a means of purchasing needed commodities suddenly dried up, they found that their homes were “under water.” That is, assuming that they could be sold at all, they could only be sold at prices that did not cover the mortgaged debt—including the home-equity loans. Their “nest eggs” built up in the form of the rising value of equity in their homes were suddenly gone.
Since the end of the housing boom in 2006-2007, U.S. residents are returning to renting as opposed to buying homes. This trend of “declining home ownership” is alarming the ruling Democrats and Republicans in the U.S., who are searching for ways to once again boost homeownership for the reasons I examined above.
Some capitalist landowners buy homes not for the purpose of living in them or even renting them out but for speculative purposes. This is called “flipping” the home. Wealthy capitalist landowners buy up residential property with the expectation that it can be sold at a profit much like stock market speculators buy corporate stock in hopes of quickly selling it again at a higher price. During the rising phase of the industrial cycle, workers who want to buy a plot of land on which to live have to compete not only with wealthy capitalists who buy land for their private use but also with land speculators who are buying up as many homes as they can in order to quickly re-sell them at a profit.
While this can vastly enrich some capitalist landowners—unless they get caught in one of the inevitable periodic real-estate crashes—it directly contributes to homelessness and the poverty of the working class as housing is taken off the market and its price further inflated. House “flipping” is yet another reason to end the capitalist mode of production with its associated rent and mortgage system.
Let’s examine some popular solutions to the problems of high rents and growing homelessness that confront workers today.
One solution that progressives often fight for and the “neoclassical-marginalist” economists love to polemicize against is rent control. Progressives point out that if the government uses its power to limit the rise in house rents, working-class residents can remain in neighborhoods that they would otherwise be driven out of. Not surprisingly, the very rich as well as the landlords and their spokesmen the neoclassical-marginalist economists are strongly opposed to rent control. These economists claim that rent control discourages the home-building industry, “which ultimately hurts the very people that these laws are intended to help.”
Let’s examine this question in light of what we have learned about the economic laws governing both capital and landed property.
The owners of residential real estate are as we have seen both capitalists and owners of landed property. As owners of landed property, they are entitled to income in the form of ground rent. As owners of capital, they are entitled to surplus value in the form of profit.
The house—whether a single residence, a dual residence or a large apartment building—is a commodity that represents a certain quantity of abstract human labor measured in time that expresses itself in the form of a price—a quantity of gold measured in terms of weight. To the owners, houses or apartment buildings are capital. They loan—or sell—the right to use the house to a buyer for a particular period of time—to a tenant, who unlike the house owner is interested in the house only as use value, a means of shelter.
The owner of the house had to purchase it from an industrial capitalist or capitalist builders and contractors. We assume that the house owner paid for the house at its price of production with the intention of loaning its use value to a tenant or many tenants at the prevailing rate of interest, much like a money capitalist loans a sum of money. If the tenants are workers, the house owner collects the house rent—which includes the interest—from the worker as part of the price of using the house for a certain period, just like the sellers of commodities that are sold as means of subsistence to the workers do. It is therefore quite an ordinary commodity transaction.
If there were no maintenance, the houses would rapidly deteriorate. Therefore, the house owner must carry out repairs and other maintenance tasks such as periodically repainting the building. To do this, the house owner must either hire workers—to this extent the house owner functions as an industrial capitalist on a very small scale—or buys the services of industrial capitalists to do this as a separate business. Again, the house rent must cover these costs.
In either case, the house owner must advance capital, and like all such advances the house owner expects to earn a profit—at the very least at the average rate of interest. The house rent therefore must be great enough for the house owners not only to recover these expenses but to realize profits that will enable them to live and support their families at a standard of living appropriate for at least a small capitalist—and a not-so-small capitalist in the case of owners of residential real estate who own many buildings. The profit must also be large enough to cover insurance expenses and any taxes our house owner must pay.
Now if the government through rent control were to keep rents so low that our house owners are not able to cover their expenses and above and beyond that realize at least the average rate of interest on their advanced capital, they will sell the house and use the proceeds to invest in interest-yielding securities instead. In addition, the developers who buy new housing from the building industry will not be willing to pay the price of production for new houses. The builders will not be able to earn the average rate of profit on their advanced capital and will choose instead to invest in other fields of industrial production. The result is that little new housing would be built. Up to this point, our neoclassical-marginalist economists are correct when they claim that state intervention that keeps house rents “too low” will only depress the building of new houses and will ultimately be counterproductive.
What the neoclassical economists get wrong
The neoclassical-marginalist economists argue in favor of allowing market forces free play to in the long run allow the proper amount of housing to be built—for the needs of capitalist society, that is. In the end, these economists point out, the capitalists will be obliged to pay the workers sufficient wages to cover the cost of housing. If they don’t, the supply of labor will grow scarce and the capitalists will then be forced to pay higher wages. The market, our economists claim, if it is allowed to operate freely without rent control, will in the long run oblige the capitalists to pay wages sufficient to cover workers’ basic needs, including the cost of renting adequate housing.
What these arguments overlook is that the owners of residential real estate are not only owners of capital but of landed property. (9) As owners of the land under the houses—and the spaces occupied by the houses—the house owners are entitled to a portion of the surplus value produced by the working class in the form of ground rent. Therefore, the house owners when they calculate the house rent will add to the elements of the house rent described above the ground rent as well. If the ground rent is relatively low, the worker-tenants should be able meet it since if they can’t they will not be able to reproduce their labor power.
But what happens if the workers are in competition with the capitalists themselves for the land on which to live. This competition is waged with the weapon of money. The person with the most money comes out the victor. This is a competition the workers are sure to lose. The capitalists have far more money than the workers. If market forces prevail without check and the capitalists want the land for their personal residential purposes—or any other purpose—the workers will be driven from their homes.
If rent control is passed, however, the state will prevent the house owners from realizing a portion of the ground rent that they would realize if market forces were granted free sway. The whole process of gentrification is slowed down by government intervention. This even helps some capitalists, since smaller local capitalists will enjoy a cheaper supply of labor if gentrification is kept at bay by rent control in a given area. This is why campaigns to implement rent control is a favorite one for liberals and progressives, who always seek to form an alliance of workers with “progressive” sections of the capitalist class.
The downside of rent control for the workers
Rent control can enable workers to remain in their existing housing they would otherwise be evicted from if market forces were granted “free sway” as our economists recommend. However, rent control does have a definite downside for workers. The artificial lowering of prices below what the market would dictate, as the economists never tire of pointing out, does lead to shortages at existing prices. It then becomes difficult for workers to find new housing. The usual solution to the problem is that rent control only applies to existing tenants while new tenants must pay the market price.
The downside for the worker-tenants is that the workers find themselves stuck in their existing apartments since they cannot afford the much higher rents they would have to pay if they were to move to comparable housing in a different location. The result is that workers are again “bound to the land,” almost like their feudal ancestors were. They lose their freedom as wage workers to play the purchasers of labor power again one another. This is the one real advantage the modern wage worker has over the slave and the feudal serf.
Therefore, while rent control can help some workers—and some capitalists—it is not the real solution to the problem caused by the uneven competition of capitalists with their huge incomes and workers with their much smaller incomes for a plot of land on which to live.
A more radical solution to the housing question is public housing. Essentially, the government builds housing and rents it at affordable rents to the workers. This can benefit the capitalists too, insomuch as it enables capitalists to pay lower wages, since the wage has to only cover a lower rent.
This, however, inevitably runs into opposition from powerful capitalist real-estate interests who see it restricting profitable fields of investment. Even if some public housing is built, it is likely to be of low quality and built in limited amounts. The owners of residential real-estate—and most rich capitalist families invest part of their capital in real estate, including residential real estate—use their vast political power to see to it that public housing is low quality and poorly maintained.
The aim is always to get the residents of public housing to move “out of the projects” and into “private sector” housing. A government strong enough to overcome the political influence of the capitalists who stand in the way of a proper program of public housing can only be a workers’ government that will be able to, and indeed would be obliged to, take far more radical actions against the capitalist exploiters. Another words, a government that will be able to begin the process of replacing capitalism with socialism.
A revival of the trade-union movement would ease the housing crisis, since union organization is necessary if the workers are to get the full value of their labor power. This means that no matter how high housing costs are in a given area, wages must fully cover the local housing costs and leave enough left over so the workers can enjoy a reasonable standard of living. This would ease but by no means solve the housing crisis, because the capitalists will still hog the most desirable residential real estate with their huge mansions, multiple-resident costly condos and penthouses. But it would still do more to ease the housing crisis than all the rent-control programs and public housing that can be won—without the working class winning political power—is likely to do. But it still can only ease the problem.
As Engels pointed out in his booklet “The Housing Question,” the basic cause of the problem does not lie in the relationship between the owners of rental housing and their tenants but rather in the relationship between the sellers of the commodity labor power and the buyers of labor power, and the inevitable extraction of ever greater masses of surplus value by the buyers of labor power from the sellers of labor power.
It is this that creates the huge mass of surplus value that leads to the astronomical incomes that enable the capitalists to drive up land prices and force ever greater numbers of workers and even middle-class people from their housing and ends in rising homelessness. The cure, therefore, lies not in the relationship between house owners and tenants but rather in the relationship between the capitalist buyers of labor power and working-class sellers of labor power.
No real solution to the housing problem is possible without depriving the capitalists of their tremendous incomes that enable them to buy up so much residential real estate. In order to do this, they must be deprived of their class monopoly on the ownership of the means of production, ending their ability to appropriate huge amounts of unpaid labor from the workers.
Emergency steps that a workers’ government might take
A workers’ government upon coming to power could take these emergency first steps to deal with the problem of homelessness and unaffordable housing: First, it would deprive the capitalist landowners of their ability to occupy huge multiple residences. In addition, all homes held by the capitalist landowners for speculation would be seized and made available to the workers at rents they can afford. If there is still a housing shortage, the capitalist mansions would be divided up into workers’ apartments and the capitalist landowning families would have to make do with an apartment like everybody else.
In the long run, the complete abolition of the capitalist-wage labor relationship will make possible a general economic plan that will see to it that all the associated producers have fully adequate housing. This will also require overcoming the distinction of town and country and achieving a more rational distribution of the population. Today’s communication technologies make possible access to high culture for all people no matter where they live. Like is the case with so many other problems, from unemployment and war to global warming, it is impossible to solve the housing crisis without dealing with its root cause—capitalism.
1 The case where capitalists pay wages that are so low that they don’t cover the costs of housing is an example of capitalists paying wages that are below the value of labor power. Just try to raise a child—the next generation of workers—on the street. Such super-exploitation, the difference between the value of labor power and the value of the wage a capitalist actually pays, creates an extra or super profit above and beyond the average rate of profit for the capitalist. (back)
2 The three-class model divides all members of capitalist society into three social classes. The classes are defined according to the form that their income takes. The landlords live off the rent of land, the capitalists live off the profits of capital, and the workers live off the wages of labor.
In the real world, class relationships are far more complicated. For example, there are persons who combine these functions in their person. Investors in real estate combine the functions of landowner and capitalist.
In addition, even today there are still workers who individually own their own means of production—for example, the U.S. working farmer. However, the weight of working people who own their own means of production tends to decline the more capitalism develops. The ownership of landed property also becomes more centralized in the hands of few large capitalist landowners.
Capitalist governments, however, work to create counter-tendencies such as encouraging private home/condo ownership where workers own as opposed to rent tiny plots of land. A pure capitalist society consisting only of landowners who own only unimproved land, capitalists who own only capital but no unimproved land and workers who own no landed property or capital whatsoever never existed and never will in the real world. If “pure capitalism” had come into existence in the 19th century, it would have been replaced by socialism long ago. (back)
3 In Marx’s theory of capitalism, it is assumed that only two classes actually sell commodities, the capitalists who sell every commodity except labor power, and the wage workers who sell labor power. The landowners are assumed to collect ground rents but not to sell commodities. The job of selling the commodities produced on the landowners’ land falls to the capitalist farmers.
Marx also assumed that the capitalists, whether industrial capitalists or commercial capitalists, have paid less for the commodities than the price they sell them at. If it were otherwise, they would not make a profit and could not function as capitalists. For completeness here, I will add that money capitalists like the landlords collect surplus value—in their case in the form of interest—but do not actually sell commodities.
Marx’s epoch-making theory of surplus value shows that when capitalists sell their commodities at their values—direct prices—the capitalists realize the surplus value contained within these commodities in the form of a monetary profit. In contrast, Marx shows that the workers when they produce and reproduce their labor power by purchasing the commodities they need do this at their value, the workers unlike the capitalists do not realize surplus value. (back)
4 The capitalization of ground rent is calculated by dividing the yearly rental income by the prevailing annual rate of interest, much like a corporate stock is capitalized by dividing the annual dividend income by the prevailing rate of interest. When we carry out the calculation, we get the price of or—speaking loosely—the “value” of the land. A speculative element is introduced here because not only are interest rates constantly changing, but the amounts of rental income—and stock dividends—are also subject to constant change. (back)
5 Even apartment renters can capture some of the ground rent by subletting their apartments, or rent portions of their apartments to boarders. However, unlike home owners or condo owners, they cannot realize rents by selling their apartments to other persons at a price higher than the one they paid when they purchased the home or condo. “Pure proletarians” are those who earn their incomes only by selling their labor power and have no other sources of income.
You can still be a pure proletarian if you own your home—a means of shelter that everybody needs—but not the land under it. For example, you live in a mobile home but have to rent land in a trailer park. Unlike an apartment renter, you own your own home but you own absolutely no landed property. In the U.S., the term “trailer trash” is sometimes used to refer to workers who are pure proletarians because they own no landed property though they own their homes in the form of the mobile homes or trailers in which they live. (back)
6 As the price of a home rises, its owner’s equity increases, if the mortgage debt remains unchanged. In a booming residential real-estate market like that of first few years of the current century, homeowners find that their ability to borrow against their home equity soars. Especially if their primary income—wages, for example—are being squeezed, they can maintain and even increase their standard of living by taking out ever greater home equity loans against the rising value of their homes, much like stock market speculators can get ever more “margin credit” from stockbrokers as long as the value of their corporate stocks are rising.
As long as home prices keep rising, this process can continue indefinitely. The problem is that this process cannot continue indefinitely due to the operation of the economic laws that I have explored throughout this blog and that many U.S. homeowners discovered to their sorrow during the crisis of 2007-2009. (back)
7 Though it is theoretically illegal, in the U.S. employers do have in mind an ideal worker in terms age, nationality, race and sex for particular jobs. Positions like janitors and bus drivers generally go to dark-skinned Latinos or, where they are available, African Americans, while jobs as engineers go to young white and Asian applicants. (back)
8 The average rate of profit is formed not by simply averaging the rate of profit of various branches of industry at a particular moment in time but by averaging the rate of profits—and losses—across a period of years of both good and bad business—that is, across the industrial cycle. During the boom period, therefore, the rate of profit in most branches of industry exceeds the average, while during the crisis/depression phase, the rate of profit in most branches of industry falls below the average rate of profit. (back)
9 Since neoclassical-marginalist economists incorrectly apply the laws that govern landed property to capital, they are unable to correctly analyze the hybrid form of property called “real estate.” They inevitably make the “mistake”—a mistake that serves their apologetic purposes quite well, by the way—of confusing the quite different laws that govern capital and landed property. (back)
2 thoughts on “The Marxist Theory of Ground Rent (Pt 2)”
“The homeowners to the extent that they build up equity in their homes—the difference between the value of the home and the remaining mortgage debt—will benefit in the form of the rising value of their homes. The homeowners in their economic role as (very) petty landowners can realize the rising ground rents on the land their homes are built on in various ways.
For example, they can rent out unused rooms in their homes. (5) They can also realize some of the rising value in money form by taking out so-called home equity loans. (6) The inflated magnitude of such home equity loans played a large role, especially in the United States, in the crisis of 2007-2009.”
When the “value” of their home has risen (in actual fact the value of buildings including houses falls, because like all other products of labour, rising social productivity means the labour-time required for their production falls over time, and the land they are built on, is not the product of labour and so has no value) and they take out a home equity loan, they do not benefit by becoming wealthier, but poorer as a consequence of having taken on debt with a requirement to pay interest!
If they sell this home to ralise any capital gain, what do they do then – live in a tent, or on the streets. If they come to buy another house of the same standard, it will cost them just as much. Its “value” will have risen by the same amount! In fact, a better house will now cost them more in absolute terms than it did previously before the rise in house prices. The rise in house prices will then be seen not to have made them better off, but to have made them significantly worse off, as with the rise in the price of any other commodity they need to buy!
The ability to rent out rooms in the property is not a function of its value, or rising land prices, but a function of the use value of the house, i.e. its size and number of rooms. To the extent I rent out rooms in my house, I deny myself the use of those rooms, and reduce the use value they represent, so I would expect not to pay the same amount of value, or to obtain that value by its resale. If I buy 2 cars, I will pay twice as much as if I buy 1 car. If I then decide not to use 1 of the cars, I do not obtain its use value as a car, so why would I pay for its value? Instead, I might rent the use of the car to someone else, and thereby obtain a reflux of its value.
That is a function of the value of the car as a car, not its value, or changes in its market price.
“Since neoclassical-marginalist economists incorrectly apply the laws that govern landed property to capital, they are unable to correctly analyze the hybrid form of property called “real estate.” They inevitably make the “mistake”—a mistake that serves their apologetic purposes quite well, by the way—of confusing the quite different laws that govern capital and landed property.”
This seems, however, to ignore the analysis of rent on residential property that Marx himself undertook in Capital III, which he said followed the same laws as for land used for agricultural purposes. It also seems to ignore what Marx says about Differential Rent II, where the surplus profit arises not from use of additional land of above average fertility, but from the use of additional capital on the same quantity of land.
For example, in his second example, Marx sets out that the effect of employing £5 of capital on one acre of land, has the same consequence as employing £2.50 each on two acres of land of the same quality, provided he says, the marginal productivity of the capital remains constant. It will result in double the amount of output in both cases, and provided market prices remain constant, twice the amount of revenue, and profit. If the land is rent producing land, it will then also produce twice the amount of rent/surplus profit.
The difference between the two situations is that where additional land is employed, the rate of rent, i.e. the amount of rent measured against the capital employed, remains constant, but the rent per acre declines, because the same rent is produced but with the use of twice as much land.
In fact, Marx and Engels spend many, many pages, looking at the effect of different marginal productivities of capital, where it is rising, falling, remaining constant, or both rising and falling, and its effect on rent, as part of their analysis of Differential Rent II.