By D. J. Webb
Writing on land is, for me, unfinished business. I found a year or two ago that supporting John Stuart Mill’s views on land was controversial in “libertarian” circles. I could presume that many of those who oppose a land value tax have large houses and have benefited from government policies that have fuelled capital appreciation of properties, particularly in the south of England. But imputing a motive to the commenters does not answer their queries as such. Part of my reluctance to write on land stems from a desire not to unduly distress Dr Gabb. I have decided to write on this subject, but not to answer (or even read) replies in the comments section. That way, I will not get drawn into low-quality discussions by people who didn’t even understand this article, and may thus safely post on this subject.
The gist of the objections to a previous post was that the argument that speculation in the value of unimproved land amounted to an attempt to corner an “unearned” capital gain somehow reflected Karl Marx’s labour theory of value, or value theory as presented by the Classical Economists preceding him. My attempts to point out that assertions of Karl Marx’s views made in the comments below that article were untrue were ignored. In effect, I faced an absurd double-lock: I was told that the anti-Marxist objection to certain views on land was cogent and defeated my argument; but at the same time I was told that, post-1989, Marxism was irrelevant, and all comment on the subject was ruled out. Either one of these contentions may be true, but not both: if it is held that the objections to my argument were sound, then examination of those objections must be relevant.
Let me start by noting that I do not support Communist attempts to plan an economy: the experience of the Soviet Union, and of publicly planned service provision in countries such as the UK, shows that this will never work, or, at any rate, not efficiently. My view of Karl Marx’s writings is that he is best regarded as the greatest of the Classical Economists, all pretensions to social revolution aside. His main work, Capital, or Das Kapital, does not address the means of running a Communist economy and, to my knowledge, he did not write anything substantial on that subject during his life. What he did write was a critique of the capitalist economy that claimed that there was a long-term tendency for the rate of profit to fall, which would, or so he thought, provoke revolution and thus attempts to run the economy on different lines. All his economic works were about how the market economy functioned. For this reason, he may be viewed as a Classical Economist. It is my view that the development of the global economy, the rise of services industries, the advent of the mixed economy characterized by state service provision and the interventionist role of central banking mean that Classical Economics does not directly describe the economy we perceive today, but that it is a mistake for libertarians to reject rigorous Classical Economics out of hand in favour of vulgar analysis of market prices.
It is incorrect to imagine that Karl Marx was an “idiot” or even a sloppy thinker: there is a rigour to his argumentation that in some way reflects a Germanic bent of mind. Central to approaching his thought is the idea that any attempt to immediately discuss the surface appearance of the economy will be analytical feeble. Categories such as money, profit, rent, wages, and so forth, are for him the surface phenomena. There are too many things going on in the way an economy presents itself to immediately begin analysis here. In his Grundrisse (the rough draft of Capital that was published after his death), Marx explained,
The concrete is concrete because it is the concentration of many determinations, hence unity of the diverse. It appears in the process of thinking, therefore, as a process of concentration, as a result, not as a point of departure, even though it is the point of departure in reality and hence also the point of departure for observation [Anschauung] and conception….
In this way Hegel fell into the illusion of conceiving the real as the product of thought concentrating itself, probing its own depths, and unfolding itself out of itself, by itself, whereas the method of rising from the abstract to the concrete is only the way in which thought appropriates the concrete, reproduces it as the concrete in the mind.
Now, it is difficult to generate intelligent discussion on the Internet, where all may partake, regardless of their intellectual qualifications to join a discussion. I will repeat over and over again that I am trying to set out Marx’s real views and not a right-wing, but ignorant, caricature of them. When reading this article, try to picture yourself in a PhD viva voce: any points you have that could not survive a grilling during your thesis defence are unworthy contributions to debate. I won’t read the debate, but I am trying to encourage people not to submit a mass of non sequiturs to litter the comment section.
In Marx’s view, and it is not an unreasonable one, any complex reality (the “concrete”), cannot be immediately analysed without first breaking it down into the simpler parts of which the concrete forms a combination. To immediately start declaiming on the subject of money or wages or profit ignores the fact that these categories of the concrete reality have not been understood. His Capital is a hard read, precisely because he begins with simple exchange, and then paints in more and more features of reality, thus building up a picture of concrete reality, or a picture that gradually approximates better to concrete reality. It would never have occurred to Marx to start writing about rents or mortgages or interest rates without first elaborating a theoretical framework that showed how those aspects of concrete reality came about and why they present themselves to the naked eye in the way in which they do.
This is directly related to the dialectical thought of Immanuel Kant, who drew a distinction between the noumenon and the phenomenon. In his Inaugural Dissertation of 1770, Kant described things as they are experienced by us as phenomena. The phenomenon is also referred to in German as das Ding für uns (the Thing-for-us). This would correspond to Marx’s “concrete”. The abstract underlying category, the noumenon, is referred to by the German term, das Ding an sich (the Thing-in-itself). Such rigorous dialectical reasoning was very much in vogue in the first half of the nineteenth century, and Marx was clear to maintain a distinction, totally adhered to, between phenomenal and noumenal categories. Price, wages, profit, costs, rent, money: these are all phenomena, categories in which the economy directly presents itself to us. Marx was at pains to work up a noumenal analysis, and his categories of value and surplus value are noumenal and not phenomenal: they are not descriptions of, and not intended to be descriptions, of the economy as it presents itself to us. He maintains clear terminological distinctions, such that value in his works does not mean price. The one is noumenal, the other phenomenal. If you think “price” when you read the word “value” in Marx’s works, you may as well stop right here.
The statements that “Marx said that all objects exchange at labour values” and that “Marx did not recognize that things, including land, exchange at whatever price someone would pay for them” are entirely incorrect. To rule discussion of this out of court is to prevent any discussion of Classical Economics, while claiming that the views of those who oppose Classical Economics must be accepted. Karl Marx said no such thing: his analysis is entirely consistent with a view that the real price action in markets for land and other things may be best described by marginal utility theories. Price and rent are phenomenal categories and Marx did not seek to claim that the phenomena we see with our own eyes don’t happen. He rather sought to understand what he held to be the underlying laws of motion of a market economy, to understand what fundamentally limited the phenomena we observe.
What we see as profit (a phenomenal category) shows that a surplus is produced in the economy. Put simply, at one point in caveman society, there was little “extra” produced. Everyone worked all day hunting and gathering and struggled for primitive survival. At some point, however, possibly when settled agriculture was introduced, a surplus was produced: in ancient Sumer or ancient Egypt a surplus was produced sufficient for investment (some seeds had to be held back to replant the next year’s harvest) and to support a class of priests and kings who did not produce any crops themselves. From a society where 100 people struggled to produce enough for basic survival of 100 people, the human race moved to a society where 99 people could produce enough food for 100 people. From this point onwards, complex societies could be formed. Societies exist today where one person can produce enough food for 100 people. The fact that a minority of people have greater access to goods produced by society may have moral objections, but I won’t bother addressing those. Libertarians accept that attempts to create an equal society will ultimately fail and prove self-defeating. In any society there has to be a surplus-product, for investment. How economists describe the origin of this surplus and thus the ultimate source of the phenomenal category of profit was written on extensively by Marx, most notably in Theories of Surplus Value, a three-volume supplement that was written before Capital and intended to be the fourth volume of Capital.
Marx does not describe this surplus as profit, which he saw as a concrete, phenomenal form. He used the term surplus value, reflecting his starting-point that the emergence of a market-based economy meant that the exchange of goods took the form of commodities that had value. All terms in his works have to be kept separate, and he argued that the use-value of a good—the natural use it could be put to (for example, the useful way in which milk can quench thirst)—had existed in pre-capitalist economic relations. Useful things have always had uses. But commodification assigns everything a value. It is possibly suboptimal that the one way of looking at a good is to see its use-value and the other its exchange value. Clearly German words are being translated in various ways, and it might make more sense to describe use-value as worth, an Anglo-Saxon word that separates it from the word “value”. Things are sold in the market because they have a use-value, of course, but capitalists are not philanthropists and wouldn’t bother to produce things that didn’t have an exchange value.
We mustn’t at this point intrude the word price, which is a phenomenal category that Marx has not built up to at this point. But commodities exchange because they have a value. Of course, the market economy has developed from simple barter to the point where everything has a phenomenal price, one that exactly shows the relationship of price between two things. A house of £100,000 has a price exactly 1,000 times a £1 loaf of bread. But in the days of barter, it would have been unclear just how many loaves of bread should be exchangeable for a house. The phenomenal category of price, however, is filtered through many degrees of concretization from the abstract categories that exist merely in theory enabling Marx to offer an explanation of the phenomenal categories we observe.
Marx argued that on the noumenal abstract level, values of commodities reflect the labour contained within them. Only the labour contained within could give them an exchange value, as opposed to free things like air that are not produced by human labour. It’s not my purpose here to set out the whole of his economic theory, but he argued that the labour performed by workers created a value that exceeded the value of the goods required to support the worker. A surplus is produced during the production process over and above what is paid for the labour of the workers: this unobservable category of surplus value is the ultimate source of the observable categories of profit, interest and rent.
As Marx gradually painted in more and more factors to build up a picture of concrete reality from abstract components, he eventually came in Volume 3 of Capital to discuss the role of the market for goods, including the market for labour. Having discussed the operation of the commodity economy at the noumenal level, he now sought to explain how the divergent phenomenal forms, the concrete observable reality, is produced. Having explained his view that labour creates value, including the surplus value, in an economy, Marx had to deal with the objection that, in fact, technology-intensive goods often fetch high prices, whereas labour-intensive goods fetch low ones. At the noumenal level, the labour-intensive goods would contain a lot of labour, and thus value. He divided the value of a commodity into constant capital and variable capital. Constant capital referred to the use of machinery and raw materials in goods: Marx argued the value of these is merely transferred to the products. A basket of yarn that can be used to spin 1,000 items of clothing sees a one-thousandth part of its value transferred to each item. No surplus value is created from the constant capital. The variable capital refers to the use of labour, which can create more value than the value of the worker’s labour power (the value of the goods required to support the worker’s life). In other words, where both raw materials and labour are employed, only the labour creates an additional value in the product that is the source of surplus value in the economy. This would imply that labour-intensive products should have an especially high value, depending, of course, on a large range of other factors, including the proportions of constant capital transferred to the commodity.
It clearly is not the case that production of high-tech goods (containing more constant than variable capital) is necessarily the least profitable line of industry. This is explained by what Marx called the transformation process: by means of the free market, where goods attract whatever price (the concrete, phenomenal, observable price) they can fetch, underlying labour values in the economy as a whole are transformed into prices. At the noumenal level, labour-intensive industries had the highest rates of surplus value, but at the phenomenal level, he argued, there is an observable tendency for rates of profit (a phenomenal category) to even themselves out into an average rate of profit. This would be only a tendency, as businesses can try to command whatever price they can for their products, and so the chips fall where they may in terms of the actual rate of profit achieved. This is what is described by Marx in a letter to Engels (April 30th, 1868, Selected Correspondence, 1982 edition, p193) as a kind of “capitalist communism”:
What competition between the various amounts of capital—which are invested in different spheres of production and have a different composition—is striving to produce is capitalist communism, namely that the mass of capital belonging to each sphere of production receives an aliquot part of the total surplus-value proportionate to the part of the total social capital which it constitutes.
It may be the case that some Marxists never got to Volume 3 of Capital, one of the hardest books to wade through, but there is no doubt that this is Marx’s theory. In chapter X of Volume 3, this is specifically stated:
But since the capitals of average composition are of the same, or approximately the same, structure as the average social capital, all capitals have the tendency, regardless of the surplus-value produced by them, to realize the average profit, rather than their own surplus-value in the price of their commodity, i.e., to realize the prices of production. …
The really difficult question is this: how is this equalization of profits into a general rate of profit brought about, since it is obviously a result rather than a point of departure? …
Let us first assume that all commodities in the different branches of production are sold at their real values. What would then be the outcome? According to the foregoing, very different rates of profit would then reign in the various spheres of production. It is prima facie two entirely different matters whether commodities are sold at their values (i.e., exchanged in proportion to the value contained in them at prices corresponding to their value), or whether they are sold at such prices that their sale yields equal profits for equal masses of the capital advanced for their respective production.
The observable rate of profit of a business has no connection with the actual rate of surplus-value (a noumenal and unobservable category) of that business: through the market, the rates of profit across the whole economy tend towards equalization. This means that products are not sold at labour values, but at observable prices of production:
Now, if the commodities are sold at their values, then, as we have shown, very different rates of profit arise in the various spheres of production, depending on the different organic composition of the masses of capital invested in them. But capital withdraws from a sphere with a low rate of profit and invades others, which yield a higher profit. Through this incessant outflow and influx, or, briefly, through its distribution among the various spheres, which depends on how the rate of profit falls here and rises there, it creates such a ratio of supply to demand that the average profit in the various spheres of production becomes the same, and values are, therefore, converted into prices of production. Capital succeeds in this equalisation, to a greater or lesser degree, depending on the extent of capitalist development in the given nation; i.e., on the extent the conditions in the country in question are adapted for the capitalist mode of production.
The “capitalist communism” whereby profit rates tend towards an average regardless of abstract labour values was described in that chapter in this way: “Here, then, we have a mathematically precise proof why capitalists form a veritable freemason society vis-à-vis the whole working-class, while there is little love lost between them in competition among themselves”. Capitalism becomes a freemason society as the capitalists share out the total social surplus value among themselves, not in proportion to the surplus value produced in various industries (which would be affected by degrees of mechanization), but in proportion to the total size of the capital advanced in each branch of industry, in other words, as an average. This is achieved by the market. Marx adds:
The price of production includes the average profit. We call it price of production. It is really what Adam Smith calls natural price, Ricardo calls price of production, or cost of production, and the physiocrats call prix nécessaire, because in the long run it is a prerequisite of supply, of the reproduction of commodities in every individual sphere. But none of them has revealed the difference between price of production and value. We can well understand why the same economists who oppose determining the value of commodities by labour-time, i.e., by the quantity of labour contained in them, why they always speak of prices of production as centres around which market-prices fluctuate. They can afford to do it because the price of production is an utterly external and prima facie meaningless form of the value of commodities, a form as it appears in competition, therefore in the mind of the vulgar capitalist, and consequently in that of the vulgar economist.
Observable prices for goods, observable wages, observable costs, observable profits do not have any direct relationship with what Marx posited as the underlying labour values. What is the point of an economic analysis that claims to detect underlying noumenal non-observable categories such as value that have no observable connection with the surface reality of the capitalist economy? Well, for Marx, total surplus value in an economy is shared out in the form of profits, rents and interest. His analysis starts with the abstract and becomes more concrete, but his final conclusions in Volume 3 do not yet paint in many aspects of the global economy as we see it today. In particular, he hasn’t discussed the use of fiat money (non-existent in his day) and the constant inflationary economy. So his analysis remains at a more abstract level than the concrete economy of our day: in a non-inflationary system, the total surplus value produced by labour would cap profits, rent and interest. The whole point of his analysis is, of course, to argue that the value form, the production of commodities for their exchange value, has a built-in flaw, that the average rate of profit tends to fall over time with the employment of more constant capital: as the economy develops, restructurings in the form of recessions become inevitable to re-establish profitability. He is not concerned to show that individual rates of profit in individual businesses have any connection with rates of surplus value theoretically produced by the individual company. Rather, at the level of total social capital (the ultimate source of profit once the market-driven transformation process has operated), investment in more and more mechanization drives down the rate of surplus value.
Marx’s economic theories are a more carefully and rigorously worked-out form of labour value theory than those of previous writers, whose views he castigates in his Theories of Surplus-Value. At no point does he argue that products exchange at their labour values (this point was well-understood by Marx’s 19th-century opponents, including Loria, who wrote “No economist with any trace of sense has ever concerned himself or will ever want to concern himself with a value which commodities do not sell for and never can sell for (ne possono vendersi mai)…. In asserting that the value for which commodities never sell is proportional to the labor they contain, what does Marx do except repeat in an inverted form the thesis of the orthodox economists, that the value for which commodities sell is not proportional to the labor expended on them?”, provoking a discussion of his critique in a supplement to Capital written by Engels. It’s absurd to claim, as some libertarians do, that Marx believed prices reflect labour values, when, in the text of Capital itself, Engels writes to refute the views of Loria, who objected, back then, to Marx’s clearly expressed view that prices do not directly reflect labour values.
At no point does Marx argue that products sell for labour values or that any of the noumenal categories are directly observable. This mistake could only be made by “libertarians” who fail to understand the difference between concrete reality and abstract analysis, between phenomenal forms and noumenal underlying categories, who see a complex reality such as an economy and immediately start mouthing off about money or profit or rent. I would encourage libertarians seeking to “refute” Marx to focus on what Marx admitted were countervailing factors that inhibited a falling rate of profit, a subject discussed by him in chapter 14 of Volume 3. As it is specifically key to his theory that values are transformed into prices via the market mechanism, nothing in marginal utility theory amounts to a successful refutation of Marx. Marx could even accept the whole of such theories tout court as describing the observable price action. In fact, passages in Capital describe the observable price action too. Most of what is written on price by what Marx would have regarded as “vulgar economists” can be found in Capital somewhere.
Clearly, land itself is not capable of creating labour values, but that does not mean that it does not have a price and that that price is not determined by demand for the land. The price of everything is what you can get for it, and Marx did not deny that. Chapters 37 to 47 of Volume 3 of Capital discuss ground-rent, but are based on a 19th-century view of land as a source of agricultural revenue, rather than on the more rarefied form of property as an investment or an avenue for speculation that we see today. Nevertheless, Marx did deny in his critique of Adam Smith that land itself created value via its natural properties: he continued to derive the value (NB: not price!) of agricultural output from the constant capital and variable capital contained therein, where labour remains the only source of surplus value. His views are consistent with an approach that would hold that possession of land enabled agricultural landowners to gain a share of the total surplus value, as described elsewhere in his work, filtered to some extent through the impact of monopolistic landownership in allowing agricultural landowners to maintain a higher-than-average rate of profit.
In any case, Marx’s analysis holds that the surplus value produced by labour is the ultimate source of the observable profits, rents and interest that are surface phenomena in the economy. The basic problem of economics is where the economic surplus comes from. To claim that marginal utility creates value in itself explains nothing: this can only explain the live price action (a divvying up of the money in an economy), but not how a surplus is generated in the economy as a whole in the first place. Neither can any other theories advanced by vulgar economists explain land appreciation. If an unimproved plot of land appreciates in price from £100,000 to £200,000 over a five-year period, you need to look elsewhere in the economy to find where the increased money is coming from. The inanimate plot of land has not produced anything. This is the reason why Marx viewed economists who merely described phenomena as vulgar economists, and it is also the reason why libertarians need a deeper analysis of economics than marginal utility prices (or any other price theories). There is much that is valuable, and difficult to cogently refute, in Das Kapital, if Marx is seen as the greatest of the Classical Economists, and his calls for communism are rejected. John Stuart Mill was also a Classical Economist, and there is a considerable overlap in his analysis with that of Karl Marx.
In the final analysis, unimproved land does not create the surplus in our society. We are told by some “libertarians” that the leaping in price of a plot of unimproved land as a consequence of central bank policies to pump the property market “creates value”. On the contrary, the financialization of the economy and the dominance of property are direct subtractions from the productive sectors of the economy. To introduce a land value tax, to restrain property and require businesses and workers to pay less to rentiers, would, as John Stuart Mill pointed out, be a libertarian policy. I’m sure I will have libertarians in big houses howling with this article: let them howl!