Munro chapter 5 part deux
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 continued
Absolute rent
Absolute rent (AR) is a one-off payment made to landowners for the use of ‘new’ land. Unlike differential rent, which arises from the capacity of the natural features of land (such as location, orientation, terrain and so on) to boost the productivity of capital invested on the land, absolute rent arises purely from the power of landowners to demand a one-off payment of absolute rent before capital can invest on the land. The magnitude of absolute rent is determined when land provides a barrier to the process that establishes the price of production. There are many potential sources of new land. For example, a landowner can make available to capital land that was previously used or zoned for non-economic purposes. Absolute rent is a one-off payment because once the land has been rezoned (or released for capitalist investment) and capital is invested on the land, the landlord will be able to calculate the magnitude of differential rent to charge in the lease from that day forward.20 A classic example of where AR intervenes in production is on the fringes of cities where the owners of ‘undeveloped’ land can demand a one-off tribute (absolute rent) to make the land available for the use of capital for purposes such as housing:
In general, housing construction meets a barrier in the ownership by a third party of the land upon which the houses are to be built. But, once this land has been leased for the purpose of housing construction, it depends upon the tenant whether he will build a large or a small house.21
AR is a particular challenge for the labour theory of value because Marx needed to explain how new, undeveloped land can have a rent and a price when it has no value (because value arises only from labour) and no capital invested on it (and hence no surplus value that could be used to establish a price). Furthermore, Marx wanted to show how and why there is always an upper limit on the amount of absolute rent that can be appropriated for undeveloped land. Landowners holding new land want a payment of rent (absolute rent) to release the land for use. Capitalists wanting to invest on the new land can examine the economy and estimate the price of production they will receive for their commodities when they invest. The payment they are required to make, to bring the land into production therefore, must be in addition to the price of production. Consider the example in Table 5.4. It shows an economy where all capitalists, except the capitalist wishing to invest on new land, produce commodities using a composition of capital of 85c+ 15v and a surplus value of 100 per cent (or 15s), produces commodities with a value of (c+v +s) or 115. On the new land, the capitalist invests in such a way to produce commodities using a composition of capital of 75c+ 25v and a surplus value of 100 per cent (or 25s) and therefore produce commodities with a market value of (c+v+s) or 125, which means the commodities produced on the new land have a value that is 5 higher than the economy-wide price of production of 120.
Ordinarily, the excess of value (above the price of production) produced by a labour-intensive sector is re-allocated by the price of production process to the more productive sectors. However, new land obstructs this process.
New land demands a payment irrespective of the existence of competition between capitals. As a result, the land-renting capitalist sells their commodities at their value (not the price of production), and the differ-ence between the value and price of production is appropriated by the landowner (as AR). In the case of Table 5.4, the excess of value embedded in the commodities of the new land-based capitalist (of value 5) is paid to the landowner as AR rather than it being allocated to the more productive capitalists.
The difference between the value of commodities produced on new land and their price of production sets the upper limit of what can be captured as AR. Whether the AR equals the entire difference between the market value and the price of production, or only a part of it, will depend on the state of the market, supply and demand for land and so on. Table 5.5 shows what happens when only a portion of the surplus value pro-duced on new land is captured by the landowner as AR, with the remainder being allocated via the price of production to the rest of the economy. In Table 5.5, the landowner captures an AR of 3 from the new land-based capitalist while the remaining surplus value of 2 is transferred by the price of production to the other capitals.
One other example is useful to clarify the economic mechanisms that produce AR. What AR is possible if the capitalist investing on new land produces commodities in a highly productive way compared with the rest of the economy? As shown in Table 5.6, if a high-technology, low-labour investment is made on new land, then the value (105) of commodities produced on the new land is less than the price of production (110) and as a result there is no excess of surplus value created on the land that can be captured by land as AR. How is it that landowners can capture the excess of surplus value as AR, or, to put it another way, why is it that the excess surplus value produced on the new land does not flow unimpeded (via the price of production) to the more productive capitals? The solution is that competition, which can force capitalists to cut costs in every other part of their business, cannot force the capitalist to reduce the AR on land.
Commodities produced by land-based capital are sold at their value (and not at the price of production) because the legal and institutional obligation to pay the landowner rent overcomes (or overpowers) the forces of competition. As a result, the higher price of land-based commodities ‘is not the cause of rent, but rather that rent is the cause of the increase in the price of the product’.22
Furthermore, whether the absolute rent equals the entire difference between the value and the price of production, or only a part of it, will depend on the power balance in the social relation between the landlord and the capitalist which is influenced by the state of the market, political factors (such as the strengths of landed property rights afforded by the state compared with the rights of capital) and economic factors (such as the strength of supply and demand for the land). Finally, the maximum limit of AR that can be appropriated by land is determined by the difference between the excess of the value of the new land commodities over their price of production.23
Monopoly prices
Rent can be confused with monopoly pricing. A monopoly price is the price for a commodity that is set by a monopoly producer. As a result of the market power of the monopoly (and the lack of competition), the monopolist can set a price which is above the price of production and above the value of the commodity. Monopoly pricing therefore involves the transfer a portion of the profit of other commodity producers to the commodities having the monopoly price. The monopoly price requires either a reduction in the profit of capitalists or a deduction from the real wages of workers.24
Monopoly prices therefore are distinctly different from, and capture surplus value from a totally different source than, differential rent which arises in intra-industry competition which establishes a surplus of surplus value over the market-price; or absolute rent which arises when the excess of value over the price of production is captured by land.
Marx’s definitions of rent are a useful reminder that the ‘filching’ of surplus value through the power of landed property involves very different economic processes from monopoly pricing, lobbying and other political actions which have the intention to capture state finances for private interests.
House (and other building) ‘rent’
Another common confusion in the understanding of rent arises when it is said housing tenants are paying ‘rent’, or other types of building lessors are paying ‘rent’. Paying for access to and use of a building is a totally different economic process from the economic process of paying for access to and use of a land-owner’s land. This confusion between ‘ground-rent’ and ‘house-rent’ is easily understood, especially when the landlord and the building speculator are the same person. However, it is important to clarify that rent is appropriated for the use of land while prices (for access and use of houses and other buildings) are a charge against the capital that was invested to build those buildings. The price paid for use of buildings is typically constituted by the interest and amortisation on the capital originally invested in the buildings (and not the land). Although rent and paying for access to buildings are two different economic processes, they can and do operate together. Especially in cities, where population increases can create a high demand for commercial buildings and housing, the rent captured by the owner of urban land is often complemented by the prevalence of monopoly prices for the construction of buildings. Here property developers use the monopoly power of landed property together with construction capital to extract monopoly prices for buildings as well as the land on which they are located.25 This distinction between land rent and housing returns helps analyse the extent to which the supply and demand for land is the basis of property speculation — which it often is — and the extent to which the cost of construction is the cause of house price and house rent inflation.
Other issues concerning capitalist rent
There are four outstanding issues raised in the above discussion that need to be clarified:
how can rent be paid if there is no surplus profit;
how is the price of land set;
under what circumstances does the landowner capture all (or only part) of the available value as rent; and
how does rent affect housing and homelessness in cities?
First, if a capitalist based on leased land is not operating profitably, how can the capitalist continue to pay rent even though they are not making enough surplus profit to cover the cost of the rent? This situation specifically arises for capitals invested on the worst land sites where, as a result, no differential rent is possible. \
In practice, there are three options.
One is for the capitalist to try to renegotiate the lease to seek a ‘rent holiday’: this is an unlikely scenario as it would mean the landlord would need to forgo, or take a reduced level of, their own (rental) income.26
Another option, and more common, is that the capitalist is forced by the market to improve their productivity by investing in labour-saving technology, reducing the size of their workforce, cutting costs and in particular cutting wages, and so on. Over time, the capital operating on the worst land may improve its productivity to the point where the capitalist is able to capture a surplus of surplus profit which can then be paid as differential rent.
Most often, however, capitalists on the worst land, who capture no surplus profit, have little choice in the short term but to pay their lease obligations by using some or all of their own profit (the surplus value, s, captured from their workers in production); by going into debt and borrowing additional capital from financial institutions or shareholders to pay for the rent; or by reducing the wages of their workers.
In all three situations, the money the capitalist pays the landlord is called ‘lease money’ because it is taken from the capitalist’s pool of capital or wages. It is not rent, which can only arise from the intervention of land in the realisation of capital through market values or the price of production.
Marx notes the payment of ‘lease money’ is a common practice in capitalist economies, such as in capitalist agriculture:
If the farmer pays ‘lease money’ which constitutes a deduction from the normal wages of his labourers, or from his own normal average profit, he does not pay rent, i.e., an independent component of the price of his commodities distinct from wages and profit. We have already indicated that this continually takes place in practice.27
These short-term options facing capitalists on the worst land (of reducing their profits, going into debt and/or reducing the wages of workers) are often observed in cities, where poorly located suburbs are also the regions with rundown buildings, old technologies, workers with depressed levels of wages and firms earning less-than-the-industry-average level of profit.
These suburbs or regions are not economically sustainable in the short run. In these economically depressed suburbs, typical actions that occur are: the labour force stays and continues to earn lower than average wages (or leaves for higher-paid jobs); capitalists continue to operate with no or very low rates of profit and typically with no new investment in technology, lack of building maintenance, and so on (or are bankrupted); the landowner evicts the capitalist and either replaces them with a profitable capitalist or leaves the land vacant for long periods until economic conditions improve; the state intervenes with infrastructure, rezoning or other strategies to revitalise the area; or there is gentrification as wealthy people move in, improve housing and attract new businesses, and displace the long-term inhabitants in the process.
A second outstanding issue arising from the discussion of rent is how the price of the land is set. In general, the price to buy a site of land is the capitalised rent on the land28 (where the current value of land is estimated using future rental income over a period of time, for example thirty years for commercial land, and taking into account costs such as inflation, debt servicing, rates and taxes). Clearly, the best located sites with the highest rent revenue will sell at a price which is higher than the price of the less well-located (and lower-rent) sites. However, how can the price of the worst land be calculated given there is no rent?
In these situations, rent is estimated by comparing the land with a similar parcel of land that is paying (differential) rent. For example, the price could be calculated on assumptions about the likely total rent that would be paid by a similar, profitable site over, say, thirty years, plus the addition of an amount equivalent to the expected interest rate. This assumption, that unused (or non-rent paying) urban land is owed a price based on a rent similar to the returns from comparable urban land contributes to the urban land speculation that is rife in cities around the world.
The third issue raised above is the basis for the magnitude of rent a land-owner can capture from capital, and under what conditions landowners are able to appropriate all (or only a part) of the available value. Marx’s analysis of rent establishes an upper limit on the magnitude of differential and absolute rent that could be captured by the landowner. Within this limit, however, how much value is actually captured by land cannot be predicted or modelled mathematically.
In the real world of the real estate market, whether the landowner captures some or all of the available value as rent, and how much the capitalist tenant retains for themselves, is subject to many factors. The landowner and the capitalist exist in a classic example of a dialectical social (economic) relation where both are mutually dependent on the other for their own economic success and both have mutually opposed economic interests. Within this contradictory social relation, each struggles against the other to maximise their own income and minimise any losses without jeopardising the relation on which both depend. These struggles are structured by real-world factors such as the prevailing legal and regulatory conditions in the city or nation (where the legal framework or standard lease agreements and obligations may be balanced more in the favour of the interests of landed property or capital); economic conditions (such as the strength of the supply and demand for the land and the potential for profit-making by the capitalist); political conditions (where government parties may be more inclined to support landowners or capitalists); and individual-level factors (such as the financial resources of the protagonists, negotiation skills of the lease parties, and so on). These land–capital struggles take many forms.
For example, there are typically strong disagreements between the landlord and their corporate tenants over core issues such as the length of a lease, the right to break the lease, and who is responsible for repairs and insurance. Interestingly, ‘international corporate occupiers are significantly more concerned about the length of lease and the incidence of break clauses than national occupiers’.29 Another indicator of the clash of economic interests between the landlord and the commercial tenant expresses itself in debates over whether to establish a gross lease (where the tenant pays a flat rental amount and the landlord pays all the other property expenses such as taxes, insurance, maintenance and repairs) or a net lease (where the tenant pays rent plus some or all of the property expenses).30
Recently, a new conflict has arisen over whether the landlord or the commercial tenant is responsible for the environmental performance of the building.31
Marx’s focus on production, rather than consumption, helps explain why he rarely considered the situation of urban housing, and focused more on how land supports capitalist investment, production and realisation (and the related issue of how landowners appropriate value as differential and absolute rent). He may also have wished to avoid an issue that was being analysed differently by his colleague Engels.32
Urban housing is an example of production, where capitalists combine constant capital (such as building materials and equipment) and variable capital (building workers) to produce commodities (such as houses or apartment buildings). Housing, for Marx, could easily fit within his analysis of the cycle of capitalist investment, production and realisation. However, Marx also recognised housing is a consumption good that is essential for the sustenance of workers, where ordinarily the cost of housing is factored into the calculation of the wage needed for the sustenance of workers. Marx was scathing of the landowning class for claiming to be interested in the good of society while, in reality, acting for their own financial benefit: The landlord being interested in the welfare of society means, according to the principles of political economy, that he is interested in the growth of its population and manufacture, in the expansion of its needs — in short, in the increase of wealth; and this increase of wealth is, as we have already seen, identical with the increase of poverty and slavery. The relation between increasing house rent and increasing poverty is an example of the landlord’s interest in society …33
Conclusion
This chapter has focussed on three key issues. First, it has shown how rent directly affects the location and type of investment that capital makes in cities. Second, to do this it provided detail on how the labour theory of value can be used to explain the complexities of absolute rent and differential rent. Finally, it clarified that commonly used terms such as ‘monopoly rent’ or ‘house rent’ are phenom-ena that arise from economic processes that are distinctly different from the processes that cause absolute and differential rent, and that to assume all forms of rent are the same leads to confusion. One of the underlying themes throughout this chapter is that the state plays a crucial role in determining the outcome of the struggles between landowners and capitalists who are mutually dependent but with diametrically opposed nterests. These struggles occur in many fields including property rights, land taxes, urban planning and environmental standards. How the landowning class influences the state is the focus of the next chapter.
Notes
1. K. Marx, Capital, vol. III, ch. 48, New York, International Publishers, 1959, https://www.marxists.org/archive/marx/works/1894-c3/ch48.htm 2. K. Beitel, ‘Circuits of Capital, Ground Rent and the Production of the Built Environment: A (New) Framework for Analysis’, Human Geography, vol. 9, no. 3, 2016, pp. 27–42. 3. K. Smet, ‘Housing Prices in Urban Areas’, Progress in Human Geography, vol.40, no. 4, 2016, pp. 495–510. 4. K. Strauss, ‘Beyond Crisis? Using Rent Theory to Understand the Restructuring of Publicly-Funded Seniors’ Care in British Columbia, Canada’, Environment and Planning A: Economy and Space, 25 Jan. 2021. 5. Australian Council of Social Service, An Affordable Housing Reform Agenda: Goals and Recommendations for Reform, Canberra, Australia, ACOSS, 2015, p. 12, https://www.acoss.org.au/images/uploads/Housing_paper_March_2015_final.pdf 6. A. E. Ryan and A. B. Koch, ‘COVID-19 and Lease Negotiations: Early Termination Provisions’, Law Journal Newsletters, Jan. 2022, https://www.lawjournalnewsletters.com/2022/01/01/covid-19-and-lease-negotiations-early-termination-provisions/ 7. K. Marx, Capital, vol. III, ch. 37, New York, International Publishers, 1959, https://www.marxists.org/archive/marx/works/1894-c3/ch37.htm 8. Ibid., vol. III, ch. 10, https://www.marxists.org/archive/marx/works/1894-c3/ch10.htm 9. For example, S. S. Rosenthal and W. C. Strange, ‘How Close Is Close? The Spatial Reach of Agglomeration Economies’, Journal of Economic Perspectives, vol. 34, no. 3, 2020, pp. 27–49. 10. Marx, Capital, vol. III, ch. 39, https://www.marxists.org/archive/marx/works/1894-c3/ch39.htm 11. Ibid., vol. III, ch. 41, https://www.marxists.org/archive/marx/works/1894-c3/ch41.htm12. Ibid. 13. Ibid., vol. III, ch. 10, https://www.marxists.org/archive/marx/works/1894-c3/ch10.htm14. Ibid.15. Ibid.16. Ibid., vol. III, ch. 9, https://www.marxists.org/archive/marx/works/1894-c3/ch09.htm17. There is a detailed example in Marx, Capital, vol. III, ch. 9, https://www.marxists.org/archive/marx/works/1894-c3/ch09.htm18. Marx, Capital, vol. III, ch. 45, https://www.marxists.org/archive/marx/works/1894-c3/ch45.htm19. Ibid., vol. III, ch. 14, https://www.marxists.org/archive/marx/works/1894-c3/ch14.htm 20. Ibid., vol. III, ch. 45, https://www.marxists.org/archive/marx/works/1894-c3/ch45.htm 21. Ibid. 22. Ibid., vol. III, ch. 45, https://www.marxists.org/archive/marx/works/1894-c3/ch45.htm
23. Ibid., vol. III, ch. 50, https://www.marxists.org/archive/marx/works/1894-c3/ch50.htm24. Ibid. 25. Ibid., vol. III, ch. 46, https://www.marxists.org/archive/marx/works/1894-c3/ch46.htm26. In Australia, for example, when businesses were affected by the 2020–21 COVID-19 pandemic, requests for a ‘rent holiday’ were typically answered with ‘no’ (D. Wood, K. Griffiths and N. Blane, ‘The Case for a Rent Holiday for Businesses on the Coronavirus Economic Frontline’, The Conversation,27 Mar. 2020, Australian edn, https://thecon versation.com/the-case-for-a-rent-holiday-for-businesses-on-the-coronavirus-economic-frontline-134890).27. Marx, Capital, vol. III, ch. 45, https://www.marxists.org/archive/marx/works/1894-c3/ch45.htm28. Ibid., vol. III, ch. 39, https://www.marxists.org/archive/marx/works/1894-c3/ch39.htm29. N. Crosby, V. Gibson and S. Murdock, ‘UK Commercial Property Lease Structures: Landlord and Tenant Mismatch’, Urban Studies, vol. 40, no. 8, 2003, pp. 1487–516.30. D. Halvitigala, L. Murphy and D. Levy, ‘The Impacts of Commercial Lease Structures on Landlord and Tenant Leasing Behaviours and Experiences’, Pacific Rim Property Research Journal, vol. 17, 2015, pp. 560–83.31. D. A. Prum, ‘Commercial-Property Leases as a Means for Private Environmental Governance’, Georgia State University Law Review, vol. 35, no. 3, 2019, https://reading room.law.gsu.edu/gsulr/vol35/iss3/532. F. Engels, The Housing Question, Marx/Engels Internet Archive, https://www.marxists.org/archive/marx/works/1872/housing-question/ch02.htm33. K. Marx, ‘Rent of Land’, Economic and Philosophic Manuscripts of 1844, Moscow, Progress Publishers, 1959, https://www.marxists.org/archive/marx/works/1844/manuscripts/rent.htm
