The Transformation Aborted: Absolute Rent and the Priority

C. The Transformation Aborted: Absolute Rent and the Priority

of the Industrial Sector

We now turn to Absolute Rent. What is involved is allowance for immobility between industry and agriculture due to private-property in land, and a presump- tion of a relatively low organic capital composition in agriculture, together implying

a “permanent” differential surplus value between sectors taking the form of rent. The matter is first expounded in letters to Engels. The first of which,

dated 2 August 1862, establishes the necessary framework by rehearsing the Transformation: “I now propose after all to include in this volume [the projected Capital] an extra chapter on the theory of rent, i.e., by way of ‘illustration’ to an

1861–1863 I: Surplus Value – Profit, Rent, and Interest

earlier thesis of mine” (MECW 41: 394). Marx initially sets aside the complex- ity created by capital immobility between sectors and establishes the deviation of equilibrium cost prices from values – the outcome of the Transformation in the case of non-uniform organic composition but a uniform rate of exploitation: “ . . . given equal exploitation of the worker in different trades, different capitals in different spheres of production will, given equal size, yield very different amounts of surplus value and hence very different rates of profit, since profit is nothing but the proportion of the surplus value to the total capital advanced. This will depend on the organic composition of the capital, i.e., on its division into constant and

variable capital” (395). 5 The solution – in his example – is to take the sum of four capitals (each of 100 with differing c/v ratios) and the sum of the individual “profit rates” (10%, 25%, 15%, 5%), based on a uniform rate of surplus value, to

obtain an average profit rate of 13 3 / 4 %; this requires that capital be “transferred” by “competition” between trades – involving appropriate industry expansionism or contraction to assure the appropriate redistribution of the total profit, with the result that equilibrium “prices” deviate from “values” (396). So far little has been added to the analysis appearing in the Grundrisse – including its representation of the organic composition as value components – unless it is greater attention now

afforded money units. 6 But now Marx introduces his new notion of Absolute Rent, an application based on the assumed backwardness of agriculture as reflected in a relatively low organic composition and on immobility of capital movement into agriculture:

If we assume that the average composition of all not agricultural capital is C 80, V 20, then the product (assuming that the rate of surplus value is 50 per cent) = 110 and the profit rate = 10 percent.

If we further assume that the average composition of agricultural capital is C 60, V 40 (in England, this figure is statistically fairly correct . . . ), then the product, given equal exploitation of labour as above = 120 and profit rate = 20 per cent. Hence, if the farmer sells his agricultural produce for what it is worth, he is selling it at 120 and not at 110, its cost price. But landed property prevents the farmer, like his brother capitalists, from equalising the value of the product to the cost price. Competition between capitals cannot enforce this. The landowner intervenes and pockets the difference between value and cost price (396–7).

5 To allow for “the further distinction between fixed and circulating capital, which arises out of the circulation process of capital,” would render “the formula . . . too involved” (MECW 41:

397). 6 Marx works throughout in terms of a money medium:

Let us assume . . . that the surplus labour = 50 p.c. If, therefore, e.g. £ 1 = 1 working day (no matter whether you think in terms of a day or a week, etc.), the working day = 12 hours, and the necessary labour (i.e. reproductive of the pay) = 8 hours, then the wage of 30 workers (or working days) = £ 20 and the value of their labour = £

30, the variable capital per worker (daily or weekly) = £ 2/3 and the value he creates = £ 1. The amount of surplus value produced by a capital of £ 100 in different trades will vary greatly according to the proportion in which the capital of £ 100 is divided into constant and variable capital (MECW 41: 395)

C. The Transformation Aborted 299 The differential organic composition between sectors is said to be “easily explicable

since . . . a prerequisite for industry is the older science of mechanics, while the prerequisites for agriculture are the completely new sciences of chemistry, geology and physiology” (397). By implication, the differential was likely to narrow in the future.

Of this analysis, represented as an advance over Ricardo, Marx was proud: “There you have . . . the critique of Ricardo. This much you will admit – that by taking into account the organic composition of capital, one disposes of a mass of what has so far seemed to be contradictions and problems.” For Ricardo had, so Marx mistakenly asserted, maintained a strict Labor Theory of Exchange Value – and thus “confused” value and cost price leading him to insist on differential rent better to defend that strict version: “Ricardo confuses value and cost price. He therefore believes that if there were such a thing as absolute rent (i.e., rent independent of variations in the fertility of the soil), agricultural produce, etc., would be constantly sold for more than its value, because at more than cost price (the advanced capital + the average profit). That would demolish the fundamental law. Hence he denies absolute rent and assumes only differential rent” (396). And in answer to Engels – who had responded that he was “by no means clear about the existence of ‘absolute’ rent – for, after all, you have to prove it first” (8 August 1862; 402) – Marx pointed out that his own position could allow for absolute rent because it did not entail the “law of value” in the strict sense he attributed to Ricardo, but allowed for deviations of relative equilibrium exchange values from relative labor inputs generated by the Transformation: “All I have to prove theoretically is the possibility of absolute rent, without infringing the law of value. This is the point round which the theoretical controversy has revolved from the time of the physiocrats until the present day. Ricardo denies that possibility; I maintain it. I likewise maintain that his denial rests on a theoretically false dogma deriving from A. Smith – the supposed identity of cost prices and values of commodities” (9 August 1862; 403).

It should be emphasized that Marx did not reject the differential-rent principle. 7

On the contrary, he extended its applicability beyond agriculture: “Differential rent as such . . . presents no difficulty in theory. It is nothing other than surplus profit which also exists in every sphere of industrial production wherever capital operates under better than average conditions. It is firmly ensconced in agriculture only because founded on a basis as solid and (relatively) stable as the different degrees of natural fertility of various types of soil” (398). Furthermore, he allowed that absolute rent would not emerge when entry of capital into agriculture is unimpeded so that farm prices fall below values as in all similar cases: “Assuming the correctness

7 Even so, Marx did not intend to give Ricardo an easy time in his projected Capital, apparently having in mind neglect of new technology: “If the proportion in agriculture becomes C 80,

V 20 (in the above premise), then absolute rent disappears. All that remains is differential rent, which I shall also expound in such a way as to make Ricardo’s assumption of the constant deterioration of agriculture appear most ridiculous and arbitrary” (MECW 41: 397).

1861–1863 I: Surplus Value – Profit, Rent, and Interest

of the above view, it is by no means essential for absolute rent to be paid under all circumstances. . . . It is not paid when landed property does not exist, either factually or legally. In such a case, agriculture offers no peculiar resistance to the application of capital, which then moves as easily in this element as in the other. The agricultural produce is then sold, as masses of industrial products always are, at cost price for less than its value.” The implication drawn above for communal arrangement – absence of private property in land – is again repeated to Engels thus: “It will

be evident to you that, given my view of ‘absolute rent,’ landed property (under certain historical circumstances) does indeed put up the prices of raw materials. Very important, communistically speaking.”

We note finally a methodological implication of the analysis. In his criticism of Ricardo, Marx complained of his excessive abstraction: “where Ricardo illustrates the thing with examples, he invariably presupposes conditions in which there is either no capitalist production or (factually or legally) no landed property. But the whole point is to examine the law precisely when such things do exist” (403). This complaint is in line with an insistence on the empirical relevance of the Absolute Rent doctrine (an issue raised by Engels): “As regards the existence of absolute rent, this would be a question that would require statistical solution in any country. But the importance of a purely theoretical solution may be gauged from the fact that for 35 years statisticians and practical men generally have been maintaining the existence of absolute rent, while the (Ricardian) theoreticians have been seeking to explain it away by dint of very forced and theoretically feeble abstractions. Hitherto,

I have invariably found that, in all such quarrels, the theoreticians have always been in the wrong.” The praise accorded “statisticians and practical men” comes as a surprise considering the danger of taking surface views of economic phenomena so often insisted on by Marx.

In what follows we focus on further elaborations of the themes of the 1862 letters given in the Economic Manuscripts of 1861–63. An exposition of the standard Transformation appears in the course of a critique of Rodbertus and involves the example given in Table 10.1. With prices proportionate to values and a rate of surplus value of 50%, profit rates differ between “spheres of production” but the sum of the profits calculated on the sum of the capitals 1000/5000 amounts to 20% which must be yielded in each sphere, and this requires deviation of prices from values and appropriate redistribution of the total surplus:

However, so that in fact each of the capitals advanced, i.e., I, II, III, etc. – or what comes to the same thing, that capitals of equal size – should receive a part of the surplus value yielded by the aggregate capital only in proportion to their magnitude, i.e., only in proportion to the share they represent in the aggregate capital advanced, each of them should get only 20% profit and each must get this amount. But to make this possible, the products of the various spheres must in some cases be sold above their value and in other cases more or less below their value. In other words, the total surplus value must

be distributed among them not in the proportion in which it is made in the particular

C. The Transformation Aborted 301

Table 10.1. The Transformation Illustrated

I II III IV V Constant Capital: Machinery

50 700 None Constant Capital: Raw Materials

350 None 500 Variable Capital (wages)

600 300 500 Surplus Value

300 150 250 Rate of Surplus Value

300 150 250 Rate of Profit

30% 15% 25% Value of Product

1300 1150 1250 Normal Average Profit

200 200 200 Average Price

1200 1200 1200 Deviations of Average Price from Value

0 − 100 + 50 − 50 Source: MECW 31: 301

sphere of production, but in proportion to the magnitude of the capitals advanced. All must sell their product at £1,200, so that the excess of the value of the product over the capital advanced = 1/5 of the latter = 20% (MECW 31: 302). 8

In sum, in his example: “only in one instance (II) [does] the average price = the value of the commodity, because by coincidence, the surplus value equals the normal average profit of 200. In all other instances a greater or lesser amount of surplus value is taken away from one sphere and given to another, etc.” (303).

As we have shown, the role of output adjustment is central to Marx’s vision, and presumably it is taken for granted even if – as in the account of the redistribution of surplus just given – Marx does not always spell it out. This is true also of an important general paragraph touching on the significance of the Transformation in destroying the “illusion” – Malthus is a culprit – that “capital is a source of income independent of labour . . . ”:

The individual capitalist, according to Mr. Malthus [1836: 268], expects an equal profit from every part of his capital – which, in other words, means only that he regards each part of his capital (apart from its organic function) as an independent source of profit, that is how it seems to him. . . . This illusion confirms for the capitalist . . . that capital is a source of income independent of labour, since in fact the profit on capital in each particular sphere of production is by no means solely determined by the quantity of unpaid labour which it itself “produces”; it is thrown into the pot of aggregate profits, from which the individual capitalists draw their quota in proportion to their shares in the total capital.

8 The data selected yield a common “average price” of 1,200 which is more restrictive than Capital

3 where the “price of production” varies from sector to sector (Chapter 1, p. 20). But elsewhere the emphasis is on equality of “the sum of the production prices of the commodities [and] the sum of their values,” as in Capital MECW 33: 67; see below, pp. 320–1.

1861–1863 I: Surplus Value – Profit, Rent, and Interest

The emergence of Absolute Rent 9 entails a breakdown of the standard Transfor- mation process. Marx – who directs his argument against Rodbertus (see Howard and King 1992a; Dussel 2001; 83–7, 90–1) – sets out to explain the phenomenon by asking why, in agriculture, “the total surplus value (or at least to a larger extent than in the other branches of industry, a surplus above the average rate of profit) remains in the price of the product of this particular branch of production and does not participate in the formation of the general rate of profit” (MECW 31: 301; emphasis added). This conclusion surely constitutes the most conspicuous feature of the analysis.

Marx goes on to argue that the fact of a permanent surplus (rent) implied – presuming the validity of the theory – that the organic composition must be lower in agriculture than in industry: “When the raw products are sold at their values, their value stands above the average prices of the other commodities or above their own average price, this means their value is greater than the production costs + average profit, thus leaving an excess profit which constitutes rent. Furthermore, assuming the same rate of surplus value, this means that the ratio of variable capital to constant capital is greater in primary production than it is, on an average, in those spheres of production which belong to industry . . . ” (325). For all that, it was still necessary to justify empirically the particular axiom implied, as it were, by the theory: “One has to prove that agriculture belongs to those particular spheres of production whose commodity values are above their average prices, whose profit, so long as they appropriate it themselves and do not hand it over for the equalisation of the general rate of profit, thus stands above the average profit, yielding them, therefore, in addition to this, an excess profit. This point . . . appears certain to apply to agriculture on an average, because manual labour is still relatively dominant in it and it is characteristic of the bourgeois mode of production to develop manufacture more rapidly than agriculture” (326). And though this was “a historical difference which can disappear,” it implied “that, on the whole, the means of production supplied by industry to agriculture fall in value, while the raw material which agriculture supplies to industry generally rises in value, the constant capital in a large part of manufacture has consequently a proportionately greater value than in agriculture.” But since absolute rent pertained specifically to a certain stage of development, it also followed that should the level of agricultural development rise so that the composition of capital came to equal the average in the industrial sector, “the value of the agricultural produce [would] = its cost price. Only differential rent could be paid then. The land which yields no differential rent but only an agricultural rent, could then pay no rent. For if the farmer sells the agricultural

9 Marx refers to and stands by several passages regarding rent given in his Poverty of Philosophy 1847, including allusions to the error of “universalising” and “eternalising” “the difference

between manufacture and agriculture” (MECW 31: 384–5) regarding MECW 6: 199, 202, 205. (See also MECW 31: 253.) For our discussion of the differential-rent principle based explicitly on land scarcity allowing for endogenous (extensive and intensive) margins with reference to demand, see Chapter 7, p. 229.

C. The Transformation Aborted 303 produce at its value, it only covers its cost price. He therefore pays no rent”

(MECW 32: 31). 10

A surprising qualification should be noted. Marx’s concern throughout is with average differentials between agriculture and industry, “the ratio of variable capital to constant capital . . . being higher in some branches of industry than it is

in agriculture” (MECW 31: 325); 11 whereas “in some branches of agriculture – in stock-raising – the variable capital, i.e., that which is laid out in wages, is extraor- dinarily small compared with the constant part of capital” (303–4). However, he does not stand by the standard notion of “average” in the case of agriculture, and in his formal investigation of rent maintained that all that matters is the organic composition in wheat production, other branches playing no strategic role: “Rent is . . . not determined by this branch [stock-raising], but by agriculture proper, and, furthermore, by that part of it which produces the principal means of subsistence, such as wheat, etc. The rent in the other branches is not determined by the composition of the capital invested in these branches themselves, but by the composition of the capital which is used in the production of the principal means of subsistence” (512).

All of this has a distinct Smithian flavor, for (in some contexts) Smith has it that non-corn agricultural products have to meet the competition for land use exerted by corn production, rather than the reverse (Hollander 1992: 83). 12 Now Marx cautioned that “[t]he interrelationship of the rents in the various branches is a secondary question that does not interest us here . . . ” (MECW 31: 512). But when

he does engage in a sort of applied economics where “one comes still closer to the surface of the phenomenon . . . ” (MECW 32: 514), he provides a micro-economic analysis of land use where the strategic role of corn is apparent just as Smith had it:

Rent . . . determines the market prices of individual commodities not directly, but only indirectly, by influencing the proportions in which the various types of commodities are produced in such a way that demand and supply will secure the best price for each so that rent can be paid. Even though rent does not directly determine the market price of corn, for example, it determines directly the market price of cattle, etc., in short, of commodities produced in the spheres where rent is not regulated by the market prices of their products but where the market prices of products are regulated by the rate of

10 Of course, absolute rent would also disappear with the abolition of private property in land for that is “the precondition on which the existence of rent is based” (MECW 31: 515).

11 See also the reference to “the higher proportion of variable to constant capital compared with that existing, not in particular spheres of industrial production, but on an average in industry

as a whole” (MECW 31: 332). 12 Marx applied the absolute-rent principle also to mining (MECW 32: 485). However,

he distinguished agriculture (corn) from mining in one respect: “only in agriculture does . . . industrial reproduction coincide with natural reproduction. It does not do so in extractive industry . . . [where] the product does not in its natural form become an element in its own reproduction . . . ” (MECW 31: 296). The corn output-input feature did not however lead Marx to assert a priority of the agricultural profit rate, as we shall see.

1861–1863 I: Surplus Value – Profit, Rent, and Interest

rent borne by the grain-producing land. . . . For the price must cover not only the cost of production, but also the rent which the land would carry if corn were grown on it (515).

The differential “average” organic composition between agriculture and industry is, of course, not enough to explain a permanent rent payment. That is accounted for by the “landed property” institution, creating a sort of monopoly of landownership which precluded appropriate capital movement to eradicate the excess of market price (reflecting value) over “cost price” including the going profit rate (MECW

31: 541). To elucidate, Marx explains why – given the pattern of final demand – capitalists are unable to assure that the value of agricultural produce falls to cost price: “Withdrawal of capital from agriculture cannot have this effect, unless it is accompanied by a fall of the demand for agricultural produce. It would achieve the reverse, and cause the market price of agricultural produce to rise above its value. Transfer of new capital to land can have as little effect. For it is precisely the competition of capitals amongst themselves which enables the landlord to demand from the individual capitalist that he should . . . pay over to him the overplus of the value over the price affording [an average] profit” (542). The role here accorded the final-demand pattern is again encountered in answer to the question why land “monopoly” cannot bring about a market price which exceeds value. Marx relies on the notion of a price ceiling assured by the possibility of foreign corn imports: “On a small island, where there is no foreign trade in corn, the corn, food, like every other product, could unquestionably be sold at a monopoly price, that is, at a price only limited by the state of demand, i.e., of demand backed by ability to pay, and according to the price level of the product supplied the magnitude and extent of this effective demand can vary greatly”; but this was not the case in the main European countries, where “originally” (and on an average) exchange rates reflect values and the problem is to explain why food prices do not fall below value

(542–3). 13 Similarly, in a case addressed against Rodbertus: “it must be shown why in primary production – by way of exception and in contrast to the class of industrial products whose value similarly stands above their average price – the values are not reduced to the average prices and therefore yield an excess profit, alias rent. This is

to be explained simply by property in land” (326). 14 On these grounds, Marx found acceptable Adam Smith’s propositions that the landlord “sometimes demands a rent for what is altogether incapable of human improvement,” and that land rent “considered as the price paid for the use of land, is naturally a monopoly price” (Smith 1937 [1776]: 144–5). “Smith stresses very strongly that it is landed property, the landlord, who as landlord ‘demands the rent.’ [Regarded] as a mere effluence

13 Nonetheless, Marx notes that “even in England a large part of the fertile land is artificially withdrawn from agriculture and from the market in general, in order to raise the value of the

other part” (MECW 31: 542). 14 Marx’s objection to Rodbertus appears to be purely formal: “It is wrong to say, as Rodbertus

does: If – according to the general law – the agricultural product is sold on an average at its value then it must yield an excess profit, alias rent; as though this selling of the commodity at its

C. The Transformation Aborted 305 of landed property, rent is monopoly price, this is perfectly correct, since it is only

the intervention of landed property which enables the product to be sold for more than the cost price, to be sold at its value” (552).

Let us review the analysis of Absolute Rent until this point. Two formulations with respect to this excess stand out in particular – that “total surplus value . . . remains in the price of the [agricultural] product . . . and does not participate in the forma- tion of the general rate of profit” (above, p. 302); and, similarly, that the excess of value over price is not “hand[ed] . . . over for the equalisation of the general rate of profit” (above, p. 302). Focusing on the Transformation as such – and Marx we have seen set out with this analysis in the background – the reader might be inclined to believe that the agricultural sector does contribute to the determination of the general rate within the initial value scheme, the abortion of the full Transformation merely preventing a full-fledged tendency towards prices of production. This read- ing, however, is unacceptable since a constraint on capital inflow into agriculture (because of the land-ownership institution) necessarily entails an excess of invest- ment elsewhere in the system – in brief a breakdown of the capital-reallocation process assuring the tendency towards a uniformity of profit rates. Marx misleads by setting out from the value scheme, for on his own terms – as the two citations given above indicate – agriculture is in fact entirely excluded from the determination of the average profit rate in the initial (or value) scheme, the process of reallocation assuring profit-rate uniformity applying solely to the non-agricultural sectors.

Marx’s intentions emerge very clearly in his analysis of agricultural improve- ments. Here he explicitly accords priority to the non-agricultural sector in profit- rate determination, with the general profit rate thus determined taken as a datum by agriculture. Specifically, agricultural improvements should they reduce wage- goods costs and thus increase the s/v ratio – an application of the inverse wage-profit relation – will raise the industrial profit rate and “hence” or “consequently” the agri- cultural profit rate; but since an increase in the latter implies an increase in the “cost price” of corn (costs inclusive of profits) and, moreover, since the initial disturbance entails a reduced value (and market price) of corn, absolute rent (the difference between value and cost) is reduced (MECW 32: 23).

The priority accorded the (average) industrial profit rate is further confirmed by Marx’s strong rejection of James Mill’s proposition – which Mill misleadingly attributed to Ricardo, as Marx very correctly insists – that “the rate of agricultural

profits determines the rate of all other profits” (288). 15 “Rent . . . cannot possibly

be explained,” Marx insisted “if industrial profit does not regulate agricultural profit,” since it constitutes the residual difference between the presumably known value of corn and the known costs of corn inclusive of a profit rate determined externally (289).

15 And this despite Marx’s own allusion elsewhere to a correspondence between “industrial” and

1861–1863 I: Surplus Value – Profit, Rent, and Interest The principle of industrial priority only applies in the presence of (scarce) landed

property; in its absence the general profit rate is determined by the standard Trans- formation as an average of all industrial and the agricultural sectors, there being nothing to distinguish the two (MECW 31: 528–9). Thus the full Transformation comes into play should “landed property” become free with an adequate increase in the “relative abundance of land.”

Whereas the presence of landed property excluded the agricultural sector from the process of general profit-rate formation, we still find Marx frequently including rent in the general return: “The surplus value produced within a given period of circulation . . . when measured against the total capital which has been advanced, is called – profit . . . includ[ing] not only interest – known to be a mere portion of the total profit – but also the rent of land, which is nothing but a part of the capital employed in agriculture. . . . [P]rofit is not to be understood exclusively as what is called industrial or commercial profit” (MECW 33: 69).

Now for some purposes this may not entail inconsistency. But a problem arises where it is implied that the agricultural sector does enter into the determination of the general profit rate. This is the case in a discussion of the general profit rate where Marx refers to “the total surplus value produced by the total capital, hence the whole class of capitalists, the absolute measure of the total profit of the total capital, whereby profit should be understood to include all forms of surplus value, such as rent, interest, etc.” (99). A corresponding dilemma is created by the all-inclusive definition of “profit” insisted on in the discussion of the falling profit rate (see below, p. 307).

The source of the apparent conflict can perhaps be traced to Marx’s habit of short-circuiting the process by which the average profit rate is arrived at. For he sometimes neglected that process of “competition of capitals” required to bring about uniformity of return on capital, simply taking the sum of the surplus values in each sector as a ratio of the sum of the capitals: For example, considering “the total capital of the capitalist class, the average rate of profit is nothing other than the total surplus value related to and calculated on this total capital. . . . Here, therefore, we once again stand on firm ground, where, without entering into the competition of the many capitals, we can derive the general law” – the context is the falling profit rate – “directly from the general nature of capital as so far developed” (MECW 33: 104). But it is only when one does “enter into the competition of the many capitals” that the exclusion of agriculture from the determination of the average rate – assuming land “monopoly” and the emergence of absolute rent – becomes apparent.