Differential rent and absolute rent

Who pays rent to whom?

Marx deals with capitalist agriculture. The landowner lets land to a capitalist tenant farmer, who hires agricultural labourers and cultivates for profit, and pays the landowner money for the use of the land over the term of the lease: this is rent. "Ground-rent, therefore, is here that form in which property in land is realised economically, that is, produces value. Here, then, we have all three classes — wage-labourers, industrial capitalists, and landowners constituting together, and in their mutual opposition, the framework of modern society."

Land itself is not a product of labour and has no value, so how can its owner be paid? Marx's answer is that rent is the part of the surplus-value produced in agriculture that exceeds the average profit, a surplus-profit. The tenant keeps the average profit, as in any other industry, and hands the rest to the landowner. The theory of rent therefore rests on the theory of prices of production and average profit.

How does differential rent arise?

Marx first shows the principle with an industrial example. Suppose most factories are driven by steam engines and a few by natural waterfalls. In the steam-driven factories the price of production of goods that use up a capital of 100 is 115, and this sets the market price. A factory with a waterfall needs no fuel and makes the same goods at a cost of 90, so selling at 115 it earns a profit of 25, of which the 10 above the average profit of 15 is surplus-profit. It springs not from the manufacturer's skill but from a natural condition that can be monopolised, so it ends up with the owner of the waterfall: the surplus-profit is converted into ground-rent.

Land works the same way. In Marx's example there are four kinds of soil, A, B, C and D, and a quarter of wheat sells at 60 shillings (Marx's illustrative figures). "Let A be this worst soil, which yields 1 quarter = 60 shillings for each 50 shillings spent; hence the profit amounts to 10 shillings, or 20%. Let B yield 2 quarters = 120 shillings for the same expenditure. This would mean 70 shillings of profit, or a surplus-profit of 60 shillings. Let C yield 3 quarters = 180 shillings for the same expenditure; total profit = 130 shillings; surplus-profit = 120 shillings. Let D yield 4 quarters = 240 shillings = 180 shillings of surplus-profit." Since the price of wheat is set by the price of production on the worst soil A, A pays no rent, and the surplus-profits of B, C and D become their rents. This is differential rent I, arising from differences in fertility or location. Rent arising from differences in the productivity of successive investments of capital on the same land Marx called differential rent II.

How did classical economics see rent?

Marx did not discover the principle of differential rent. Thomas Robert Malthus, David Ricardo, Robert Torrens and Edward West are credited with the first clear analysis of it in their pamphlets of February 1815, with James Anderson as an earlier precursor; Ricardo regarded West and Malthus as its discoverers, while Marx pointed to Anderson's work of 1777. Ricardo held that rent is not a cause but a consequence of the price of farm produce and that there must always be some cultivated land that pays no rent. Marx took Ricardo's theory as his basis but held that it could not explain why even the worst land pays rent. He also distinguished the historical forms of rent: labour rent (corvée), rent in kind and money rent, leading up to capitalist ground rent.

What is absolute rent?

In reality not even the owner of the worst land lets it for nothing. Marx explains this as a ground-rent independent of differences in fertility and of successive investments on the same land, "a rent, in short, which is to be clearly distinguished in concept from differential rent and which we may therefore call absolute rent."

His figures run as follows (Marx's illustrative assumption): "If the average composition of the non-agricultural social capital were = 85c + 15v, and the rate of surplus-value = 100%, then the price of production would = 115. If the composition of the agricultural capital were = 75c + 25v and the rate of surplus-value were the same, then the value of the agricultural product and the regulating market-price would = 125." Agriculture uses more hand labour relative to machinery and so produces more surplus-value with the same capital. In industry the difference of 10 would be dispersed among other branches by the equalisation of profit rates. But capital can be invested in land only with the landowner's leave, and landed property, by its very existence, is a barrier to the investment of capital. Farm products can therefore sell near their value of 125 rather than their price of production of 115, and all or part of the difference becomes absolute rent. Conversely, Marx added, if the composition of agricultural capital were equal to or higher than the social average, absolute rent in this sense would disappear. Rent that arises because produce sells at a monopoly price above its value is a distinct category, monopoly rent.

What does the theory mean?

The theory of rent completes Marx's account of how surplus-value is divided under capitalism into industrial profit, interest and rent. The landowner takes part of society's surplus-value without taking part in production, on the strength of the legal title of landed property. The Marxist tradition has therefore linked land nationalisation and the question of rent to the agrarian and urban questions. Because the theory of absolute rent rests on the historical premise that agriculture has a lower organic composition than industry, its range of application has been debated since the mechanisation of farming.