Marx’s Theory of Ground Rent
Marx’s theory of ground rent is arguably one of the more underappreciated elements in his economic argument. Perhaps because it is tucked away towards the end of Marx’s three-volume magnum opus or because it is not as fleshed out as the section on the tendency of the rate of profit to fall, ground-rent doesn’t receive the kind of spotlight it deserves. Marx actually notes, however, that without a conception of how land plays a role in the relations of the capitalist mode of production, we cannot arrive at a complete picture of capitalism as a whole.
And so, in chapter 38 of Volume III, Marx gives us the example of two types of enterprises producing the same commodity: one powered by steam and one powered by a water wheel. The former (steam-powered) capital’s commodities have the same price of production as the average price of production, whereas the latter’s commodities have a lower price of production than the average. This is because the water wheel eliminates the need to pay for coal energy and is (more or less) indefinitely sustainable. As a result, the water wheel capital accrues a surplus profit that exceeds the average profit the steam-powered capital collects.
The use of the water wheel is not a universal condition of production and can never be. Only certain locations allow a manufacturer to use this type of energy. This exclusivity is further limited by the fact that the land on which the special resource is present is owned by a proprietor, who then collects this surplus profit thereby turning it into ground rent. In some cases, the manufacturer can be the proprietor himself. Either way, the surplus-profit made possible by specific differences in the production process — which are in turn based on intrinsic differences in the land — is collected as ground rent.
Importantly, the natural conditions allowing for greater productivity is not a source of wealth in itself, but rather a natural means by which an enterprise can enhance its productivity.
Marx is clear in pointing out that land itself has no price as it contains no objectified labor: “Where there is no value, there is eo ipso nothing to be expressed in money” (Marx 1991, p.787).
What the proprietor draws value from is the difference between the individual price of production and the average price of production, the individual profit and the average profit. This is why Marx calls his theory of ground rent differential.
Going forward, Marx expands the concept of differential ground rent into three parts. Differential rent I is rent based on the yield differences between lands of varying fertility, with equal investments of capital. This is the type of rent we saw in the example of the water wheel and the coal powered enterprise. As such, this type of rent is more common in “underdeveloped” agriculture and generally understood as the historical basis for differential rent II. Differential rent I sets the basis for differential rent II in the sense that the differentiation between lands of varying fertility creates an osmotic capital flow towards more fertile/productive lands.
Differential rent II is rent based on different levels of capital investment across the same type of land (in terms of fertility). This type of differential rent is more prevalent in “developed” agriculture as it effectively reflects a higher saturation of capital per unit of land.
Ben Fine writes the following with regard the distinction between differential rent I and II:
“DRII is based on the temporary surplus profits derived from the magnitude of capital invested rather than from the more or less permanent natural differences in fertility that are the basis for DRI” (Fine 1979, p.253).
However, we should be careful in calling differential rent I the “historical basis” for differential rent II. As Fine points out, their relationship is not simply additive:
“There is no presumption that the interaction of DRI and DRII is simply additive. A more complex analysis is necessarily involved concerning the coexistence of unequal lands and unequal capitals on those lands. For DRI, there is the problem of determining the worst land in the presence of unequal applications of capital (DRII). Some lands may be worst for one level of investment but not for others, for example. Second, for DRII, there is the problem of determining the normal level of investment in the presence of differing lands (DRI). Some capitals may be normal for some types of lands, other capitals normal for other lands” (p.254).
Marx also introduced a third form of rent: absolute rent. This rent arises from the naturally lower value composition of capital in agriculture. The composition of capital in agriculture tends to be lower than the average composition of capital on a total scale. Thus, the agricultural sector has less productive labor, a lower ratio of constant to variable capital, and tends to produce surplus-value above the average rate (Marx 1991,p. 893–4). The lower value composition produces above average rates of surplus value, some of which is then transformed into rent by the landowner class.
We can look again to Fine’s article for a succinct explanation of the difference between differential rent and absolute rent:
“DR depends upon the divergence between individual and market values, AR on the divergence between market values and prices of production” (Fine 1979, p.258).
The concept of absolute rent brings us, somewhat divergently, into the discussion of compositions of capital. Addressing this part of the theory will help us better understand ground-rent.
The composition of capital is simply the ratio between its various components, that is, the ratio between the labor-power and the means of production. Marx often speaks of the composition of capital in three ways: technical composition, value composition, and organic composition. The technical composition refers to the physical ratios between labor-power and the means of production, the proportion of labor employed to the machinery and equipment used. A high composition then refers to a highly technologized enterprise whereas a low composition refers to an enterprise that more heavily relies on manual labor.
Value composition is the composition of capital expressed in value form, that is, the ratio between the value of labor-power and the value of the means of production.
Though it may seem to be the case that the technical composition of capital and the value composition of capital coincide, it is possible for either to change without any movement in the other. The value of the machinery used in a given production process could be reduced due to some broader economic and technological changes while the physical quantity of that machinery remains the same.
Marx goes on to describe organic composition in the following manner: “The organic composition of capital is the name we give to its value composition, in so far as this is determined by its technical composition and reflects it” (Marx 1991, p.245).
Marx summarizes the relationship between these three concepts best:
“The composition of capital is to be understood in a two-fold sense. On the side of value, it is determined by the proportion in which it is divided into constant capital or value of the means of production, and variable capital or value of labour-power, the sum total of wages. On the side of material, as it functions in the process of production, all capital is divided into means of production and living labour-power. This latter composition is determined by the relation between the mass of the means of production employed, on the one hand, and the mass of labour necessary for their employment on the other. I call the former the value-composition, the latter the technical composition of capital. Between the two there is a strict correlation. To express this, I call the value-composition of capital, in so far as it is determined by its technical composition and mirrors the changes of the latter, the organic composition of capital. Wherever I refer to the composition of capital, without further qualification, its organic composition is always understood” (Marx 1990, p.762).
Returning to our discussion of rent, we can understand the difference in the compositions of capital as the basis for absolute rent. The agricultural sector, generally speaking, has a lower composition of capital than the social average. Remember that a lower composition suggests a lower ratio of labor-power to means of production. This means, as we’ve already noted, that agriculture produces surplus value at a greater rate than the economic average. In the rest of the capitalist economy, this difference in composition has a tendency to even out since capital flows to areas of high profitability. Overtime, the difference between various manufacturing rates of profit equalizes (though there are forces at play that can depress or reverse this dynamic). However, because absolute rent lays exclusive claim to a portion of the extra surplus value produced in agriculture, the equalization between agriculture and the social average is not so smooth.
The important takeaway in Marx’s theory of ground rent is that rent exists in economic margins. Rent is effectively a claim on the extra portion of surplus value produced by enterprises that are less productive than the social average. This claim is based on exclusive ownership of land or resources. As you might imagine, rents are not strictly limited to land or physical resources.
An interesting argument developed by Tomas Rotta and Rodrigo Teixeira applies the Marxist conception of rent to knowledge-commodities like proprietary software. Rotta and Teixeira “argue that knowledge-commodities are “valueless” commodities. Using Marx’s definition of value as that “determined not by the labour-time originally taken by their production, but rather by the labour-time that their reproduction takes” they assert that knowledge-commodities are valueless because labour is employed in their production but not in their re-production (except for the material content of the storage and transportation devices which constitute an insignificant component of its market price). The price of such “valueless” commodities is therefore the result of monopoly property rights — just like land, which has no value but yields ground-rent to its owner. Thus, for them, the return to capital in production of knowledge-commodities is not surplus value from direct production, but “rent” earned from monopolizing the knowledge-product and leasing or selling it to producers who make rental payments to use these knowledge-commodities in production. Thus, what the owners of the knowledge-commodities get is a cut of the surplus value generated in production by others using the knowledge-commodities” (Bhattacharya and Seda-Irizarry 2019).
Such an application of the Marxist theory of rent demonstrates the overall usefulness of this component of Marx’s work.
With that, we’ll conclude this video. As usual, if you have questions or reflections, leave them in the comment section below. Until next time, remember: “The philosophers have only interpreted the world in various ways; the point is to change it.”
Sources
Bhattacharya, R., & Seda-Irizarry, I. J. (2017). Problematizing the Global Economy: Financialization and the “Feudalization” of Capital. Economics, Knowledge, and Class: Marxism Without Guarantees, Routledge, 329–45.
Harvey, D. (2018). The limits to capital. Verso books.
Fine, B. (1979). On Marx’s theory of agricultural rent. Economy and Society, 8(3), 241–278.
Marx, K. (1990). Capital: A Critique of Political Economy (Vol. 1). Penguin Books.
Marx, K. (1991). Capital: A Critique of Political Economy (Vol. 3). Penguin Books.
Rotta, T. N., & Teixeira, R. A. (2015). The autonomisation of abstract wealth: new insights on the labour theory of value. Cambridge Journal of Economics, 40(4), 1185–1201.
