Ground Rent

Land refers to those elements of wealth & means of production that are the products of nature rather than human labour. Since land is not produced by human labour, it has by definition no value.

Unimproved land is not capital. A person who owns land, as opposed to a capitalist, is a landowner.
However, improvements in land that are the result of human labour applied to land do have value & function as commodities and capital.

The income from ownership of unimproved land is called ground rent & represents a part of the surplus value produced by the working class.

The theory of differential ground rent was developed by classical bourgeois political economy & perfected by Marx. Marx also added the concept of absolute rent.

The theory of rent developed by the classical economists assumes that unimproved land is owned by a distinct landlord class, the capital used in farming is owned by capitalist farmers, while the labour power utilized in agriculture is owned by a separate class of wage workers who sell their labour power to the capitalist farmers in order to live.

Marx assumed in his analysis of ground rent that the organic composition of capital invested was lower in agriculture than it was in most other branches of industry.
As a consequence, if commodities sell at prices that directly reflect their values—as opposed to at prices of production—the rate of profit will be higher than average in agriculture.

Marx’s first form of differential rent.
If a branch of industry with a below-average organic composition of capital can sell its commodities at their value it will make a higher-than-average rate of profit.
However, assuming free competition, unless special factors are at play, this situation will not be maintained. The reason is that capital will flow into a branch that is making an above-average rate of profit until the profit is reduced to the average rate. In this way, prices that directly reflect values are transformed into prices of production.
In agriculture, there is a special factor that prevents this process from occurring. Some land is more fertile than other land. The most fertile grades of land are in short supply. This enables owners of the more fertile grades of land to realize a monopoly. Such persons are in a position to realize a super-profit that competition cannot eliminate. A super-profit that competition does not tend to eliminate is economic rent.
A monetary income that flows from the leasing out of land is only ground rent in the strict sense of the word if it is indeed such a super-profit.
The landlord steps in & reduces the profit of the capitalist farmer farming on such fertile land to the average rate of profit. The landowner performs this economic function by collecting rent.
The most fertile land will bear its owner the highest rent while less fertile lands that are still in short supply will bear its owner a lower rent.

The second form of differential rent involves repeated investments of a given quantity of capital on the same land. You cannot invest an infinite amount of capital on a finite quantity of land.

Ricardo assumed that as the population grew, poorer grades of land would have to be cultivated. This would result in higher differential rents & a fall in the rate of profit on capital. This is the Ricardian version of the falling rate of profit.
Some of Ricardo’s more radical followers demanded the nationalization of the land. This would put all the differential rent into the hands of the state, which would largely eliminate the need to tax the capitalists.
Lenin pointed out that the demand for nationalization of the land is not as such a socialist demand but rather a condition for the fastest possible development of capitalism.

If the landlords by holding back some of their worst lands can raise the price of the produce to the point where the market price is equal to the price that directly expresses the individual value of the produce produced on the worst land, the individual direct price of the produce produced on the worst land will determine the market price of all the produce of a given type & quality under the given conditions of production.

Marx defined absolute rent as the difference between the direct price of produce produced on the worst land & its individual price of production.
This absolute rent is then collected by the landlord, which once again reduces the rate of profit of the capitalists using the worst land to the average rate of profit.
Unlike the case with differential rent, absolute rent can be abolished if ownership the land is transferred to the capitalist state. If the state takes over ownership of the land, the government if it wishes can rent the poorest land to capitalist farmers for nothing. If it does so, this will lower the price of produce to the individual price of production on the poorest land. Absolute rent then disappears.

If a person with money wants to obtain some of the surplus value & doesn’t want to take on the risks of becoming an industrial or commercial capitalist, that person has two choices. He can lend out the money to industrial or commercial capitalists either directly or through the banking system, or that person can buy land.
When individuals invest in land, they therefore expect the same rate of return that they would get if they lent the money to an industrial or commercial capitalist.

The price of land moves inversely to the rate of interest.
If interest rates rise, the price of land will fall. If the rate of interest falls, the price of land will rise.
Let’s assume that an acre of land sells for $100 and the interest is 5 percent. The price of land will be 100/.05 or $2,000. If the rate of interest rises to 10 percent, the price of an acre of land will fall to $1,000. If the rate of interest falls to 2.5 percent, the price of and will rise to $4,000 per acre.

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