Empirically, all rent appears in the accounts as a total sum (“a lump sum” as Ward and Aalbers 2016, 1764 specify). Different rent theorists categorize various types of rent, highlighting the nature of land rent as differential, absolute, monopoly, and class-monopoly, among others. Each category entails variables that explain its relationship with other economic and institutional forces shaping rent and its role in the overall total. For example, on marginal plots where differential rents are zero, absolute rent accounts for most of the total rent, whereas on other plots, both differential and absolute rents contribute. However, this does not mean that magnitudes and rates of rent cannot be calculated. On the contrary, they can and should be, as shown in Part 2.
1.1 Differential Rent
Ricardo viewed land rent as differential rent, calculated as the difference between the total (or aggregate) price of production and the total regulating price. The total production price is the price at which the product must be sold to ensure a normal profit for that type of capital, while the total regulating price is the price at which the product will be sold. Lands with better soil fertility have lower production costs and higher potential yields, so the level of rent is determined by differential fertility. Survival conditions refer to the best generally available land (or the marginal land in use) and determine the expansion of supply, as this land provides the minimum production needed to meet demand and earns a normal profit. All other plots earn a higher profit rate. Moreover, since the survival condition of production in the marginal plot, in terms of rates of return, regulates the produce’s price, Ricardo argues, the least fertile plot earns no rent, while all other (more fertile) plots earn excess profits, which constitute rent—the highest excess profits, or highest rent level, will be in the most fertile plot with the highest yield. Therefore, differential natural conditions of production in agriculture guarantee that rent is paid in the more fertile plots. Social arrangements are necessary for the landlord to refuse to lease the land (or demand higher rent) and for the capitalist to refuse to invest in it (or seek higher profits). Empirically, if the same capital is invested in different plots, the total production price for all will be the same. However, individual production prices will vary, centered around the conditions of the marginal plot. Differential natural conditions lead to high rents in the best plots. As the economy expands, more land will be cultivated. The least fertile lands require more labor for cultivation, which in turn increases produce prices and ultimately decreases demand (Ricardo 2004 [1911], 69). This falling demand might cause workers to demand higher wages, which can lower profits and potentially trigger an economic crisis.
In contrast to “vulgar economists” who see rent as a direct factor of production (i.e., as the market price of land), Ricardo argues, “[w]hen land of an inferior quality is taken into cultivation, the exchangeable value of raw produce will rise, because more labour is required to produce it” (ibid. 37). For “the exchangeable value” of the products is determined by the amount of labor time needed to produce them in “the most unfavourable circumstances” (ibid.). Ricardo defines differential rent as “a surplus accruing to landlords because of different fertilities” (Murray 1977, 103). It results from the proprietor’s monopoly control over the fertile plots (Ricardo 2004 [1911], 39). Shaikh argues, “Ricardo assumes that over time this process extends to ever-worse land, with ever-higher (relative) prices of corn” (Shaikh 2016, 333). As inferior plots enter production, the market price of the product will increase to cover the higher natural (or production) prices of plots with lower quality. Thus, the process contributes to higher average prices of agricultural products, which indirectly causes wages to fall as workers’ demand decreases, leading to a decline in overall profit shares (Ricardo 2004 [1911], 41). This is what leads to the crisis. For Ricardo, in other words, differential rent is understood as a result of “diminishing returns to soil” (Economakis 2003, 341).
Marx critically improves on Ricardo’s concept of differential rent. First, Marx (1969, 247–249; (with Engels) 2010 [1982], 260–262) explains that it is not the labor time spent on a single commodity, but the socially necessary labor time required to produce that commodity across the entire economy that determines its value. Socially necessary labor time is understood as the expected labor time above which the labor process is considered unproductive. Second, Marx argues that a flawed labor theory of value—one that fails to distinguish between constant and variable capital—causes Ricardo to attribute profits to a natural factor, such as fertility. Third, Marx contends that Ricardo fails to recognize fertility as a social process that depends on technological development and the level of capital investment. Fourth, Marx elaborates that the excess yield and the resulting excess profit that form rent could be generated by either expanding land in use or investing more intensively in technology. Fifth, there is no evidence to support Ricardo’s claim that “economic growth leads to the use of land of ever-poorer quality” (Shaikh 2016, 336, footnote). Sixth, Marx notes that in practice, rising rents do not necessarily lead to falling profits; they may instead cause profits to rise, fall, or remain unchanged (Murray 1977).
All this led Marx (1991 [1894]) to identify two categories of differential rents. Differential rent I is generated by equal quantities of capital invested in plots with varying fertility levels (i.e., expanding land to increase yield or the extensive margin). Differential rent II is produced by successive quantities of capital invested in plots with the same fertility level (i.e., intensive investment in the same plot, or the intensive margin), such as with the aid of chemical fertilizers. (Shaikh Unpublished Lecture Notes1 ). Shaikh explains differential rent I and II as investment strategies, meaning that depending on which one appears more economical (in terms of expected profit for a respective type of capital), the capital either engages in extensive movement (more acquisitions or mergers) or invests more intensively (incorporating more technologies to extract additional value from the land) (ibid.). The competition between differential rent I and II as investment strategies is determined by regulating production conditions, specifically by focusing on the worst available conditions of production rather than the worst available land (ibid.). This means that moving to the next land (as in differential rent I) or going deeper (as in differential rent II) depends on which strategy the investor considers cheaper (lower costs) (ibid.). Empirically, especially with differential rent I, the strategy depends on external circumstances, such as the condition of other available plots. In both cases, the capitalist would not invest or lease if the expected profit rate is lower than the normal rate (i.e., below the interest rate) for a capital of its type.
Differential Rent I and II are essential in urban economic geography and political-economic analyses of urbanization, especially concerning residential and commercial development (Harvey 2006 [1982]; 1985; also Edel 1976; 1992). Harvey’s key contribution lies in his interpretation of how Differential Rent I and II function within the urban space. To do so, he builds on Marx’s (1991 [1894], 871) analysis of a dialectical interaction between the two types of differential rent interacts with capital flows onto land parcels. This interaction allows the two types of differential rent to set limits and impose conditions on one another (Harvey 2006 [1982], 354–356). As Fine explains, “Marx’s theory of [Differential Rent] (1 and 2) is built around intra-sectoral competition to establish the value of differential productivity of capitals across the lands in use, thereby realizing these rents” (Fine 2019, 454). In terms of TILR, the intra-sectoral competition among firms within a region determines the limits and conditions for rent levels and regulates the interaction Harvey describes.
1.2 Absolute Rent
Marx further criticizes Ricardo by incorporating the roles of competition and inter-sectoral dynamics. He contends that there is a relationship between rents and profits. However, unlike Ricardo’s assertion, this relationship operates not at the micro (i.e., firm) level but across the entire economy within an inter-sectoral competitive context. In other words, rent may increase due to a decline in profits in other sectors, but this rise does not necessarily reduce profits within the same sector, as Ricardo assumes. Marx thus develops a concept that explains the structural connection between the rise of rent at the macro level and long-term sectoral competition, which he calls absolute (i.e., non-relative) rent. The variation in sectoral profitability across the entire economy determines the rate and level of absolute rent (Marx 1991 [1894]; Murray 1977). According to Marx, at the macro level, the equalization of rates of return among sectors produces rent, and the competitive dynamics between sectors define its limits.
Absolute rent depends on three things:
i) The tendency of commodities to exchange at their value, and the modification of this tendency towards exchange at prices of production as a result of the free flow of capital between branches.
ii) The presence of low organic composition of capital in those branches yielding absolute rent.
iii) The reproduction of comparative monopoly power of landed property against capital in those branches. (Murray 1977, 109)
It starts with the difference between the product’s value and its production prices. The product’s value is set by the socially necessary labor time needed to produce it in a specific economy. Meanwhile, production prices reflect long-term, competitive, average prices that also include material costs (Shaikh 2016). Although the total value determines the total production price in each economy (Marx 1991 [1894], 892), the actual production prices can be higher or lower than the value of the products made in each sector. This is because different sectors require varying amounts of labor time to produce. Marx (1991 [1894], 892) states that labor-intensive sectors that need less machinery, equipment, etc. (i.e., the lower capital-labor ratio, or the organic composition of capital) than capital-intensive sectors can sell their products at their actual value, not at the average price (also Sheppard and Barnes 1990, 130). Rent is the difference between these two prices, which appears as excess profit (Murray 1977, 107). Typical examples include agriculture, mining, other extractive sectors (forestry and fisheries), and construction.
A type of rent that, on a macro level, determines landlords’ demand for payment in such sectors is called “independent of the differences in fertility between types of land or successive investment of capital on the same land” (Marx 1991 [1894], 894). Absolute rent “arises out of inter-sectoral competition to equalize the rate of profit across sectors via flows of capital to and from higher and lower rates of profit” (Fine 2019, 454). In the TILR, the level of competition between sectors determines the excess profit (the source of rent). Rent, therefore, increases in proportion to the total excess profit (driven by differential profitability between sectors). This process is historically contingent, as macro-level rent effects could be reduced if excess profits in extractive sectors disappear and their overall sectoral profit falls below that of manufacturing. However, Harvey finds this category “irrelevant” and “meaningless” for urban research (Harvey 2013 interview in Barnes and Sheppard 2019, 207; also Harvey 2010, 81).
1.3 Monopoly Rent
Harvey says, “Marx does not develop monopoly rent but mentions it on the edges. But it has a clear relevance in urban situations” (Harvey 2013 interview in Barnes and Sheppard 2019, 207). Harvey considers monopoly rent relevant in two cases: a) “property owners who control land of such special quality or location in relation to a certain kind of activity may be able to extract monopoly rents from those desiring to use that land,” and b) “landowners may refuse to release the unused land under their control unless paid such a high rent that the market prices of commodities produced on that land are forced above value” (Harvey 2006 [1982], 350). Marx develops three rent categories: differential rent I and II, and absolute rent. Many geographers and urban researchers also include monopoly rent among rent categories (Ball 1977; 1985; Edel 1976; Evans 1988; 1991; 1993; 1999a; 1999b; Harvey 1973; 1974a; 2006 [1982]; 1985; Houghton 1993; Markusen 1978; Scott 1976; Swyngedouw 2012). As Harvey states (Harvey 2013 interview in Barnes and Sheppard 2019, 207), for Marx (1991 [1894], 772), monopoly rent is not developed as a separate category. Instead, it is seen as a universal feature of all land ownership, therefore a form of rent, and is defined in terms of monopoly pricing detached from the overall dynamics of capitalist land production (Marx 1991 [1894], 971; 910).
1.4 Class-Monopoly Rent
Harvey introduces a fourth category to Marx’s three categories to explain social conflicts and power relations related to the monopoly pricing of land. He considers it relevant in “any situation in which the rate of return to a class of providers of an urban resource (such as housing) is set by the outcome of conflict with a class of consumers of that resource” (Harvey 1974a, 239). Rent, in this context, is “the outcome of the conflict of interest” between a class of owners and a class of users (ibid. 243). Class-monopoly rent also helps incorporate finance capital into the analysis. “When trade in land is reduced to a special branch of the circulation of interest-bearing capital,” Harvey states, “then, I shall argue, land ownership has achieved its true capitalistic form” (Harvey 2006 [1982], 347). This concept allows for examining the conflictual economic relationship over land in terms of class. Landlords and developers can claim land rent and extract excess returns only if they act as a unified class. Land rent occurs when landowners manipulate supply, such as by keeping dwellings vacant in housing cases. Doing so requires a favorable legal and regulatory environment and a well-developed financial market that offers instruments to liquidate a fixed spatial asset, such as land. Essentially, class monopoly is the condition regulating this category of rent. Class-monopoly rent is especially important in spaces of social reproduction (including housing) and the redistribution of resources (Harvey 2006 [1982], 350).
Notes from Shaikh’s transcribed lectures on rent theory (Shaikh 1982b; 1984; 1994) digitized by Bard Digital Commons.