Differential rent theory (19TH CENTURY)

Raised as an issue by Scottish economist JAMES ANDERSON (1739-1808) and English economist David Ricardo (1772-1823), differential rent theory asserts that rent arises because of the differences in the fertility or location of agricultural land.

No rent is paid on the worst land and the total amount of rent increases as the margin of cultivation is extended.

Source:
D Ricardo, On the Principles of Political Economy and Taxation (London, 1817)

Aim of the theory

In good part, Marx’s theory is a critique of David Ricardo’s Law of rent,^[7] and it examines with detailed numerical examples how the relative profitability of capital investments in agriculture is affected by the productivity, fertility, and location of farmland, as well as by capital expenditure on land improvements.^[8] Ricardo conceptualized rent income essentially as an “unearnt” income in excess of true production costs, and he analyzed how some farm owners could obtain such an extra profit because of farming conditions which were more favourable than elsewhere.

Marx aims to show that capitalism turns agriculture into a business like any other,^[9] operated for purely commercial motives; and that the ground rents appropriated by landowners are a burden for the industrial bourgeoisie both because they imply an additional production-cost and because they raise the prices of agricultural output.^[10] More specifically, Marx intended to show how the law of value governed capitalist farming, just like it governed capitalist industry.^[11]

The peculiarity of capitalism in agriculture is that commerce has to adapt to physical factors such as climate, altitude and soil quality, the relative inelasticity of agricultural supply, and the impact of bad harvests on international prices for farm products.^[12] Eventually, however, the production of farm products is completely reorganized according to the exchange-value of farm output – foodstuffs are then produced mainly according to their expected trading value in the market (this is not always completely true, e.g. because it may be feasible to cultivate only a limited variety of crops, or run a limited variety of cattle on particular lands, or because there is no perfect knowledge about what the market will do in the future, if there is great price volatility, climate uncertainty etc.).

Law of value

According to Marx, the operation of the law of value and the formation of prices of production was modified in capitalist agriculture, because prices for farm output were co-determined by land yields and land ownership-rents quite independently of labor-productivity. For example, a poor harvest in a major agricultural region due to adverse weather conditions, or the monopolization of the supply of farmland, could have a big effect on world market prices for farm products.^[13] Marx extends his theory of agricultural rents to building rents and mine rents, and considers the effect of rent income on land prices.^[14]

Theoretical significance

This theory is the least known part of Marx’s economic writings, and among the more difficult ones,^[15] because earnings from farm work can be affected by many different variables, even at a highly abstract level of analysis. However the theory became very important to neo-Marxists such as Ernest Mandel and Cyrus Bina who interpreted late capitalism as a form of increasingly parasitic rentier capitalism in which surplus profits^[16] are obtained by capitalists from monopolising the access to resources, assets and technologies under conditions of imperfect competition.^[17] Marxist writers such as Cyrus Bina have extended the concept of rents to oil rents