Munro chapter 5
Marx’s Theory of Land, Rent and Cities
Munro, Don
Bringing together Marx’s original writings on land, rent and the landed property class, this book applies them to contemporary cities in the Global North and Global South. The book shows how landed property, and not just labour and capital, directly affects urban economic development, the built environment, urban governance and the quality of life of people living in cities. It also shows how land, rent and class transform cities in different ways depending on the indigenous, Asiatic, feudal, capitalist or other modes of production that mould the form and substance of cities. Presenting a new comparative approach, this book provides novel insights into the origins of, and solutions to, many of today’s urban problems including urban enclosures, exclusive property development, the financialisation of land, land grabbing, and climate change.
“https://library.oapen.org/handle/20.500.12657/60229”
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CHAPTER 5
Capitalist Rents
Just as the operating capitalist pumps surplus-labour, and thereby surplus value and surplus-product in the form of profit, out of the labourer, so the landlord in turn pumps a portion of this surplus-value, or surplus-product, out of the capitalist in the form of rent …1
Introduction
Rent is central to many current crises in capitalist cities. The power of rent is often associated with a variety of social issues such as the long-term rises in property prices,2 the uneven development of housing prices in cities,3 and restructuring of publicly funded seniors’ care in Canada.4 The price of a house or other real estate property is directly affected by rent because property prices are essentially capitalised rent.
For residential tenants, government initiatives such as capital gains taxes, negative gearing policies and investment incentives can distort the rental housing market by causing ‘more high-value, high-rent stock being brought into the rental sector, and low-cost, low-rent properties dropping out’,5 exacerbating homelessness.
The authority of rent also controls commercial tenants, as was shown during the COVID-19 pandemic in the early 2020s, when businesses around the world found they were obliged by the terms of their lease to pay rent even if they had no income (due to lockdowns).6
Marx proposed there are three main forms of rent in capitalism.
Absolute rent determines whether capital will invest on land at all.
There are two forms of differential rent which, in different ways, influence the extent to which capital will invest in city centres or in suburban regions. However, Marx also recognised rent caused a theoretical problem for his theory of value.
Capitalist rent, as with other modes of production, is always a portion of the surplus labour provided by workers.
*However, rent is not a portion of the profit captured by capitalists but additional to profit: rent ‘is always a surplus over and above profit’.7
*The problem then arises: if capitalists appropriate all the unpaid surplus value as their profit, what is the source of the additional surplus value that comprises rent?
This chapter addresses these issues. It analyses the economic mechanisms whereby landed property captures differential rent (DR) and absolute rent (AR) from capital. It will show that DR arises when land interferes in the process that establishes the market value of a commodity; and AR arises when land intervenes in the process that establishes the price of production for a commodity. The magnitude of rent that can be captured from capital by landed property, however, is not limitless; the very nature of the rent appropriation process puts limits on how much can be captured. To understand how DR and AR arise and drive crises in contemporary capitalist cities, therefore, it is necessary to delve deep into the processes of how the market value of a commodity is determined, and how the price of production of a commodity is established.
First we consider the case of how market value is formed, thus making it possible for landowners to extract DR from capitalists.
Market value
As noted in Chapter 2, capitalism consists of a continuous, relentless and crisis-ridden cycle of capital accumulation. In general terms, an amount of capital (of value M) is invested to buy commodities (with an equivalent value, C); the commodities are then transformed by labour in production (P) where they gain an enhanced value (C’) arising from the unpaid surplus value (profit) provided by workers; and the new commodities with their enhanced value (C’) are then sold for an equivalent amount of value (M’). As a result, the capitalist realises a larger magnitude of value (M’) than was originally invested (M). The general formula for this cycle of investment, production and realisation of capital is summarised as:
M — C … P … C’ — M’
Within this general formula are numerous detailed economic processes. To solve the problem of rent, of where surplus value for rent originates when all surplus value (created by labour) is captured as profit by capital, it is necessary to focus on the way commodities are realised for money; that is, what occurs in detail in the C’ — M’ phase of the overall process for the production and realisation of capital.
The first process which is necessary for the creation of rent, differential rent (DR), is the establishment of the market value of a commodity. Consider any industry sector where multiple capitalists are producing the same commodity in competition with each other. Each capitalist produces a commodity which embodies a particular quantity of value. The value embedded in commodity is made up of the value of the physical commodities used up to produce the commodity (called constant capital, ci); the value of the employees’ labour used up to transform the materials into the new commodity and which is paid for with a wage (called variable capital, vi); plus the value provided by labour that was not paid for (surplus value, si).
The value of each new individual commodity, therefore, is (ci+vi+si).
No capitalist in this industry sector is the same. Each capitalist uses a different combination of physical commodities and technologies ( c )and different magnitudes of labour-time (v) and extracts different amounts of unpaid surplus value (s) from its workers. As a result, the commodities made by each capitalist have different magnitudes of value embodied in them. For example, Capitalist A may produce a commodity that has a value of (ca+va+sa) while Capitalist B, producing the same commodity, may have a commodity that has a value of (cb+vb+sb), and so on.
Having produced their commodities, the capitalists within each industry then have to realise the value of these individual commodities (ci+vi+si) as money. To do so, each capitalist puts their commodities into the market to sell. It is here in this competitive marketplace, with its many buyers and sellers, that the market value of the commodity is established. Our capitalists present their commodities to the market for sale. As happens in all markets, capitalists who ask too high a price for their commodities will not sell them all; and capitalists who ask too low a price will sell them all but at the risk of not making as large a profit as is possible.
Through this market bidding and correction process, an agreed market price (or, in value terms, an agreed market value) is established for each particular commodity.
This market value is ‘the average value of commodities produced in a single sphere [industry sector]’ or, more accurately, ‘the individual value of the commodities produced under average conditions of their respective sphere and forming the bulk of the products of that sphere’.8 The market value of this particular commodity, established by the average conditions of production used to produce the commodities, is symbolised as (cm+vm+sm) to distinguish it from the value of the individual commodities (ci+vi+si) produced by each capitalist in the industry.
Conceptually, the ‘market value’ of a commodity is similar to the contemporary concept of the Wholesale Price Index, a measure of the average selling price of a representative basket of wholesale goods. This is a common measure of the wholesale price of each commodity which is used by many contemporary bureaux of statistics around the world.
For example, consider an industry sector where two capitalists, Capitalist A and Capitalist B, produce the same commodity. Capitalist A produces commodities very efficiently (using labour-saving technologies that require far less labour) or more productively (where a set amount of capital and labour inputs produced a larger-than-industry-average number of commodities).
In this case, Capitalist A discovers their commodities, which have an individual value of (ca+va+sa), is lower than the industry-average market value that this commodity sells for (cm+vm+sm).
That is, symbolically, (cm+vm+sm) > (ca+va+sa). As a result, Capitalist A sells the commodities in the market at the going market value (cm+vm+sm), even though it cost only (ca+va+sa) to produce. The outcome of the sale is that Capitalist A realises the surplus value (sa) they captured in production plus an extra amount of surplus value (symbolised as (cm+vm+sm) — (ca+va+sa)). Marx calls this additional amount of surplus value, captured from the sale of the commodity in the market, the ‘surplus of surplus value’ or ‘surplus profit’.
On the other hand, Capitalist B produces the same commodity in a relatively inefficient or less productive way. In this case, when Capitalist B sells their commodities in the market at the average, market-determined value for the commod-ity, they lose value. Capitalist B’s commodities, which have an individual value of (cb+vb+sb), is higher than the industry-average market value that the commodity sells for (cm+vm+sm). Symbolically, (cb+vb+sb) > (cm+vm+sm).
As a result, when Capitalist B sells their commodities at the going market value, Capitalist B loses value. Depending on how inefficient or how unproductive is Capitalist B’s production process, when Capitalist B sells their commodity in the market, they may lose all their profit (sb) and only receive an amount of money to pay for the cost of the commodities (cb+ vb) used up in production.
In a worst-case scenario, Capitalist B will receive payment for their commodities (cm+vm+sm) which does not even cover their cost to produce those commodities (cb+vb+sb) and they will go into debt or bankruptcy.
In this simple industry sector, with Capitalist A and Capitalist B making the same commodity in different ways, the average, market-determined selling price for the commodity (the market value) produces a result that is similar to a zero-sum game, where the magnitude of Capitalist B’s loss of value equals the magnitude of Capitalists A’s value gain.
For clarity, it is worth briefly considering a different example expressed in monetary terms.
Consider an industry where Capitalist A and Capitalist B make the same number of the same commodities, using the same constant capital and exploit their workers at the same rate (they both make a profit of 100 per cent of the cost of their workforce).
The more efficient and productive Capitalist A uses relatively little labour to produce each commodity at a cost of, say, $100 per commodity (made up of $40 + $30 + $30 for commodities, wages and profit, respectively).
The less efficient and less productive Capitalist B uses relatively more labour to produce the same commodity but at a cost of, say, $130 (made up of $40 + $45 + $45 for commodities, wages and profit, respectively).
Both firms enter the market to sell their commodities and discover the commodity sells at the average market price of $115. As a result, efficient Capitalist A makes a profit in production of $30 and an additional surplus profit of $15 in the market (because the commodity it made for $100 is sold at the market value of $115). As a result, efficient Capitalist A makes a total profit of $45 per commodity.
On the other hand, the inefficient Capitalist B, which produced the same commodities but at a cost of $130, finds their commodities sell in the market at the going market price of $115, incurring a loss of $15 per commodity. Capitalist B’s loss of $15 per commodity is Capitalist A’s gain of $15 per commodity.
For this industry sector as a whole, Capitalist A will continue to produce successfully, while Capitalist B will be forced to modernise their technology, reduce labour costs, change work practices and take other actions so it can compete against the more efficient Capitalist A.
With this explanation of the process which establishes market value and makes it possible for more efficient firms to capture surplus profit, it is now possible to explain the source of the differential rent (DR). To foreshadow Marx’s argument, it is the surplus profit captured by the efficient firms which is the value that is potentially available to be appropriated by landowners as differential rent.
Differential rent I
There are two types of differential rent (DR).
The first, differential rent I (DR I), arises when equal amounts of capital are invested on different types of lands (lands with different locations, orientation, terrain or other natural features that are attractive to capital and are not made by labour).
Differential rent II (DR II) arises when different amounts of capital are invested on equal lands.
In both cases, differential rent arises because the intervention of landed property in production changes how market value is established.
This section considers DR I, and the next, DR II.
In all modes of production, an investment on land with the best situation will be more productive than an equal investment on the same size of land in a poorly situated site. Consider, again, a simple example using the industry sector with two capitalists, Capitalist A and Capitalist B. Assume both capitalists are equally efficient in their use of capital and labour: the only difference is that Capitalist A is located on the best-situated site (e.g. housing is being built on terrain that is flat) while Capitalist B is located on the worst-situated site (housing is being built on terrain with a strong incline).
As noted above, the market value for a commodity is established by the commodities produced under average conditions and forming the bulk of the products of an industry.
In this present example, Capitalist A and B have the same materials, technology, labour force and rate of profit: the only difference is Capitalist A is situated on the best land for production and Capitalist B is situated on the worst land for production. In this case, it is not average conditions that establish the market value for the commodity but the worst land establishes the market value and therefore determines how much surplus profit the capitalists on the better located land will be able to capture.
Why does the worst land determine the market value of commodities? In non-land-based industries, market value is at first determined by the differences between the capitalist firms within the sector, but over time, competitive pressures over the short to medium term will force efficiencies within each firm in the industry sector and force the least efficient capitals to become more efficient and eventually all firms within the sector produce commodities at the same market price.
On the other hand, with land-based industry sectors, competitive pressure cannot change the features of land; there will be a permanent advantage to capital investing on the best land, and a permanent disadvantage to capital investing on the worst land. As a result, the worst land — in this case, the sloping land — which reduces the productivity of the capital invested on the land establishes the market value of commodities. When Capitalist A and Capitalist B sell their commodities in the market, the value of the commodities produced by Capitalist B on the worst land establishes the market value for those commodities.
Differential rent (DR I) arises from the difference between the value of the commodities produced on the worst land compared with the value of the commodities produced on the best land.
Consider a more complex (and realistic) example where there are four equal sites of urban land (with the same size, terrain and so on) except for one difference: their location.
The first site, Site A, has the best location for a firm within its industry (it is located in the centre of its market in the central business district, CBD);
the second site, Site B, is located in the middle suburbs;
Site C is in an outer suburb, and
Site D is located on the urban fringe, far from its markets in the CBD.
In this example, the capitalists investing on the urban sites are specialised design offices producing CAD/CAM design and 3D printing but this example could equally apply to many other businesses such as those in construction; textiles and fashion which designs and produces clothing, footwear and jewellery; publishing (including digital publishing and websites); accommodation; and food production (such as restaurants and cafés).
The four capitalist firms invest on their sites an equal amount of constant capital (c, such as buildings, raw materials and technology) and variable capital (v, labour power), and all produce the same commodities with the same use value and with the same rate of profit.
The capitalist invested on Site A located in the CBD benefits from its location: there are urban agglomeration effects such as lower transport and communication costs, a large supply of skilled labour, close and cheap access to customers and suppliers, and higher knowledge spill over rates.9
Site D, by comparison, located on the urban fringe, has limited access to a skilled workforce and its customers, has high transport and other costs, and does not benefit from knowledge spill overs.
The middle suburban sites, Sites B and C, will have some benefits arising from their location, fewer than Site A but more than Site D. As a result, although all sites are equal in terms of the quantities of capital invested on them, the firm on the CBD land is more productive, producing more commodities for the same capital inputs than Sites B and C, with Site D being the least productive.
When the commodities are sold on the market by the four firms, the market value for the commodity is established. Ordinarily, if there had been no intervention by landed property, the market value would be the value set by the average conditions of production for the bulk of the commodities. However, with the intervention of a natural feature of land, ‘the worst soil, i.e., which yields no rent, is always the one regulating the market-price’,10 or, in other words, the ‘ market-price is regulated … by the capital invested in the worst soil’.11
Returning to our example of the four sites, Table 5.1 shows the four firms mobilise an equal magnitude of capital (c+v+s= 60) but on different sites. Site A, on the best-located land, is able to use its capital to produce four commodities. On the other hand, Site D, the worst-located site, uses an equal amount of capital but it can produce only one commodity. In the suburban sites, the better-situated Site B, uses an equal amount of capital to produce three commodities and the less well-located Site C uses its equal amount of capital to produce two commodities. (Note: each number of commodities can be thought of as dozens, scores, hundreds, thousands or some other multiple of the number of commodities.) In other words, the capitals invested on the more advantageous sites are more productive and therefore capture more surplus profit, whilst the capital invested on the worst land, which sets the market value, captures no surplus profit.
It is this surplus profit, which capitalists have captured because of the features of the land where they are located, that landed property then demands as rent while the capitals invested on the less advantageous sites are less productive.
Table 5.1 shows numerically what happens when the commodities are sold in the market. Site D, the worst-located site, produces one commodity with a value of 60; and this value sets the going rate, the market value, that is used to sell all the commodities. Site D, therefore, which produced one commodity with a value of 60, sells it at the market value of 60 and, by doing so, covers the cost of production (c+v plus a surplus value, s) but does not create any ‘surplus of surplus value’ or ‘surplus profit’. On the other hand, Site A sells its four commodities at the going market value (of 60) with the result that it earns a revenue of 240; and given that the value of the capital it invested was 60, the capital on Site A captures a surplus profit of 180. Similar calculations apply to the capitals on Sites B and C, which generate a surplus profit of 120 and 60, respectively. As Table 5.1 shows, the landowner of site A can potentially capture all the surplus profit of 180, with the differential rent paid to the landowners of sites B, C and D being 120, 60 and 0, respectively
This example assumes, for the sake of simplicity, that there is demand for all the commodities supplied, and there are no barriers to the competitive operation of the market, with the exception of that caused by the location of the land. Similarly, although this example assumes the distinguishing natural feature of the urban sites is their location, the same results would be achieved even if the land was affected by other natural features which advantage, or disadvantage, the capital invested on them: for example, the orientation of the sites towards or away from the sun (which would affect, for example, the productivity of the capitals invested in the production of solar energy, gardening or urban farming), or the slope of the site’s terrain (which would affect, for example, the productivity of the capitals invested in building construction).
This example of equal capital invested on different lands explains two essential features of differential rent.
First, differential rent (and the surplus profit which is its basis) does not appear magically in the economy from nowhere: it emerges from the process that establishes the market value at which commodities are sold. Specifically, the potential for differential rent arises from the ‘surplus of surplus value’ or ‘surplus profit’ that is captured by capitalists who have greater productivity because of the advantageous natural features of the land.
Second, the owner of land, as always, will demand a tribute, a rent, from the capitalist for the lease of the site. However, there are clear limits on what can be captured as differential rent. Marx’s analysis of DR I shows there is always a maximum limit on the amount of value that can be captured as DR I which is determined by the magnitude of surplus profit that is appropriated by the capitalist. Similarly, the potential maximum rent that can be captured by landlords varies from site to site depending on the extent to which the features of the land facilitate or hinder the production of surplus profit.
In practice, does the landowner automatically capture all of the capitalist’s surplus profit, or only some of the surplus profit? Economics cannot predict the outcome of the struggle within the social relation between each landowner and capitalist. Within the limits set by the economic processes, how much surplus profit the landowner captures depends on historically specific contextual factors such as the power differential in the social relation between the landowner and the capitalist, the negotiating skills of the parties, and, more generally, the status of the class struggle between landowners and capitalists in particular cities and at particular times.
Differential rent II
Thus far we have considered the differential rent that arises when equal capitals are invested on unequal lands, where DR I is determined by the difference between the yield from capitals operating on the best land and the yield of capital on the worst land. By its nature, DR I arises from how the natural features of land enable (or hinder) the productivity of capital, not from the characteristics of the land itself.
Differential rent II (DR II), on the other hand, arises when unequal capitals are invested on equal land.
When this occurs larger capitals (invested on equal lands) will generate larger quantities of surplus value and hence larger surplus profits which can be appropriated by landowners as rent.
Consider, for example, four equal urban sites with different magnitudes of capital invested on them which are producing the same commodities (see Table 5.2). This could be a land site that has different amounts of capital invevsted in it over time, or one which is subdivided into four lots, with different magnitudes of capital invested on each of the four lots.
Site A has 60 units of capital invested on it which produces one commodity (or one dozen, score, hundred or other multiple of one). Sites B, C and D are invested with 70, 80 and 90 units of capital respectively, and produce two, three and four commodities, respectively. As usual, when the capitals sell their commodities, the market value for each commodity is established by the average conditions of production that apply to the majority of the products. As the lands are equal, they have no impact on the formation of the market value. Assume Site A sets the market price and therefore generates its usual profit but no surplus profit, while the other sites generate a surplus profit of 60, 120 and 180 units. Some or all this surplus of surplus value, the surplus profit, could be appropriated by the landlord as DR II.
In ‘Transformation of Surplus-Profit into Ground-Rent’, Marx considers multiple variations for how DR II may arise (such as a case where the additional capital on the equal land has a constant, decreasing or an increasing effect on the productivity)12 and in all cases there is a relative rise in DR II with the addition of capital. DR II has a number of qualities.
First, DR II is not independent of DR I, because the existence of DR II is not possible without the presence of DR I.
Second, DR II is not permanent. As occurs with any industry sector in capitalism, a larger-than-normal investment of constant capital (in new equipment, machinery, technology and so on) gives a capitalist a short-term productivity advantage over their competitors which allows them to capture the additional surplus value. However, over the longer term, competition between capitalists causes a general diffusion of equipment and technologies across the industry sector and the additional surplus value (and DR II) arising from the first-mover advantage is lost.
Third, DR II and DR I have an interactive, not a cumulative, effect on each other. For example, the best sites (generating more DR I) will also be the ones selected for greater investment (generating more DR II) because they afford the best promise that the capital invested on that site will be more profitable.
On the other hand, the worst sites (which generate no or little DR I) are also less likely to have capital invested on them (and therefore will generate no or little DR II).
Differential rent is a reminder that capitalists who invest higher-than- industry-normal quantities of capital on the best land are not guaranteed to capture higher- than-industry returns because some or all of the benefits of the investment on that land will be captured by the landowner as rent.
It is in this sense that landowners block capital.
Landowners are a clear disincentive to capitalist investment on land.
Capitalists who invest extra capital on land in the hope of producing greater profits face the certainty that some or all of the surplus profit they create will be captured by the landowner as differential rent.
As a result, over time, the rate of investment in land-based industries slows (relative to investment in other industries) and the diffusion of productivity-increasing investment into land-based sectors slows. In the best-case scenario, capital technology continues but at a slower rate over time (all other factors being equal).
In the worst case, investment ceases, technology is no longer modernised, the land-based industry stagnates and unemployment increases.
Prices of production
As just discussed, differential rent is made possible when intra-industry competition (competition within each industry sector) establishes the market value for each commodity. However, intra-industry competition is just one factor in determining the final price of each commodity. The final price of a commodity (produced in one industry sector) also depends on the competitiveness and productivity of capital in that industry compared with the profitability of capitals in all other industry sectors across the whole economy.
That is, the final price of a commodity is also affected by inter-industry competition which creates each commodity’s price of production.
This section considers how prices of production are formed, and the following section shows how these prices of production make it possible for landowners to capture absolute rent (AR).
Recall all capitalist economies are divided into various specialised industry sectors (such as agriculture, manufacturing, transport, wholesale and retail, and finance). Each industry sector has its own rate of profit (r’ ) calculated as the ratio of the surplus value (s) produced by the industry in proportion to the constant capital (c )and variable capital (v) used up to create that surplus value.
That is, each industry has its own rate of profit summarised as r’ =sc + v.
Each industry sector is in competition with the others to maximise their rate of profit. If one industry sector is more profitable than another, capital from low-performing sectors will exit the low-profit industries and move into the more profitable sectors. This continuous flow of capital out of the least profitable sectors into more profitable sectors in search for greater profits leads to constant industry restructuring, innovation, and the growth and decline of employment in the more profitable and less profitable industries, respectively. As investment moves into high-profit industries, competition increases, profit falls and the rate of profit in the high-profit sector will fall towards the general, ‘average’ economy-wide rate of profit (R’). Conversely, low-profit industry sectors lose investment as some capital exits and moves to sectors where it can get a higher return.
This decline continues up to the point where the remaining capitals are able to increase their rate of profit to levels towards the general, ‘average’ economy-wide rate of profit (R’).
The general rate of profit (R’) therefore refers to the general return on the investment of all capital in a capitalist economy.
It is calculated as the ratio of total surplus value or ‘total social capital’ (S) produced in the economy divided by the capitals that were advanced to create and realise that total surplus value; that is, total constant capital, C, and total variable capital, V: that is, R’ =SC + V.
In a similar way to how competition between capitals within an industry sector establishes a commodity’s market value, so, too, does competition between capitals across the whole economy establish the economy-wide rate of profit that is used to finalise the commodity’s price of production:
What competition, first in a single sphere, achieves is a single market-value and market-price derived from the various individual values of commodities. And it is competition of capitals in different spheres, which first brings out the price of production equalizing the rates of profit in the different spheres.13In essence, capitalist firms in the least efficient (more labour-intensive) industry sectors that produce commodities with higher-than-average magnitudes of surplus value find some or all of that value is transferred by the general rate of profit (R’) to the industry sectors where capitalist firms produce their commodities with lower-than-average value.
The result is that when commodities sell, they sell not at their market value (established within their industry sector) but at their price of production — a price that includes the market value established within the industry but also incorporating the allocation of surplus value across the economy.
Recall that when commodities, produced with and for capital, are exchanged in the marketplace for money, they are not exchanged simply as commodities, as objects with a use value that are sold at any price determined by the invisible hand of the market that balances supply and demand.
Instead, there are distinct limits on what price capitals can sell their commodities for because all capitals are under relentless economic pressure (from their financiers, employees, share-holders and competitors) to sell their commodities at prices that will realise ‘as much surplus-value, or profit, on capital advanced for production, as any other capital of the same magnitude, or pro rata to its magnitude’.14
In other words, all sellers exchange their products of capital (their commodities) at a price which will capture their share of the total surplus value (S) produced in the economy in proportion to the magnitude of the capital used to produce it.15
The price at which commodities are sold then, the price of production, is the price that allocates a portion of the total S in the economy to all the individual capitals in the different industry sectors consistent with the economy-wide general rate of profit (R’).
In other words:
When a capitalist sells his commodities at their price of production, therefore, he recovers money in proportion to the value of the capital consumed in their production and secures profit in proportion to this advanced capital as the aliquot part in the total social capital.
His cost-prices are specific. But the profit added to them is independent of his particular sphere of production …16
Table 5.3 gives an example of how the price of production allocates the total S to individual capitals in all industries (while making the usual simplifying assumptions to make calculations easier but which are nevertheless consistent with the labour theory of value and with the reality of the production and circulation of capital).17
Consider a simplified economy made up of four different industry sectors, each of which has the same total quantity of capital (100 units). Each sector has its own particular mix of constant capital ( c ) and variable capital (v): for example, Sector 1 has a capital of 80c+ 20v and Sector 3 has a capital of 40c+ 60v. For simplicity, assume each industry sector has the same rate of exploitation of labour; that is, the amount of unpaid surplus value produced by labour is 100 per cent in all sectors. As a result, all the industry sectors, some of which are more labour-intensive and some more technology-intensive, use the same total capital (100) and the same rate of labour exploitation (100 per cent) but produce commodities with different individual prices (which in value measures are 120, 140, 160 and 180, respectively).
For this four-sector economy, the total amount of the constant capital is 200C, the total amount of variable capital is 200V and the total magnitude of surplus value (S) is 200S. As discussed above, inter-industry competition forces this total surplus value (S) to be allocated equally to all sectors in proportion to the magnitude of capital advanced to produce the total surplus:
Prices of production arise from an equalisation of the values of commodities. After replacing the respective capital-values used up in the various spheres of production, this distributes the entire surplus-value, not in proportion to the amount produced in the individual spheres of production and thus incorporated in their commodities, but in proportion to the magnitude of advanced capitals.18
In Table 5.3, the general rate of profit is R’ =SC + V (or 50 per cent), and there-fore the price of production, the price paid for the commodities when bought and sold throughout the economy, consists of the value needed to replace the advanced capital (c+v) plus a profit equal to the general rate of profit allocated in proportion to the amount of the advanced capital (R’(c+v)). In this example, capitalists receive a price of production for their commodities equal to (c+v =100) + (R’(c +v) = 50), or 150. The commodities sell in the market at their price of production. When this occurs, the capital in Sector I, which used labour-saving technology to produce its commodities at an individual cost (or total value) of 120, receives the price of production for its commodities (150), thus making an excess profit of 30. On the other hand, the capital in Sector IV produced its commodities relatively inefficiently (with much labour) with an individual price (total value) of 180. When this capital sells its commodities in the market, it receives the economy-wide price of production (150), thus making a loss of profit of 30. The inefficient industry Sector IV, which had captured a large amount of unpaid surplus value in pro-duction, is paid a price of production for its commodities that results in it losing a portion of its surplus value which is transferred, through the price of production, to the more efficient and productive Sector I. As we shall soon see, this excess profit captured by Sector I is the source of the Absolute Rent which is appropriated by landowners.
In summary, Marx uses the labour theory of value at three levels of analysis:
the individual capitalist firm;
the firm within its industry sector; and
the industry sector within the economy.
At the level of an individual capitalist firm, each capitalist produces individual commodities with a cost of production (ci+vi) plus a profit (unpaid surplus value, si); that is, with an individual value of (ci+vi+si).
Having produced a commodity with its individual value, each capitalist in the industry uses the market to determine the market value of the particular commodity. By benchmarking the commodity against the same commodity produced by other firms in the industry, the capitalist ascertains the ‘average’ market value of the commodity of (cm+vm+sm).
Finally, having established its market value, the capitalist determines the commodity’s actual selling price, its price of production. All the unpaid surplus value produced in each industry sector makes up the total surplus value (S) in the economy.
Due to inter-industry competition, which establishes the general rate of profit in the economy (R’), the commodity sells at its price of production of (ci+vi) +R’(ci+vi).
Establishing the general rate of profit and the price of production in the market is never a smooth, technical exercise based on perfect information, market harmonisation and general equilibrium.
In reality, each capitalist market is one of constant, unrelenting and historically specific forms of competition between capitals; disruptions in the flow of technology within industry sectors and across the economy; class struggle as employees and shareholders struggle to capture a larger portion of the firm’s profit for themselves; and other crises.
This relentless search to maximise profit causes individual firms to shed labour, introduce labour-saving technologies, increase the rate of exploitation of the labour force (to produce more commodities using fewer labour costs) and/or move their capital to more profitable industry sectors; and causes individual industries to restructure and innovate in ways that are often chaotic and wasteful.
As discussed in Chapter 2, many industries take action to reduce competition and/or seek government ‘protection’ from competitive pressures. Occasionally, ‘disruptive’ industries emerge that capture very high excess profits for a period of time. However, in general, competition slowly brings the rate of profit of all industry sectors back to the economy-wide average rate of profit.
Incidentally, when the rate of profit in all industries settles around the economy-wide average rate of profit (R’), this does not result in economic stability or economic ‘equilibrium’; instead, competition and other political economic forces create a tendency for this general rate of profit to fall over time, which forces the capitalist economy to undergo its characteristic cycles of growth and crisis.19
With this explanation of the process which establishes prices of production, it is now possible to explain how landed property intervenes in this price of the production-setting process and, by doing so, captures absolute rent (AR).
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The YIMBY movement (short for “yes in my back yard”) is a pro-infrastructure development movement mostly focusing on public housing policy, real estate development, public transportation, and pedestrian safety in transportation planning, in contrast and in opposition to the NIMBY (“not in my back yard”) movement that generally opposes most forms of urban development in order to maintain the status quo.[1][2][3] As a popular organized movement in the United States, it began in the San Francisco Bay Area in the 2010s amid a major housing affordability crisis and has subsequently become a potent political force in state and local politics across the United States.[4][5]
three essential concepts from this book.
- Capital is not just money but a legal infrastructure of property rights that shapes power and wealth in society.
- The code of capital, comprised of legal frameworks, shapes who benefits from capital and determines economic outcomes.
- Understanding the legal coding of capital is crucial to questioning and potentially altering the structures of inequality and power in society
https://live-ssmatrix.pantheon.berkeley.edu/research-article/katharina-pistor-code-capital/
On September 21, Social Science Matrix was honored to co-sponsor a virtual Matrix Distinguished Lecture by Katharina Pistor, Edwin B. Parker Professor of Comparative Law at Columbia University and Director of the Center on Global Legal Transformation.
In her lecture, Pistor discussed her book, The Code of Capital: How the Law Creates Wealth and Inequality, which argues that the law selectively “codes” certain assets, endowing them with the capacity to protect and produce private wealth. The book was lauded as one of the Financial Times‘ Best Books of 2019 in the field of economics and one of the Financial Times‘ Readers’ Best Books of 2019.
The event was co-sponsored by the Berkeley Network for a New Political Economy and introduced by Steven K. Vogel, Chair of the Political Economy Program, the Il Han New Professor of Asian Studies, and a Professor of Political Science at UC Berkeley.
“One of the core questions that the book addresses is the question of, what is capital?” Pistor explained. “What I’m basically arguing in the book is that capital is a wealth-generating asset. And what we have to understand is the legal DNA, if you want to call it that, or the ‘code of capital.’ We have to understand what kinds of features create assets that are really wealth-generating.”
As an example, Pistor noted how a piece of land is only considered to be “capital” when it is classified as such by the law. “If you take land, it’s just a piece of dirt,” she said. “If you want to monetize land, you have to graft certain legal protections for the holder of land rights onto that land. That’s not natural. It’s a social decision. One of the critical questions is, who makes this decision on behalf of whom, and who has access to or control over the decision-makers? Let me just take away the punch line: lawyers are really important here, including private transactional lawyers who work mostly in private offices behind closed doors.”
Pistor explained that different legal frameworks work together to “code” capital, including property law, trust and corporate law, bankruptcy law, and contract law. She said that all capital has certain shared characteristics, including priority, with the law determining who has rights to assets, with some rights stronger than others; and durability, the ability “to extend rights that we bestow on asset holders over time and to protect these rights from too many other competing claimants.”
Another defining attribute of capital, Pistor said, is universality, which ensures that the priority and durability rights are protected not only between two people who entered into transaction with one another, but are “actually enforced against the world,” Pistor said. “The state comes in here because it will enforce these titles, not only against parties to the transaction, but against anybody” Another defining trait is convertibility, the ability to convert assets into other assets, such as cash. “Three out of those four, and then you have something that I would call capital,” Pistor said.
Pistor emphasized that the subtitle of her book, “How the Law Creates Wealth and Inequality,” relates to how the law is “a representation of the centralized means of coercion… As lay people, we may think of law as a relationship between the citizen and the state by which the state governs its citizens. And we might also think about civil and political rights, or human rights more generally, and realize that actually, citizens can also use the law, which is a creature of the state, against the state itself, in order to protect their own individual, civil, and political rights. And then there’s this third dimension, which is really what my book is all about, which is that citizens can harness the centralized means of coercion of the state for their own means when they want to organize their relationship with other citizens. It is this horizontal relationship between citizens — or actors that don’t have to be citizens — who want to harness the law to avail themselves of the coercive powers of the state to organize their private rights.”
The beauty of digital code is that it is highly scalable. We don’t even have to rely on a centralized state power at the territorial nation-state level, but we can create digital relations across national boundaries.
Pistor drew upon legal history to explain how, starting with land, the same “core modules” have been used “time and again” to code capital. “We can see a lot of capital creation and a lot of also skill development for how to code capital,” she said. “Once lawyers and their clients understood the mechanism, they realized that the same legal coding techniques could be applied to different types of assets.”
“One of the questions I asked myself in the towards the end of the book is whether the legal code might be replaced at some point or is already being replaced by the digital code,” Pistor said. “The beauty of digital code is that it is highly scalable. We don’t even have to rely on a centralized state power at the territorial nation-state level, but we can create digital relations across national boundaries. In the book, I come out with the question, is this a new kind of code, and will it replace the legal code? Or is it more complementary, where the legal code will encode the digital code, rather than the other way around? I think that question is still open.”
Pistor argued that the processes through which capital is “coded” through legal mechanisms need to be reformed to reduce wealth inequality. “We have to get at the system,” Pistor said. “It’s not enough to chop off a head of a ruler, what you really have to do is get at the system. The system, of course, is resistant. So you have to use an approach I call “strategic incrementalism….” It’s basically taking a page out of the script that lawyers and capital holders have used over centuries to say, okay, how did you do this, and what did you need to accomplish this? And how much do we have to take back to so that we can make sure that we can cherish our democratic values and get the upper hand in governance again?”
