Absolute Rent, Basic Goods and Unproductive Labour – Why Rent Always Comes From Somewhere

The problems of capital theory, value theory cannot be tackled without the simultaneous treatment of rent.  They show the almost forgotten deep connections between these issues that provide a ‘core’ of economic theory – based on accounting identities – that is invariant to the degree of monopoly a produced has .  That is it is deep and foundational.

I was reminded of this by reading a preview of Anwar Shaikhs new book which says ‘Takes a unique approach in developing an economic model of modern capitalism without any reliance on conventional assumptions of either perfect or imperfect competition’

Now that’s interesting – what could he mean?  I was lucky enough to have several emails from Anwar on the issue of rent theory including a lecture note on Absolute Rent which he said he would base a chapter of his book on – there was the clue.

Lets wind back to the theory of Absolute rent.  Adam Smith said it existed, Ricardo disagreed, Marx said Smith was right on this point.  Here Marx was right.

Smith regarded rent as the price ‘demanded’ by the landlord for the use of land, and that even land which was incapable of improvement could demand a rent.  This he said was ‘naturally a monopoly price’ and was distinct from additional rent which could be extracted from application of capital to land.  Though Smith did not use the term ‘absolute rent’ – that comes from Marx’s close reading of this section – the distinction is clear.  There was a gap in Smith’s theory which Ricardo and his immediate predecessors and successors filled in, it did not explain the level of variations in rent at the extensive and intensive margins or through variations in location.

But the basic issue remains – is rent possible at the left most point on this cost curve, does it intersect above zero implying an absolute rent?

For Smith it did (without implying he understood the issue graphically) and is closely tied to his theories of value and distribution.

As long as land could produce a basic crop sustaining workers, and that that crop on the land of lowest fertility in use could be sold then it could attract a rent that the landowning class would be able to extract from other classes. In such cases absolute rent would be price determining not price determined.   For Smith this created a moral imperative on the landowning class – you should invest it in productive consumption and not in the list of activities in his famous and much misunderstood section on ‘unproductive labour’.

Marx extended this argument in terms of the capital intensity of the agricultural sector.  He considered that  agriculture had a lower organic composition of capital (capital intensity) than manufacturing so that given the distinction between value and price there had to be a net flow of value extricable as rent.  Marx took from the immediate ricardian contemporaries the notion that value from labour was preserved at the system as a whole and looked at its transfer – his famous and flawed exposition of the Transformation problem in Capital III.

Marx was wrong on this specific point on the origin of Absolute rent.  It can arise where the capital intensity is above the average – as in modern western agriculture which hardly employs a sole.  The issue for its creation is whether the basic goods (to use Sraffas term) grown on it are profitable.  Marx had spotted an important clue however, on the necessity of value to flow in time and space between sectors.

Imagine two firms equally competitive and non colluding, there only difference is how they feed there workers.  Firm A has access to  a more productive peice of land – which it rents – than form B – which also rents.  There is a third piece of land, less productive still which neither rents.

The landowner is able to extract rent.  However firm A wishes to expand its production and so seeks to rent this third piece of land.  The owner of this third pace of land is able to charge an absolute rent if – and only if – its cost is less than the differential rent on the first piece of land at the extensive or intensive margin.  This rent adds to the cost of the product and the revenue is split between the absolute rent and the additional profit.

Consider now that this additional profits are not spent on investment but solely on consumption goods and services (unproductive labour) – its spending – and respending on unproductive labour proceeds as a geometrical contraction which adds to employment  but not investment or growth.

Sraffa discovered when you treated the value of such basic goods as your numerare it created a problem in the methodology used by post ricardian thinkers (of which he wasn’t the first) that the value of durable ‘capital’ could be reduced to dated physical inputs of land and labour.  The maths for this only worked at zero rate of profit.  But what is the source of the discrepancy at positive rates of profit?

A few weeks ago I suggested the source was the labour spent on ‘unproductive labour’  it seemed to me obvious and implied in post Keynesian accounting identities.  In that article I made a mistake – implying Sraffa has misapplied a dated reduction technique of Dmitriev – I was wrong my copy of Sraffa was so moth eaten a power had worn off on an equation.  But this still implied a contradiction with post Keynesian accounting identities – which implied that value must be created in the system somewhere.  It supported the theory proposed by Ian Wright that that somewhere was ‘unproductive’ labour expenditure when the system was seen as a self reproducing whole.

Here at least is a clue for value theory.  Where a producer is able to create profits by extracting ‘schumpeterian rents’ than this is translated to absolute rent which enables expenditure on unproductive labour.  If one then assumes reproduction at a ‘steady state’ on non accelerating growth the ‘dated land’ inputs must equal the ‘dated labour’ inputs on unproductive labour.  This then becomes interesting because then the complex problems of insufficient terms of equations cancel out and you are able to reduce everything to dated labour and circulating capital.  You can apply the solution Sandelin applied to the well known ‘Wicksells missing equation’ problem – that is the durability of capital is endogenous and is the period which maximises the rate of profit -the solution from forestry economics to the barrel of wine fixed capital problem, and you can apply Dmitriev solution to Walras’s ‘missing equation’ critique of Ricardo by substituting dated labour repeatedly to fixed capital.

The result of al of this is that the intuition of the immediate post ricardians – such as James Mill and Torrens (in a late recantation) that all problems of fixed capital for a labour theory of value go away when you treat it as joint production producing value at the same rate of a annuity of the same duration, go away.  This theory though always had a problem for ‘objectivists’ how could sitting on your hands, waiting, produce value (interest in this case) which Marx derided.  Now we are in reach of seeing the answer.  The value being created is the labour producing cpaital consumption goods extracted from absolute rent, and that value is the result of the physical productivity of land in producing basic goods.


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