The Theory of Differential Rent

The theory of capitalist ground rent developed by the English political economist David Ricardo (and adopted, with some modifications, by Marx) was a breakthrough because it showed that capitalist ground rent was a fundamentally different kind of phenomenon to earlier, pre-capitalist, forms of rent based on the coercive power landlords held over peasants subordinated to them through the politico-juridical bonds of serfdom.

1. We start the analysis by assuming a supply of arable land in an "unimproved", natural state. The land varies in terms of natural fertility, and so, if we have five grades of land of differing productivity, each will produce a different amount of corn if it is exploited up to the point where diminishing returns set in.
2. Diminishing returns represent a classic application of the economic reasoning which became central to the whole of orthodox economics through the later work of the Austrian neoclassical or marginalist school (which focused, however, on individual consumption rather than income distribution between social classes as the motive force behind the development of economic systems). Take a plot of land of given size. As we apply more labour (the variable input or factor of production) to the fixed factor or input (the land), the extra output we get from each extra input of labour will eventually start to diminish. In neoclassical terms, the marginal productivity of labour will fall. Eventually a further increase in labour input will add more to costs (the wage bill in the case of capitalist agriculture) than it adds to revenue (money received from the sale of the corn, farmer income). So a farmer would be wise to stop trying to apply more units of labour at the point where the product added by the last unit of labour added equals the addition it makes to costs (the marginal product of extra unit of labour number n = the marginal cost of unit labour of labour n).
3. We can now proceed with the analysis of differential rent. Suppose that the size of the country's population is such as to make it necessary to extend cultivation to lands of inferior quality if the whole population is to be fed (given the current state of agricultural technology). We will assume that cultivation is extended right to the margin, i.e. to the very last acre of land from which it is possible to extract some sort of harvest with a profit, even if, as we'll see, it may be a very small harvest. Given diminishing returns, production will follow a pattern of the kind indicated in Table I. The different grades of land (A to E) produce different total products (harvests), since the worse the quality of the land, the sooner the margin at which cultivation becomes unprofitable is reached. The marginal products (additional products) per additional unit of labour are also (necessarily) higher at each step in intensification the better the land: for example, the increase from 2 to 3 units of labour on A adds 160 to A's product, whereas it only adds 150 to B's and 140 to C's. D stops at 2 units of labour, and E at 1, because further intensification of production on land of this quality would already add less than 140 to their total product and therefore increase costs more than revenue.

Table I

 

• If the farmers are competitive capitalist producers using wage labour, they will all face the same costs per unit of labour used: no one would go to work for a farmer who paid less than the going wage rate, and the going rate will be established by individual farmers offering a wage, seeing if there are takers, and revising their offers if there aren't, until wages equalize across the labour market (equilibrating supply and demand). If the price of corn is £1 a bushel, farmer A produces 800 bushels and gets £800, B gets £620, and so on. A uses 5 units of labour, E uses 1. E is the last unit of land cultivated and it does not pay to cultivate it more intensively: we must conclude that this is because doing so would add more to costs than receipts, and so we deduce that the price of a unit of labour, which will be the same for all producers, is £140. So farmer A has a wage bill of 5 ´ £140 = £700, B must find 4 ´ £140 = £560, and so on.

• There is therefore a difference for each farmer in the relationship between total receipts and total costs, as shown in Table 2. This difference is differential rent. The odd thing about Table 2 is that Farmer E appears to have made nothing at all by sowing his land (the difference between receipts and costs is zero in his case). But we could have included as part of his necessary minimum costs a minimum level of profit which a capitalist farmer would need in order to invest his capital in farming the land (rather than investing it in some other activity, or putting it in the bank to earn interest). Looked at this way, it becomes apparent that differential rent can be seen as a kind of extra profit some producers get: the producers with the best land get the largest amount of this "super-profit" and those with the most marginal land get none.

Table 2

 

• Ricardo was the first economic theorist to see that in a market economy in which land and labour are commodities, differential rent arises not from nature's bounty but from the operation of capitalist market forces. What produces the differential rents in this example is the differing productivity of the variable input labour applied to the fixed factor land in different quantities but at a uniform cost per unit to each and every producer because there is a single uniform wage throughout the agricultural labour market.

• To reinforce this point, we can observe that natural differences in fertility are not the only possible source of differential rents. Some farmers may have access to better technology (machinery, irrigation) than others, or have better access to financial credit. This is often the case where peasant farmers are supplying grain to an urban market or a "world market" alongside capitalist producers. What happens depends, however, on the structure of the market. If peasants are supplying the major part of domestic production of a given crop to the urban market, then their relative lack of productivity per hectare resulting from low capitalization of their farms may boost the profits of private sector producers. But if domestic prices are determined by cheap imports, the peasants will only be able to survive in the market by working harder and they will be unable to recover the notional market value of their labour inputs (as measured by prevailing money wages for agricultural labour) when they sell their harvest (their rent is therefore negative, though this is only possible because their costs of production in terms of labour inputs are not fully monetized). Under competitive market conditions, there is only one market price for a bushel of corn, however it's produced. Whther differential rents accrue to more efficient producers is conditioned by the overall shape of the market and the factors that determine market prices. Ricardo therefore finally broke with the physiocrat conception and showed that under modern conditions, where agriculture was organized on a capitalist basis, rent could be treated as a purely quantitative economic category.

• It is important to understand that this theory of differential rent makes, and need make, no reference to landlordism as a social class phenomenon. If land was nationalized by the state, these differential rents would still exist, and it doesn't matter logically whether the farmer keeps them as extra profit or pays them to a landlord by virtue of the latter's rights of ownership of the land. In other words, social property relations and agrarian class structures don't matter from the point of view of understanding how the market determines what the quantitative level of rents generated in agriculture is. Ricardian economics already reveals a tendency which was to be completed by the "neoclassical school" in the 1870s: the "disembedding" of economic analysis and categories from their social and political context and the emergence of an autonomous concept of the economy and its laws. This reflected the effects of the development of capitalism itself, with its tendency to objectify and reduce to the purely abstract and quantitative what had previously been more particularistic kinds of social relations. Nevertheless, to Ricardo's generation, there was a sense in which social property relations did still matter, because the question of the relationship between economic growth and the distribution of national income (the social surplus) between social classes remained a central item on the agenda of Ricardo's economics as a development of the classical tradition of political economy, and this was equally central to Marxian analysis, which rested in this respect on Ricardian foundations.

Ricardian theory was the child of an epoch in which manufacturing interests were mounting a stronger political challenge to agrarian interests and landed aristocracies. Manufacturers complained that landlordism was a "block" on national development, because the idle aristocracy and gentry squandered their share of the national income on luxuries and vice, whereas manufacturers invested what they gained in productive ways which benefitted the nation. George Eliot, in Silas Marner (published in 1861), exemplifies the critical attitude to agricultural interests which was to make possible the repeal of the Corn Laws (which protected British farmers from foreign competition) in 1846. Writing of the period of the Napoleonic Wars, when a French blockade cut off all imports, she remarked:

It was still that glorious war-time, which was felt to be the peculiar favour of Providence towards the landed interest, and the fall of prices had not yet come to carry the race of small squires and yeomen down that road to ruin for which extravagant habits and bad husbandry were plentifully anointing their wheels.

Evidently, then, antagonism was not reserved simply for the big aristocratic landlords by this period, and "bringing down the price of bread" by opening English markets to cheap imports from Russia and the U.S.A. was seen as a necessary step to sustain the development of industrial capitalism, even if it was to some extent at the expense of agrarian capitalism.

Ricardo justified the Repeal of the Corn Laws by appealing to his Theory of Comparative Advantage in International Trade, according to which all countries can benefit from specializing in what they do best and importing goods for the production of which they are less well endowed than their competitors. In Ricardo's theory, specialization always pays even if a country cannot produce anything more efficiently than some competitor. This theory is based on the implicit assumption that differences in productivity due to differences in economic organization are equivalent to differences in natural resource endowments and by its static nature it ignores the dynamic implications of specialization: that structural differences in the economic development of countries can be made relatively permanent and generate long-term processes of uneven development. In particular, it abstracts from questions of class structure and how the benefits of a certain pattern of economic development may accrue to particular classes (merchant capitalists, mine and plantation owners, for example) at the expense of other interests and perhaps those of society at large, precisely the sort of issues on which classical political economy focused at home. But the theory did corresponded to Britain's actual position in the world economy in the first half of the 19th century, when she enjoyed a de facto global monopoly of industrial capitalist manufacturing and could therefore benefit from a "free trade imperialism" which ensured that her manufactures could penetrate foreign markets without facing tariff barriers and wipe out less efficient domestic producers.