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My interview Razor Sharp 18 February
Me interviewed by Sharon Firebrace on Razor Sharp on Tuesday 18 February. http://sharonfirebrace.files.wordpress.com/2014/02/18-2-14-john-passant-aust-national-university-g20-meeting-age-of-enttilement-engineers-attack-of-austerity-hardship-on-civilians.mp3 (0)

My interview Razor Sharp 11 February 2014
Me interviewed by Sharon Firebrace on Razor Sharp this morning. The Royal Commission, car industry and age of entitlement get a lot of the coverage. http://sharonfirebrace.com/2014/02/11/john-passant-aust-national-university-canberra-2/ (0)

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Some random thoughts on Marx, absolute rent and the mining industry

Marx struggled with the idea of absolute rent. Put simply it is the component of the rent payment the owner receives for just being the owner of the land. We need to remember we are dealing here with 2 different entities – the landowner and the capitalist. The landowner receives some amount of rent for just owning the land and allowing the capitalist farmer to exploit it. This rent flows to the owner, the landlord, not because of any improvements on the land, for example, but because of ownership of the land, itself a monopoly (more of which later.)

At the time Marx wrote, the level of capital investment in agriculture was lower than in industry in general. This appears to have been true too of mining. Both were labour rather than capital intensive. In other words, the Organic Composition of Capital  (OCC) was low in agriculture and the mining industry. This has implications for the return that landlords could obtain.

Absolute rent results from differences in capital investment in agriculture compared to industry. Because this level of investment – the OCC – is lower in agriculture than industry it can make absolute rents.[2] By way of explanation, Mandel says that Marx’s theory of rent:

… means that as long as productivity of labour in agriculture is generally below the average of the economy as a whole (or more correctly: that the organic composition of capital, the expenditure in machinery and raw materials as against wages, is inferior in agriculture to that in industry and transportation), the sum total of surplus-value produced in agriculture will accrue to landowners + capitalist farmers taken together, and will not enter the general process of (re)distribution of profit throughout the economy as a whole.

How so? I mentioned above in discussing OCC, industries where the organic composition of capital is low will have higher profit rates but that competition would tend to average out or equalise profit rates over time. Capital would flow to the high profit area reducing the level of profitability there. But what happens if that free flow of capital cannot occur? Here’s how Marx puts it:

If capital meets an alien force which it can but partially, or not at all, overcome, and which limits its investment in certain spheres, admitting it only under conditions which wholly or partially exclude that general equalisation of surplus-value to an average profit, then it is evident that the excess of the value of commodities in such spheres of production over their price of production would give rise to a surplus profit, which could be converted into rent and as such made independent with respect to profit. Such an alien force and barrier are presented by landed property, when confronting capital in its endeavour to invest in land; such a force is the landlord vis-à-vis the capitalist.[3]

What this means is that in the circumstances where there is a low OCC and[4] an ‘alien force’ (for example a barrier to entry) a product can sell above its price of production but still be below its value.[5] The price of production here is basically the cost of production plus the average profit rate.[6] Its value is the socially necessary labour time embedded in it. What does all this mean? Essentially if OCC is lower the value of its products will be above the price of production and so will create ‘surplus’ profit which can be enforced or expropriated by landlords because of barriers to entry, Marx’s alien forces. The discussion above on the organic composition of capital the example of investment by A and B shows how this creation of surplus profit or rent happens. Marx again:

The relation of the price of production of a commodity to its value is determined solely by the ratio of the variable part of the capital with which the commodity is produced to its constant part, or by the organic composition of capital producing it. If the composition of the capital in a given sphere of production is lower than that of the average social capital, i.e., if its variable portion, which is used for wages, is larger in its relation to the constant portion, used for the material conditions of labour, than is the case in the average social capital, then the value of its product must lie above the price of production. In other words, because such capital employs more living labour, it produces more surplus value, and therefore more profit, assuming equal exploitation of labour, than an equally large aliquot portion of the social average capital. The value of its product, therefore, is above the price of production, since this price of production is equal to capital replacement plus average profit, and the average profit is lower than the profit produced in this commodity. The surplus-value produced by the average social capital is less than the surplus-value produced by a capital of this lower composition. The opposite is the case when the capital invested in a certain sphere of production is of a bigger composition than the social average capital. The value of commodities produced by it lies below their price of production, which is generally the case with products of the most developed industries.[7]

Private ownership of land in agriculture and state ownership of minerals together with private rights to mine in the mining industry are the alien forces which give power to this transfer, this ‘filching’ of surplus value arising from a low OCC sector like farming and mining in the mid1800s. However, palpably today the OCC in mining in Australia is the highest of any industry in the country.[8] As a Productivity Commission Staff Working Paper said in 2008:

Mining is a capital intensive industry. Table 4.1 shows that capital inputs account for about half the total costs in mining production (or around 80 per cent of value added). The average for the economy as a whole is 21 per cent (or approximately 44 per cent of gross value added).

Labour inputs account for a relatively small share — approximately 12 per cent — of total costs (table 4.1 and figure 4.1) and around 23 per cent of value added in mining. In contrast, labour inputs in the economy as a whole are around 25 per cent of total costs, and around 52 per cent of gross value added.[9]

Having laboured our way through Marx on agriculture, are we to settle then for being told that his ideas on absolute rent don’t apply to mining in Australia today because the OCC in mining, unlike agriculture in the 1850s, is very high? Well, no, because Marx’s approach to absolute rent gives us the tools to understand resource rents and because there are other threads to Marx’s thinking that further help us to understand resource and other economic rent in high OCC industries like mining. [10] For a start the state licensing capitalists to explore for and then exploit minerals and charging them a fee – for example a royalty – based on what is extracted appears to put the State or Territory doing this in the same position as a landlord demanding rent for the capitalist to farm on their land. In this way it is a form of absolute rent.

However absolute rent arises from a low OCC, so how can this be? Harvey says this: ‘Part of the excess surplus value produced in agriculture by its labour intensity (lower value composition) is “filched” (as Marx puts it) by the landlord, so it does not enter into the equalization of the rate of profit.’[11] But for industries with high OCC and alien forces preventing equalisation of profit rates, like mining in Australia, the argument becomes that that those barriers to entry or other alien forces allow the filching to continue despite there being a high OCC in those industries. However to get to that position the mining capitalist must first pay licence fees to the State or Territory government and anticipate paying royalties based on what is extracted, if anything. These royalties are inefficient from capitalism’s point of view (a view reflected in the Henry Tax Review) because they are not just like the absolute rent a landlord filches courtesy of her ownership of the land; they are absolute rent a State or Territory filches courtesy of its ownership of the minerals. The difference is that the payments only arise once the mineral is found (if it is there at all) and extracted.

Absolute rent has caused great debate and controversy among left wing writers. Is it actually two concepts – monopoly rent and absolute rent, or just absolute rent arising from the low level of say capital investment in agriculture? [12] I adopt David Harvey’s approach, of distinguishing between absolute rent and monopoly rent. [13] Others, like Faysil Yachir, argue that despite a very high OCC in the mining industry there can still be absolute rent because of monopoly.[14] The two, as I have outlined above are different, but related, a matter which I hope becomes clearer when we work through the differences between State and Territory absolute rents such as royalties and Commonwealth monopoly rents in the form of rent taxes.

[2] Marx, above n 100, 625 et ff.

[3] Ibid, 761-762.

[4] I agonised over whether this should be ‘and’ or ‘and/or’. There can be no absolute rent if, as in mining today, the OCC is high. But there can and will be monopoly rent because an alien force or alien forces stand in the way of more, competitive, investment. The question then becomes what is the mechanism for the production of this surplus profit and in what sphere does it arise? The answer will be that it is a transfer of surplus value in the realm of distribution of surplus value, not its production, from the other hostile brothers to mining capital or the sections of it with quasi-monopolies.

[5] David Harvey, above n 136, 351.

[6] In chapter 45 of Vol II of Capital Marx developed this idea and a range of other concepts to address the transformation problem – how do values become prices? The situation is more complex than that and for many the transformation problem undermines Marx’s argument about there being a tendency of the rate of profit to fall and the labour theory of value. For a discussion of the issue and a possible analysis verifying theoretically and empirically Marx’s approach, see the discussion of Temporal Single System Interpretation (TSSI) in Andrew Kliman, Reclaiming Marx’s “Capital”: A Refutation of the Myth of Inconsistency, (Lanham, MD: Lexington Books, 2007).

[7] Marx Vol II Capital ch 45.

[8] See for example Australian Bureau of Statistics, Mining Investment in ABS Publications (ABS 31 May 2012) <http://www.abs.gov.au/ausstats/abs@.nsf/0/C663DEB965257495CA257679000FA4A6?OpenDocument>

[9]Vernon Topp, Leo Soames, Dean Parham, and Harry Bloch, Productivity in the Mining

Industry: Measurement and Interpretation, Productivity Commission Staff Working Paper,

(December 2008) 66 <http://www.pc.gov.au/__data/assets/pdf_file/0011/84917/06-chapter4.pdf>

[10] They may also help us to understand the basis of the economic rents that other industries, with seemingly low levels of OCC, such as banks in Australia, receive.

[11] David Harvey above n 136, 351.

[12] Ibid, 349.   Harvey thinks monopoly and absolute rent are separate categories. Some like Ben Fine recognise the ambiguity of Marx’s discussion of monopoly rent as a form of absolute rent but reject the idea. See for example Ben Fine, ‘On Marx’s theory of agricultural rent’ (1979) 8(3) Economy and Society 241. Miguel D Ramirez synthesises the two positions, in my opinion. Miguel D Ramirez, ‘Marx’s theory of ground rent: a critical assessment’ (2009) 28(1) Contribution to Political Economy 71.

[13] Harvey, above n 136, 349, 353.

[14] Faysil Yachir, ‘Mine rents and mineral prices’ Chapter 8 in Mining in Africa today – Strategies and prospects (United Nations University Press, Tokyo 1988) <http://archive.unu.edu/unupress/unupbooks/uu29me/uu29me0c.htm>.

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