Capital Vol. III Part VI
Transformation of Surplus-Profit into Ground-Rent

Chapter 42. Differential Rent II.
Second Case: Falling Price of Production

The price of production may fall when additional investments of capital take place with an unaltered, falling, or rising rate of productivity.

I. Productivity of the additional investment of capital remains the same.

In this case, the assumption, therefore, is that the output increases proportionally to the capital invested in the various soils and in accordance with their respective qualities. This means for constant differences in soils that the surplus-product increases in proportion to the increased investment of capital. This case, then, excludes any additional investment of capital in soil A which might affect the differential rent. For this soil, the rate of surplus-profit = 0; thus, it remains = 0 since we have assumed that the productiveness of the additional capital, and therefore the rate of surplus-profit, remain the same.

But under these conditions the regulating price of production can only fall, because it is the price of production of the next best soil, of B, or any better soil than A, rather than that of A, which becomes the regulator; so that the capital is withdrawn from A, or perhaps from A and B if the price of production of C should become the regulating one, and thus all soils inferior to C would be eliminated from the competition among grain-producing soils. The prerequisite for this is, under the assumed conditions, that the additional yield from the additional investments of capital satisfy the demand, so that the output from the inferior soil A, etc., become superfluous for the re-establishment of a full supply.

Thus, let us take, for instance, Table II, but in such a way that 18 qrs instead of 20 satisfy the demand. Soil A would drop out; B * and its price of production of 30 shillings per quarter would become regulating. The differential rent then assumes the following form:

TABLE IV

[* In the German 1894 edition this reads: D. — Ed.]

Compared with Table II, the ground-rent would hence have fallen from £36 to £9, and in grain from 12 qrs to 6 qrs; total output would have fallen only by 2 qrs, from 20 to 18. The rate of surplus-profit calculated on the capital would have fallen to one-third, i.e., from 180% to 60%. [Ibid.: one-half, from 180% to 90%. — Ed.] Thus, the fall in the price of production is accompanied here by a decrease of the rent in grain and money.

Compared with Table I, there is merely a decrease in money-rent; the rent in grain is in both cases 6 qrs; but in the one case it = £18, and in the other £9. For soil C, [Ibid.: for soil C and D. — Ed.] the rent in grain, compared with Table I, has remained the same. In fact, it is owing to the additional production resulting from the uniformly acting additional capital that the yield from A has been excluded from the market, and thereby soil A has been eliminated as a competing producing agent, and it is owing to this fact that a new differential rent I has been formed in which the better soil B plays the same role as did formerly the inferior soil A.

Consequently, on the one hand, the rent from B has disappeared; on the other hand, nothing has been altered in the differences between B, C and D by the investment of additional capital — in accordance with our assumption. For this reason, that part of the output which is transformed into rent is reduced.

If the above result — the satisfaction of the demand with A excluded — had been accomplished, perchance, by the investment of more than double the capital in C or D, or in both, then the matter would assume a different aspect. For example, if the third investment of capital were made in C:

TABLE IVa

In this case, compared with Table IV, the output from C has risen from 6 to 9 qrs, the surplus-product from 2 to 3 qrs, and the money-rent from £3 to £4½. Compared with Table II, where the latter was £12, and Table I, where it was £6, the money-rent has, on the other hand, decreased. The total rental in grain = 7 qrs and has fallen compared with Table II (12 qrs) and risen compared with Table I (6 qrs); in money (£10½) it has fallen compared with both (£18 and £36).

If the third investment of capital of £2½ had been employed on soil B, it would indeed have altered the quantity of production, but would not have affected the rent, since, according to our assumption, the successive investments do not produce any differences upon the same soil and soil B does not yield any rent.

If we assume, on the other hand, that the third investment of capital takes place upon D instead of C, we have the following, Table IVb:

Here the total product is 22 qrs, more than double that of Table I, although the invested capital is only £17½ as against £10, that is, not twice the amount. The total product is also larger by 2 qrs than that of Table II, although the invested capital in the latter is larger — namely, £20.

Compared with Table I, the rent in grain from soil D has increased from 3 [In the German 1894 edition this reads: 2. — Ed.] to 6 qrs, whereas the money-rent, £9, has remained the same. Compared with Table II, the grain-rent from D is the same, namely, 6 qrs, but the money-rent has fallen from £18 to £9.

Comparing the total rents, the grain-rent from Table IVb = 8 qrs is larger than that from Table I = 6 qrs and than that from Table IVa = 7 qrs; but it is smaller than that from Table II = 12 qrs. The money-rent from Table IVb = £12 is larger than that from Table IVa = £10½ and smaller than that from Table 1 = £18 and that from Table II = £36.

In order that the total rental may, under the conditions of Table IVb (with the elimination of rent from B), be equal to that of Table I, we need £6 more of surplus-product, that is, 4 qrs at £1½, which is the new price of production. We then have a total rental of £18 again as in Table I. The magnitude of the required additional capital will vary according to whether we invest it in C or D, or divide it between the two.

On C, £5 capital yields 2 qrs of surplus-product; consequently, £10 additional capital yields 4 qrs of additional surplus-product. On D, £5 additional capital would suffice to produce 4 qrs of additional grain-rent under the conditions assumed here, namely that the productivity of the additional investments of capital remains the same. We should then obtain the following results:

TABLE IVc

TABLE IVd

The total money rental would be exactly one-half of what it was in Table II, where the additional capitals were invested at constant prices of production.

The most important thing is to compare the above tables with Table I.

We find that while the price of production has fallen by one-half, i.e., from 60 shillings to 30 shillings per quarter, the total money rental has remained the same, namely = £18, and the grain-rent has correspondingly doubled from 6 to 12 qrs. Upon B the rent has disappeared; upon C the money-rent has risen by one-half in IVc, but has fallen by one-half in IVd; upon D in IVc, it has remained the same, = £9, and has risen from £9 to £15 in IVd. The production has risen from 10 to 34 qrs in IVc, and to 30 qrs in IVd; the profit from £2 to £5½ in IVc and to £4 in IVd. The total investment of capital has risen in the one case from £10 to £27½, and in the other from £10 to £22½; i.e., in both cases it has more than doubled. The rate of rent, that is, the rent calculated on the invested capital, is in all tables from IV to IVd everywhere the same for each kind of soil — which was already implied in the assumption that the rate of productivity for the two successive investments of capital remains the same for each soil type. But compared with Table I this rate has fallen, both for the average of all kinds of soil and for each one of them individually. In Table I it was = 180% on an average, whereas in IVc it = (18/27½) × 100 = 65 5/11% and in IVd it = (18/22½) × 100 = 80%. The average money-rent per acre has risen. Formerly, in Table I, its average was £4½ per acre from all four acres, whereas in IVc and IVd it is £6 per acre upon the three acres. Its average upon the rent-bearing land was formerly £6, whereas now it is £9 per acre. Hence the money-value of the rent per acre has risen and now represents twice as much grain as it did formerly; but the 12 qrs of grain-rent are now less than one-half of the total output of 34 and 30 [In the German 1894 edition this reads: 33 and 27. — Ed.] qrs respectively, whereas in Table I the 6 qrs represent 3/5 of the total output of 10 qrs. Consequently, although the rent as an aliquot part of the total output has fallen, and has also fallen when calculated on the invested capital, its money-value calculated per acre has risen, and still more its value as a product. If we take soil D in Table IVd, we find that the price of production corresponding to the capital outlay here = £15, of which £12½ is invested capital. The money-rent = £15. In Table I, for the same soil D, the price of production was = £3, the invested capital = £2½, and the money-rent = £9; that is, the latter was three times the price of production and almost four times the capital. In Table IVd, the money-rent for D, £15, is exactly equal to the price of production and larger than the capital by only 1/5. Nevertheless, the money-rent per acre is ⅔ larger, namely, £15 instead of £9. In Table I, the grain-rent of 3 qrs = ¾ of the total product of 4 qrs; in Table IVd it is 10 qrs, or one-half the total product (20 qrs) per acre of D. This shows that the money-value and grain value of the rent per acre may rise, although it constitutes a smaller aliquot part of the total yield and has fallen in proportion to the invested capital.

The value of the total product in Table I = £30; the rent = £18, or more than one-half of it. The value of the total product in IVd = £45, of which the rent = £18, or less than one-half.

Now, the reason why in spite of the fall in price by £1½ per quarter, i.e., a fall of 50%, and in spite of the reduction in competing soil from 4 to 3 acres, the total money-rent remains the same and the total grain-rent is doubled, while, calculated per acre, both the grain-rent and money-rent rise, is that more quarters of surplus-product are produced. The price of grain falls by 50%, and the surplus-product increases by 100%. But in order to obtain this result, the total production under the conditions assumed by us must be trebled, and the investment of capital in the superior soils must be more than doubled. At what rate the latter must increase depends in the first place upon the distribution of additional capital investments among the better and best soils, always assuming that the productivity of the capital invested in each soil type increases proportionately to its magnitude.

If the fall in price of production were smaller, less additional capital would be required to produce the same money-rent. If the supply required to throw soil A out of cultivation — and this depends not merely upon the output per acre of A, but also upon the share held by A in the entire cultivated area — thus, if the supply required for this purpose were larger, and thereby also the amount of additional invested capital required in soils better than A, then, other circumstances remaining the same, the money and grain rents would have increased still more, although soil B would have ceased yielding money and grain rents. If the capital eliminated from A had been = £5, the tables to be compared for this case would be tables II and IVd. The total product would have increased from 20 to 30 qrs. The money-rent would be only half as large, or £48 instead of £36; the grain-rent would be the same, namely = 12 qrs.

If a total product of 44 qrs = £66 could be produced upon D with a capital = £27½ — corresponding to the old rate for D, 4 qrs per £2½ capital — then the total rental would once more reach the level attained in Table II, and the table would appear as follows:

The total production would be 54 qrs as against 20 qrs in Table II, and the money-rent would be the same, = £36. But the total capital would be £37½, whereas in Table II it was = 20. The total invested capital would be double almost, while production would be nearly treble; the grain-rent would be double and the money-rent would remain the same. Hence, if the price falls — while productivity remains the same — as a result of the investment of additional money-capital in the better soils which yield rent, that is, all soils better than A, then the total capital has a tendency not to increase at the same rate as production and grain-rent; thus the increase in grain-rent may compensate for the loss in money-rent due to the falling price. The same law also manifests itself in that the invested capital must be proportionately larger as more is invested in C than D, i.e., in soils yielding less rent rather than in soils yielding more rent. The point is simply this: in order that the money-rent may remain the same or rise, a definite additional quantity of surplus-product must be produced, and the greater the fertility of the soils yielding surplus-product, the less capital this requires. If the difference between B and C, and C and D, were still greater, still less additional capital would be required. The specific proportion is determined by 1) the ratio of fall in price, in other words, by the difference between soil B, which does not yield rent now, and soil A, which formerly was the soil not yielding rent; 2) the ratio of the differences between the soils better than B upwards; 3) the amount of newly invested additional capital, and 4) its distribution among the soils of varying quality.

In fact, we see that this law merely expresses what was already ascertained in the first case: When the price of production is given, no matter what its magnitude, the rent may increase as a result of additional capital investment. For owing to the elimination of A, we now have a new differential rent I with B as the worst soil and £1½ per quarter as the new price of production. This applies to Table IV as well as to Table II. It is the same law, except that our point of departure is soil B instead of A, and our price of production is taken as £1½ instead of £3.

The important thing here is this: To the extent that so much and so much additional capital was necessary in order to withdraw the capital from soil A and create the supply without it, we find that this may be accompanied by an unaltered, rising, or falling rent per acre, if not from all plots of land then at least from some, and so far as the average of the cultivated plots is concerned. We have seen that grain-rent and money-rent do not maintain a uniform relation to one another. It is merely due to tradition that grain-rent is still of any importance in economics. One might demonstrate equally well that, e.g., a manufacturer can buy much more of his yarn with his profit of £5 than he could formerly with a profit of £10. It shows at any rate, that messieurs landlords, when they are simultaneously owners or shareholders in manufacturing establishments, sugar-refineries, distilleries, etc., may in their capacity as producers of their own raw materials still make a considerable profit when the money-rent is falling.^[1]

II. Decreasing rate of productivity of the additional capital.

This introduces nothing new into the problem, in so far as the price of production may also fall in this case, as in the case just considered, only when additional investments of capital in better soils than A render the output from A superfluous and the capital is therefore withdrawn from A, or A is employed for the production of other products. This case has been exhaustively discussed above. It was shown that the rent in grain and money per acre may increase, decrease, or remain unchanged.

For convenience in making comparisons we reproduce the following table:

TABLE IV

Now let us assume that a quantity of 16 qrs supplied by B, C, and D at a decreasing rate of productivity suffices to exclude A from cultivation. In such case, Table III is transformed into the following:

TABLE V

[* In the German 1894 edition this reads 51 2/5. — Ed.]
[** Ibid. 137 1/5 — Ed.]
[*** Ibid.: 4. — Ed.]
[**** Here, as well as in tables VI, VII, VII I, IX and X the land which yields no rent is left out of consideration. — Ed.]

Here, at a decreasing rate of productivity of the additional capital, and a varying decrease for the various soil types, the regulating price of production has fallen from £3 to £1 5/7. The investment of capital has risen by one-half-from £10 to £15. The money-rent has fallen by almost one-half-from £18 to £9 3/7, but the grain-rent has fallen by only 1/12 — from 6 qrs to 5½ qrs. The total output has risen from 10 to 16, or by 60%. The grain-rent constitutes a little more than one-third of the total product. The advanced capital is to the money-rent as 15:9 3/7, whereas formerly this ratio was 10:18.

III. Rising rate of productivity of the additional capital.

This differs from Variant I at the beginning of this chapter, where the price of production falls while the rate of productivity remains the same, merely in that when a given amount of additional produce is required to exclude soil A this occurs here more quickly.

The effect may vary in accordance with the distribution of investments among the various soils for a falling, as well as an increasing, productivity of the additional capital investments. In so far as this varying effect balances out the differences, or accentuates them, the differential rent of the better soils, and thereby the total rental too, will fall or rise, as was already the case in differential rent I. In other respects, everything depends upon the magnitude of the land area and capital excluded together with A, and upon the relative magnitude of advanced capital required with a rising productivity in order to produce the additional output to meet the demand.

The only point worthwhile analysing here, and which really takes us back to the investigation of the way in which this differential profit is transformed into differential rent, is the following:

In the first case, where the price of production remains the same the additional capital which may be invested in soil A does not affect the differential rent as such, since soil A, as before, does not yield any rent, the price of its produce remains the same, and it continues to regulate the market.

In the second case, Variant I, where the price of production falls while the rate of productivity remains the same, soil A will necessarily be excluded, and still more so in Variant II (falling price of production with falling rate of productivity), since otherwise the additional capital invested in soil A would have had to raise the price of production. But here, in Variant III of the second case, where the price of production falls because the productivity of the additional capital rises, this additional capital may under certain circumstances be invested in soil A as well as in the better soils.

Let us assume that when invested in soil A an additional capital of £2½ produces 1 1/5 qrs instead of 1 qr.

TABLE VI

Aside from being compared with the basic Table I, this table should be compared with Table II, where a two-fold investment of capital is associated with a constant productivity, proportional to the investment of capital.

In accordance with our assumption, the regulating price of production falls. If it were to remain constant, = £3, then the worst soil A, which used to yield no rent with an investment of only £2½, would now yield rent without worse soil being brought under cultivation. This would have occurred due to an increase in the productivity of this soil, but only for a part of the capital, not for the original capital invested. The first £3 of production price yield 1 qr; the second yield 1 1/5; qrs; but the entire output of 2 1/5; qrs is now sold at its average price. Since the rate f productivity increases with the additional investment of capital, this presupposes an improvement. The latter may consist of a general increase in capital invested per acre (more fertiliser, more mechanised labour, etc.), or it may be that only through this additional capital it is at all possible to bring about a qualitatively different more productive investment of the capital. In both cases, the investment of £5 of capital per acre yields an output of 2 1/5 qrs, whereas the investment of one-half of this capital, i.e., £2 1/5, yields only 1 qr of produce. The produce from soil A could, regardless of transient market conditions, only continue to be sold at a higher price of production instead of at the new average price, as long as a considerable area of type A soil continued to be cultivated with a capital of only £2½ per acre. But as soon as the new relation of £5 of capital per acre, and thereby the improved management, becomes universal, the regulating price of production would have to fall to £2 8/11. The difference between the two portions of capital would disappear, and then, in fact, the cultivation of an acre of soil A with a capital of only £2½ would be abnormal, i.e., would not correspond to the new conditions of production. It would then no longer be a difference between the yields from different portions of capital invested in the same acre, but between a sufficient and an insufficient total investment of capital per acre. This shows, first of all, that insufficient capital in the hands of a large number of tenant farmers (it must be a large number, for a small number would simply be compelled to sell below their price of production) produces the same effect as a differentiation of the soils themselves in a descending line. The inferior cultivation of inferior soil increases the rent from superior soils; it may even lead to rent being yielded from better cultivated soil of equally poor quality, which would otherwise not be yielded. It shows, secondly, that differential rent, in so far as it arises from successive investments of capital in the same total area, resolves itself in reality into an average, in which the effects of the various investments of capital are no longer recognisable and distinguishable, and therefore do not result in rent being yielded from the worst soil, but rather: 1) make the average price of the total yield for, say, an acre of A, the new regulating price and 2) appear as alteration in the total quantity of capital per acre required under the new conditions for the adequate cultivation of the soil; and in which the individual successive investments of capital, as well as their respective effects, will appear indistinguishably blended together. It is exactly the same with the individual differential rents from the superior soils. In each case, they are determined by the difference between the average output from the soil in question and the output from the worst soil at the increased capital investment — which has now become normal.

No soil yields any produce without an investment of capital. This is the case even for simple differential rent, differential rent I; when it is said that one acre of soil A, which regulates the price of production, yields so much and so much produce at such and such a price, and that superior soils B, C and D yield so much differential produce, and therefore so much and so much money-rent at the regulating price of production, it is always assumed that a definite amount of capital is invested which, under the prevailing conditions of production, is considered normal. In the same way, a certain minimum capital is required for every individual branch of industry in order that the commodities may be produced at their price of production.

If this minimum is altered as a result of successive investments of capital associated with improvements on the same soil, it occurs gradually. So long as a certain number of acres, say, of A, do not receive this additional working capital, a rent is produced upon the better cultivated acres of A due to the unaltered price of production, and the rent from all superior soils, B, C and D, is increased. But as soon as the new method of cultivation has become general enough to be the normal one, the price of production falls; the rent from the superior plots declines again, and that portion of soil A that does not possess the working capital, which has now become the average, must sell its produce below its individual price of production, i.e., below the average profit.

In the case of a falling price of production, this also occurs even with decreasing productivity of the additional capital — as soon as the required total product is supplied, in consequence of increased investment of capital, by the superior soils, and thus, e.g., the working capital is withdrawn from A, i.e., A no longer competes in the production of this particular product, e.g., wheat. The quantity of capital which is now required, on an average, to be invested in the better soil B, the new regulator, now becomes normal: and when one speaks of the varying fertility of plots of land, it is assumed that this new normal quantity of capital per acre is employed.

On the other hand, it is evident that this average investment of capital, say, in England, of £8 per acre prior to 1848, and £12 subsequent to that year, will constitute the standard in concluding leases. For the farmer expending more than this, the surplus-profit is not transformed into rent for the duration of the contract. Whether this takes place after expiration of the contract or not will depend upon the competition among the farmers who are in a position to make the same extra capital advance. We are not referring here to such permanent soil improvements that continue to provide the increased output with the same or even with a decreasing outlay of capital. Such improvements, although products of capital, have the same effect as natural differences in the quality of the land.

We see, then, that a factor comes into consideration in the case of differential rent II which does not appear in the case of differential rent I as such, since the latter can continue to exist independently of any change in the normal investment of capital per acre. It is, on the one hand, the blurring of results from various investments, of capital in regulating soil A, whose output flow simply appears as a normal average output per acre. It is, on the other hand, the change in the normal minimum, or in the average magnitude of invested capital per acre, so that this change appears as a property of the soil. It is, finally, the difference in the manner of transforming surplus-profit into the form of rent.

Table VI shows, furthermore, compared with tables I and II, that the grain-rent has more than doubled in relation to I, and has increased by 1 1/5 qrs in relation to II; while the money-rent has doubled in relation to I, but has not changed in relation to II. It would have increased considerably if (other conditions remaining the same) more of the additional capital had been allocated to the superior soils, or if on the other hand the effect of the additional capital on A had been less appreciable, and thus the regulating average price per quarter from A had been higher.

If the increase in productiveness by means of additional capital should produce varying results for the various soils, this would produce a change in their differential rents.

In any case, it has been shown that the rent per acre, for instance with a doubled investment of capital, may not only double, but may more than double — while the price of production falls in consequence of an increased rate of productivity of the additional capital invested, i.e., when this productivity grows at a higher rate than the advanced capital. But it may also fall if the price of production should fall much lower as a result of a more rapid increase in productiveness of soil A.

Let us assume that the additional investments of capital, for instance in B and C, do not increase the productivity at the same rate as they do for A, so that the proportional differences decrease for B and C and the increase in output does not make up for the fall in price. Then, compared with Table II, the [money] rent from D would remain unchanged, and that from B and C would fall.

TABLE VIa

Finally, the money-rent would rise if more additional capital were invested in the superior soils with the same proportional increase in productiveness than in A, or if the additional investments of capital in the superior soils were effective at an increasing rate of productivity. In both cases the differences would increase.

The money-rent falls when the improvement due to additional investment of capital reduces the differences completely, or in part, and affects A more than B and C. The smaller the increase in productivity of the superior soils, the more it falls. It depends upon the extent of inequality produced, whether the grain-rent shall rise, fall or remain stationary.

The money-rent rises, and similarly the grain-rent, either when — the proportional difference in additional fertility of the various soils remaining unaltered — more capital is invested in the rent-bearing soils than in rentless soil A, and more in soils yielding higher rent than in those yielding lower rents; or when the fertility — the additional capital remaining equal — increases more on the better and best soils than on A, i.e., the money and grain rents rise in proportion to this increase in fertility of the better soils above that of the poorer ones.

But under all circumstances, there is a relative rise in rent when increased productive power is the result of an addition of capital, and not merely the result of increased fertility with unaltered investment of capital. This is the absolute point of view, which shows that here, as in all former cases, the rent and increased rent per acre (as in the case of differential rent I on the entire cultivated area — the magnitude of the average rental) are the result of an increased investment of capital in land, no matter whether this capital functions with a constant rate of productivity at constant or decreasing prices or with a decreasing rate of productivity at constant or falling prices, or with an increasing rate of productivity at falling prices. For our assumption: constant prices with a constant, falling, or rising rate of productivity of the additional capital, and falling prices with a constant, falling, or rising rate of productivity, resolves itself into: a constant rate of productivity of the additional capital at constant or falling prices, a falling rate of productivity at constant or falling prices, and a rising rate of productivity at constant and falling prices. Although the rent may remain stationary, or may fall, in all these cases, it would fall more if the additional investment of capital, other circumstances remaining the same, were not a prerequisite for the increased productiveness. The additional capital, then, is always the cause for the relatively high rent, although absolutely it may have decreased.

Notes

1. The above tables IVa to IVd had to be recalculated due to an error in computation which ran through all of them. While this did not affect the theoretical conclusions drawn from these tables, it introduced, in part, quite monstrous numerical values for production per acre. Even these are not objectionable in principle. For all relief and topographical maps it is customary to choose a much larger scale for the vertical than for the horizontal. Nevertheless, should anyone feel that his agrarian feelings have been injured thereby, he is at liberty to multiply the number of acres by any numerical value that will satisfy him. One might also choose 10, 12, 14, 16 bushels (8 bushels = 1 quarter) per acre in Table 1 instead of 1, 2, 3, 4 quarters, and the derived numerical values in the other tables would remain within the limits of probability; it will be found that the result, i.e., the ratio of rent increase to capital increase, is exactly the same. This has been done in the tables included by the editor in the next chapter. — F. E.

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