From: Cyrus Bina (binac@MRS.UMN.EDU)
Date: Mon Jan 26 2004 - 21:17:20 EST
Dear Colleagues and Friends:
I am so sorry for my delayed comments and responses. Here you are with the following twin notes. Thanks and happy New Year!
Warm Regards,
Cyrus
OPE-L@SUS.CSUCHICO.EDU
A Twin Note on the "Unanswered Questions About Rent"
Cyrus Bina
Copyright © 2004 by Cyrus Bina
It is with much regret that I have not realized that a number of dear colleagues and friends on the OPE-L were addressing this inquiry to me. I was out of town busy in-and-out of airports, speaking on the issues that are surrounding the US intervention in Iraq, the fiftieth anniversary of the CIA coups in Iran and Guatemala, and many similar engagements during the last several months. I should apologize for my delayed answers, particularly to Michael Lebowitz, Paul Zarembka, Claus Mango, Gerald Levy and Rakesh Bhandari.
As you all know, there is a decisive literature on the Marxian and Ricardian versions of rent theory, particularly in the fields of the Political Economy of Urban Housing, Coal, and Petroleum. Yet, despite the straightforwardness of the value-theoretic analysis, there are many disagreements and, at times, much confusion in exchanges among the contending parties, particularly on the vision and method of analysis. Some of these contentions though arise from the fact that the question of rent is not only abstract and theoretical but also concrete and empirical. My interpretation of Marx's Theory of Ground Rent (in agriculture) and my own theory of oil rent are as follows:
I. A Note on Marx's Theory of Agricultural Rent
1.. The notion of rent in Marx (as opposed to Ricardo's axiomatic formulation) is not a general theory or model that can be applied to any given sectors of capitalist economy at will. It is rather a materialist category, a product of peculiar reflections of specific property and institutional relations where capitalist mode of production (CMP) is dominant. Hence, concrete examination of such property relations in the presence of CMP is of primary importance.
2.. While these property relations (e.g., their particular ownership pattern, their definite form of institutional resistance to capital accumulation, etc.) pose as a "monopoly" and/or a "permanent barrier," they tend to impede the process of accumulation in particular production fields. Yet the definite effects of these interventions are being formed as rents in (Marxian) competition (see Anwar Shaikh for the meaning of competition in Marx).
3.. Marxian competition (and its Schumpeterian counterpart) reflects the process of concentration and centralization of capital and thus constitutes as a war of capital upon capital. Integration in Marx is not the opposite of competition. Speaking of "barrier to entry," on the other hand, amounts to an analogue of idealized capital and idealized (i.e., "perfect" or, more properly, benign) competition associated with the axiomatic spectrum of neoclassical market-structure theory. This sort of competition is characterized by John Weeks as the "quantitative theory of competition." Joseph Schumpeter justifiably dismisses this competition as "textbook competition." And both tend to show this neoclassical construct as ideal and irrelevant. I tend to think that the buzzword of "barrier to entry" is not more than a tautological chat. Indeed, what is called "barrier to entry" is not the barrier at all but overcoming the increasing size of "regulating capital" in the battle of competition. I am not trying to pick on this tiny point, but careful theorists, particularly Marxists, should mean what they say and say what they mean.
4.. Absolute Rent (AR) in Marx reveals the immediate effects of property relations. Such effects include the types and patterns of ownership of agricultural lands. According to Marx, AR in agriculture is the result of "monopoly" of private land ownership. AR must be paid to the owner of lowest quality land under cultivation, the land that is called "marginal" land. Marx maintains this terminology in order to keep the conversation and, by going beyond it, advances his own theory. Marx's capital (or land) does not have anything to do with "marginal" analysis. Indeed, his "regulating capital" remains lumpy and connected with "average productivity." Marginal land for Marx is the lowest quality land that may or may not be coincided with the "regulating value" of the total product in agriculture. Once the "regulating value" of the product from the "marginal" (lowest quality land) land represents the "regulating value" of the total product of land, AR will become a part and parcel all individual values associated with all categories of lands under cultivation. And, once (for reasons given in #5) eliminated, neither the "individual" value(s) nor the "regulating value" of total product does include AR.
5.. Differential Rent (DR) is the effect of the variation of the quality of land under cultivation and/or the variation of capital invested upon them. Marx categorizes DR into DRI and DRII. DRI refers to the application of equal quantity of capital to the unequal qualities of land under cultivation, whereas DRII reveals the application of unequal quantity of capital to the given quality of land. Such distinction, and latter revelation, is crucial for the examination of concentration and, particularly centralization of capital (capital deepening), and thus the pace and condition of capital accumulation in agriculture. Historically (and, certainly, theoretically), therefore, DRII may set the limits upon the magnitude of AR and, by replacing the product of land associated with AR, would potentially eliminate AR altogether. Conceptually, to avoid AR one must replace AR. The consecutive capital deepening on a given "intra-marginal" land-that also encounters DRI-may eventually lead to falling average productivity and rising individual "regulating value" equal to the magnitude of "regulating value" of "marginal" land. This, in turn, would "regulate" the market value of the total product. In this case, the entire product will be produced on the "intra-marginal" lands-and the individual "regulating value" of produce from the "intra-marginal" land in question would become the "regulating value" of the total product. In other words, the total product will encounter DRI and DRII only, as the latter sets the limits of AR. Here, in this example, the consecutive investments on the same leasehold, on the one hand, and replacement of the product of "marginal" land, on the other hand, initiated the elimination of AR. This is how the rising "organic composition of capital" can be consistently theorized in agriculture. For, unlike Ricardo's, Marx's theory of rent is not a simple theory of distribution but a theory of production as well. As I understand it, this is also Ben Fine's interpretation of Marx's Theory of Rent in Agriculture. Finally, I have used the concepts such as "regulating value," "market value," "individual" value, etc. in order to signify the value formation and notion of intra-industry competition here in this note. Where there is the question of inter-industry competition and thus formation of prices of production, the analysis of rent in Marx remains consistently the same (notice the comparison of terms in the Theories of Surplus Value I-III and Capital, Vol. III).
6.. In actuality, the effects of DRI and DRII can by no means be linearly separated. Hence, one obtains the combined effects. Consequently, the "regulating value" of the entire product of land may not be necessarily fashioned after the Ricardian "margin." Besides, Ricardian producers arbitrarily start to lease the most fertile land and then gradually move into the lesser and lesser fertile land. Marx, on the other hand, refrains from this axiomatic and uncritical framework. He constructed a rent theory (in agriculture) that is compatible with his theory of capital accumulation in CMP. He developed a theory of rent that incorporates the movement of capital from worse to better, back to best or the worst, depending upon the historical circumstances and conditions of capital and landed property (see, for instance, Marx's letter of January 7, 1851 to Engels on three related and crucial points on the concrete historical development of agriculture in England). Again, Marx's rent theory is specific to historical and material conditions of capital accumulation (CMP) in the transformation of modern agriculture.
7.. According to Marx, the nationalization of landed property results in the elimination of private property in land and thus removal of AR. In such a case, DR would remain as the only form of rents.
8.. Unlike Smith's theory of rent (e.g., the corollary of his adding-up theory of value), the concept of rent in Marx is price-determined, not price-determining. This is particularly noteworthy for those "radicals" who tend to doubt the validity of the operation of the law of value in late-or global-capitalism and thus resorting to some sort of ad hoc monopoly terms for the explanation of rent in contemporary economy. Modern neoclassical theory has already universalized the meaning of rent in terms of "general equilibrium" and the assumption of "perfect" markets. Others in the neoclassical-and, to some extent, within heterodox-tradition, who converge on the "market-imperfection" models, have made a cottage industry out of generalization of rent. Yet, without a fully grounded theory of value, rent can be anything and anywhere as it is so trendy in the framework, parlance, and "toolbox" of nearly all neoclassical economists.
II. A Note on my own Theory of Oil Rent
1.. Parallel with Marx's Theory of Ground Rent in agriculture, the category of rent in the oil industry is also a product of historically specific property relations. Therefore, value and price formation in the oil industry does not follow the common presumptions of a general theory. This also goes for Coal and perhaps other production processes that are subject to the intervention of particular "landed" properties (see, for instance, Ben Fine on the British Coal Industry). Yet, what is common to all this is the context of value formation in capitalist mode of production (CMP).
2.. Unlike agriculture, the oil industry has a short but turbulent history since the 1859 discovery of oil in Pennsylvania. Yet, one has to recognize two parallel, yet interconnected, histories in the development of oil: (1) the development of American oil and (2) the development of oil in the rest of the world. The discovery, development, and production of US oil were tied to the rule of capture-i.e., to the recognition of combined (private) ownership in both the surface and sub-surface land. Whereas the discovery, development, and production of oil elsewhere materialized along the separation of land ownership from the ownership of sub-surface deposits. Therefore, regardless of the existence of private property in land, in the latter category, state authorities, colonial rulers, or semi-colonial officials almost always decided on leasing of the sub-surface.
3.. In order to be able to find the significance of Marxian categories in the uneven and tumultuous history of oil, one has to subject it to adequate periodization. For the present purpose, I would replicate the framework that was presented in my Economics of the Oil Crisis (1985). Such a periodization relates directly to the discovery and subsequent development and production of oil in the Middle East. Yet, from the standpoint of theorization, it would adequately overlap the larger picture of transnational oil, from cartelization, through to its eventual globalization. I recognized three distinct periods in the history of oil. The first period covers the era of cartelization (and neo-cartelization) of oil prior to 1950; the second deals with the transitional period of 1950-1973; finally, the third period extends beyond the mid-1970s in which we are entering into the era of globalization, de-cartelization, and the absence of "administrative" pricing. Here, oil prices and differential oil rents are being formed uniformly and competitively within a value-theoretic framework on a worldwide basis.
4.. In the Middle East, Latin America, and North Africa historical cartelization of oil reflected in the huge size and long duration of oil concessions. The determination of oil royalties was based on the mechanism of "posted prices," which, in turn, determined arbitrarily according to the "basing point," at the (US) Gulf of Mexico, plus the transportation cost. This was a reference point for determination of cost and pricing of oil anywhere, regardless of the actual costs. The calculation of early oil royalties was made on a per ton basis, a miniscule and fictitious magnitudes, unrelated to "posted prices." Posted prices were an advance over such deliberate calculations. They primarily functioned as a framework for inter-company transfer of oil within the cartel as well as calculation of (12½ percent) oil royalties. As soon as substantial production of oil from Persian Gulf came to the market, the cartel began to establish the second basing-point there, the magnitude of which was much smaller than that of the US Gulf. And, it was this "price" that was chosen for the calculation of (12½ percent) oil royalties of this bountiful oil region. In 1960 OPEC was formed to counter cartel's frequent and arbitrary "posted price" reductions, which had direct consequences for arbitrary reduction of the oil royalties.
5.. The US oil has remained as the highest cost (i.e., least productive) oil region in the world. Under the cartel, it was the center of gravity of oil production and its cost was primarily a point of reference for pricing of oil worldwide. In the transition period through to the present time, US have continued to be as the most explored and thus costliest oil region of the world. In contrast, Persian Gulf oil region has remained as the lowest cost (i.e., most productive) in the world. According to the rule of capture, the owner of the US land is also the owner of sub-surface minerals. This also goes for the private leaseholds in the United States. In the Middle East (and elsewhere), however, the mineral deposits in the sub-surface belong to the state; hence, no undo division in the ownership of oil reserves there.
6.. The US is the most explored oil region of the world in terms of the number of producing oil well and types of enhanced activities in recovery and development of oil, such as the secondary and tertiary recovery, field unitization, and maintenance. The US oil is also among the most divided leaseholds in the world and historically has had formidable impact on the new exploration in the US lower 48 States. As I have shown in details (Bina 1985), the significant productivity decline in the US oilfields is the consequence of increasing and continuous capital investments in the already-explored ("intra-marginal) oilfields in the late 1960s and early 1970s. This was reflective of the avoidance of new leases in the unexplored and potential oilfields that may have resulted in large number of "dry holes," corresponding with certain level of AR. The additional explorations were made either on or in the vicinity of (old) "intra-marginal" oil reserves under production. The fresh explorations, however, were made somewhere outside of the US lower 48 States (i.e., in offshore or Alaska). Some years ago, a writer mimicking my approach to the oil industry (without any reference to my work!) mistakenly argued "The 'monopoly ownership' of Third world landlord governments would be stronger, and the magnitude of absolute rent exacted by them would be greater, as the demand for minerals expands and the supply of rich mineral deposits becomes more limited" (Chibuzo Nwoke, The Third World Minerals and Global Pricing, London: Zed Press, 1987, p. 30). This is a terrible example of being tangled in the webs of neoclassical scarcity and "general rent theory," without concrete grounding. Speaking of absolute rent here is an empty phrase without concrete investigation of the accumulation process that underpins it. Nwoke also, perplexed by the Ricardian decreasing margin, claims that least productive global oilfields are located in the North Sea and Alaska, rather than within the lower US 48 States. He assumes mistakenly (similar to Ricardo) that the order of exploration (or cultivation) is always descending; hence, the oil from Alaska and North Sea must be less productive that that of the US lower 48 States. In order to realize the vulgarity of the approach, Marx's (January 7, 1851) letter to Engels (see Note I, #6) is a good place to start.
7.. From the mid-1960s, a further decline in (average) productivity of US oil, which was already the highest cost oil in the world, led to the eventual increase in the magnitude of the "regulating value" of oil globally. Decline of the cartel and the "administrative pricing," on the one hand, and transformation of the oil regions into the objects of flourishing market forces, on the other hand, made the transition to globalization possible. Here, the double-edged sword of competition, epitomized in the budding and destabilizing spot markets, and belated restructuring of the US oil industry, made this epochal transformation possible.
8.. As I have amply demonstrated (Bina, 1985), capital accumulations associated with the US lower 48 States; regulate the "value" of both US and global oil since the mid-1970s. There are differential production costs and thus differential productivities associated with the competing oil regions of the world. There is also landed property associated with the production in the various oil regions of the world. Finally, the above oil regions are also part and parcel of dynamics of value formation via competition that accordingly leads to the formation of differential oil rents globally. These differential oil rents are of two types: Differential Oil Rent I and Differential Oil Rent II that, although formed concretely and independently of rent in agriculture, follow the same value-theoretic framework in the presence of landed property. Yet, given the specificity of landed property, ownership of sub-surface deposits, and the dialectical interaction of capital and "landed property" in the oil sector, the concrete effects are not the same. Therefore, a systematic study of oil is indispensable for adequate theorization of capital accumulation and rent in the oil industry.
9.. OPEC is a rent-collecting agency, not a cartel. Without OPEC differential oil rents will not be either diminished or enhanced. Those who consider OPEC as a barrier and monopoly, have no understanding of what the differential oil rent is about or how the differential oil rent is formed. Aside from the competitive formation of differential oil rents, as we have argued, neither US oil nor OPEC oil has to do with AR. We have come full circle: in this context, the meaning of capital intensity and integration in the Marxian has nothing to do with ad hoc, tautological, and bourgeois notion of "monopoly," in general and of OPEC, in particular (see my 1990 OPEC paper). Fundamentally, there are two levels of analysis here: one relates, more or less, to the perception of phenomenal forms and the other concerns the underlying material forces that are proven to be larger than life. And, these must go together in order to compose an informed concrete, if the analysis is worthy of the name.
Let me end this note with a small passage from my recent manuscript on the remarkable identity of the right and the left when it comes to the question of oil and war. The right is still fantasizing about the "administrative pricing," monopolistic manipulation, Pax Americana and scarcity. The left, i.e., popular left, is against monopoly and/or Pax Americana in its gut, yet has neither guts nor intellectual wherewithal to develop an adequate theory of its own.
"On the right, in an interview, James Schlesinger remarked: "The United Stated [Bush, the father] has gone to war now, and the American people presume this will lead to a secure oil supply. As a society we have made a choice to secure access to oil by military means. The alternative is to become independent to a large degree of that secure access" (Challenge, March/April, 1991). On the left, Michael Klare declared: "Two key concerns underlie the Administration's [Bush, the son] thinking: First, the United States is becoming dangerously dependent on imported petroleum to meet its daily energy requirements, and second, Iraq possesses the world's largest reserves of untapped petroleum after Saudi Arabia" ("Oiling the Wheels of War," The Nation, October 7, 2002). As can be seen, the positions of the right (a right wing, Chicago School economist) and the left (a progressive anti-war scholar), on the cause of these wars, are remarkably identical. The question is, why? Is it because of the correctness of neoclassical economic theory in revealing the universal truth? Or, is it because of the ideologically fallacious economic theory that is uncritically accepted by the theory-less and clueless left."
This was a rough idea about some of questions that might be of theoretical, historical, and empirical interest on the theory of rent in the Marxian tradition. I hope that my limited time and my hasty approach have not diminished my intended intentions. The copyright should not impose any restriction for your scholarly use. It is a right for its future publication.
Cyrus Bina
Sunday, January 25, 2004
Camden Hall
UMM Campus
Minnesota, USA
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