Change in Differential and Absolute Rent as an Extension of Marx’s Theory of Ground Rent to Knowledge

  

I.  Introduction

The importance of knowledge in the capitalist economy has grown in recent years. In contrast to reproducible material goods, knowledge is a non-reproducible condition of production. Given this resemblance, political economists have viewed knowledge as an extension of the ground-rent theory.

Marx formulated rent theory, which consists of Differential Rent I (DR1), Differential Rent II (DR2), Absolute Rent (AR), and Monopoly Rent. Subsequently, the Unoist scholars of Japanese Marxian economics have logically reconstructed Marx’s rent theory, transcending mere textual interpretation. Among them, Hidaka (1962) stands as a seminal reference. Although Hidaka’s (1962) theory could apply to knowledge, land and agriculture are its primary focus. Recently, Obata (2009) used the term “original powers of nature” to describe the characteristics distinguishing land and knowledge from reproducible materials. We intend to further define the characteristics of land and knowledge as two types of the original powers of nature. Type 1, such as land, is inherently bound to tangible objects and fundamentally heterogeneous. In contrast, Type 2, like knowledge, can be separated from specific tangible objects and exist simultaneously in multiple tangibles. In Type 2, discontinuous differences emerge when intellectual property rights are enforced.

Hidaka’s (1962) theory is based on two conditions: (1) the existence of numerous plots of land in the same productivity type, and (2) the existence of discontinuous differences between the various productivity types of land. However, due to the inherent diversity of land, different investments neither yield identical productivity nor lead to discontinuous variations in the order of productivity. Therefore, Hidaka’s conditions do not apply universally. Consequently, only DR2 is applicable, whereas DR1 is irrelevant. AR exists so long as the landowner restricts usage until DR2 reaches an amount that the landowner considers to be the minimum rent.

Hidaka’s conditions are paradoxically valid within the realm of knowledge or Type 2 of the original powers of nature. Moreover, the application of specific knowledge can be infinitely expansive. The knowledge owner may increase the rent by the amount of the difference in productivity between using patented and unpatented knowledge. From this, we can consider AR and DR in Type 2.

The remainder of the paper is structured as follows: Section 2 examines the Uno School’s achievements and challenges in rent theory. Section 3 elaborates on the two types of original powers of nature. Section 4 explores the viability of DR1, DR2, and AR in Type 1. Section 5 argues that Type 2 has AR. Finally, Section 6 concludes the paper.

II. Accomplishments and Challenges in Rent Theory Within the Uno School

The Uno School, which originated in Japan with Kozo Uno, is distinguished by its reconstruction of foundational concepts, such as commodity and capital instead of merely interpreting Marx’s “Das Kapital.” The most typical ground-rent study is Hidaka (1962) . Firstly, one of  Hidaka’s theoretical contributions is the distinction between “general DR” and “specific DR.” General DR results from the disparity between limited and unlimited natural forces. The term “specific” arises solely from various limited natural forces. For instance, in “Das Kapital,” general DR refers to waterpower and steam engines in industry, whereas specific DR refers to agriculture, which always requires limited natural force, land (Hidaka 1962, 6). Thus, the theory of ground rent can be analyzed not only in agriculture, where land use is crucial, but also in industry.

Secondly, Hidaka introduced the notion of “regulating conditions of production”. Marx assumed that each type of soil consists of a single plot, and Hidaka modified Marx’s interpretation to include multiple plots within the same productivity type of soil (Hidaka 1962, 87, 282–3). The most productive type of land is utilized first. There are both utilized and unutilized plots within the worst type. The utilization of plots in the worst type changes due to production volume adjustments in response to fluctuating demand. This is the meaning of “regulating.” Figure 1 shows the regulating production conditions, which consist of multiple types.

Figure 1. Concept of regulating conditions by Hidaka 

For this theory to be tenable, two conditions must be met:

  1) There are multiple plots within the same productivity type of soil

             2) There are discontinuous gaps between the various land productivity types.

These conditions shall be referred to as Conditions 1 and 2 of Hidaka. 

Thirdly, AR is the rent demanded by owners of the worst type of soil, who would not rent out their land for free. Marx assumed that there is only one plot of land in each type, making it easy for the owner of the worst type to demand AR by limiting its use. AR falls to zero, however, when there are multiple owners of plots within the worst type, because of rent-reduction competition among the owners of the worst type (Hidaka 1962, 400). However, if they could collude, they would be able to successfully demand AR.

The upper limit of AR is determined by the difference in productivity between the worst type of soil in use, and even worse type still unused or even worse additional investments still unexecuted in the superior type. Nevertheless, if this difference is negligible, AR is essentially non-existent. In fact, Hidaka (1962, 209) himself believes that the amount of AR is extremely low due to rent-reduction competition (ibid, 209).

If the AR demanded by colluding owners of the worst type of soil is excessively high, inferior additional investments on superior types commence. These additional investments become a new “regulating condition” under which only average profits are possible. Consequently, the owners of the worst type will no longer receive AR but rather DR2, a new form of DR. This is consistent with Marx’s theory of “differential rent also on the worst cultivated soil.” (Marx 1998, ch.44)

Lastly, Hidaka demonstrates that [DR1 (+AR)] and [only DR2] alternate. If inferior investments are newly made due to the social necessity of production expansion, there are two options: invest in lands that are even worse than the current worst type; or make inferior additional investments on superior lands. In the first scenario, rents on superior lands become DR1, and collusion between the owners of the new worst land could generate AR. In the latter case, DR2 occurs on both superior and inferior lands (Hidaka 1962, 402).

Consider a traditional rent table (Table 1) to illustrate the alternation between [DR1 (+AR)] and [DR2 only].

Table 1. The price at which every investment can generate an average profit.

 

		Type of soil
		A	B	C
Additional investment	First investment	4	4	6
	Second investment	6	8	8
	Third investment	8	13	11

 

Figure 2. DR1 + AR Case

 

In Figure 2, the area enclosed by the dotted line represents unused land. If the owners of the type C’ land can collude to demand AR, the market price rises. 

When the market price rises to a point where average profits can be achieved with the third investment in A and the second investment in B, as depicted in Figure 3, these investments become regulating conditions.

Figure 3. Only DR2 Case

 

This alternation is based on Hidaka’s conditions 1 and 2. The validity of these conditions will be considered in the next section.

III. Original Powers of Nature

To conceptualize land and knowledge as a single notion, Obata (2009) termed them original powers of nature and defined them according to two criteria: (1) they do not degrade regardless of how often they are used, and (2) they are not reproduced but rather discovered. In this context, the distinction between “produce” and “discover” is that “production” entails definite costs based on social reproduction relationships, whereas “discovery” is not reproduced and the costs associated with it do not constitute its value. 

To extend the ground-rent theory to the realm of knowledge, we must abstractly conceptualize the distinction between land and knowledge. Because there are various types of land and knowledge, we will refer to them as Types 1 and 2 for abstract comparison. Table 2 summarizes the characteristics of the two types.

Table 2. Distinction of original powers of nature

 

Land	Knowledge
Type 1	Type 2
Inseparable from specific material objects.	Separable from specific material objects, ubiquitous in multiple material objects.
Essentially heterogeneous. Slight differences from others.	Discontinuous differences from others.
Possible to physically restrict.	Possible to only legally restrict or to restrict by keeping them secret.

 

Several prior studies have identified the Type 2 features in the same way (see, Rigi 2014, 910, 924; Qiao and Feng 2023, 61). Type 1 does not satisfy Hidaka’s conditions 1 and 2, due to essential heterogeneity and small difference in productivity. Therefore, AR cannot exist. In contrast, Type 2 satisfies these conditions, allowing for the existence of AR (see section 5). Nevertheless, the possibility of AR in Type 1 should also be considered (see section 4). Subsequently, we will examine DR and AR in both Types 1 and 2.

IV. DR and AR in Type 1, Land

The traditional rent table from Table 1 can be graphed, as shown in Figure 4. 

Figure 4. Graphed discontinuous rent table.

  

The superiority relationship in this numerical example reverses as additional investments are made. Figure 5 is derived from increasing the unit of additional investment and interpolating the three graphs.

Figure 5. Continuous graph

 

It transforms into the following figure (Figure 6) by overlaying many graphs and shading them in.

Figure 6. Filled graph.

 

In Figure 6, the curves on the lower right indicate greater productivity, whereas those on the upper left indicate lower productivity.

Assume the market price is 20, as shown in Figure 7.

Figure 7. Price regulating condition when the market price is 20.

  

The regulating conditions with no super-profits consist of both the initial investment on the worst type of soil (plot H) and the numerous worst investments on superior lands. Regarding the general rate of profit, these final, worst additional investments are not necessarily made in this sector and can be allocated to other sectors. As a result, these investments may or may not be realized. These regulating production conditions consist primarily of additional investments in superior lands. The rent is therefore DR2 and not DR1 or AR.

Hidaka argued that the market price would increase if owners of the worst type of soil could collude and demand AR. Nonetheless, in Figure 8, the owner of plot H cannot receive any AR so long as the regulating conditions on the superior lands can increase investment.

However, Figure 8 demonstrates the possibility of AR.

Figure 8. AR in Type 1

  

We can make an AR argument in the sense that land cannot be rented for nothing, without any increase in the market price by the owners of the worst soil. Consider plot E, which is slightly more productive than H. When the market price is 15, plot E generates only average profit and no excess profit. If the owner of plot E demands rent, no capitalist can afford to pay it. However, if the market price increases, plot E’s surplus profit becomes apparent. For this analysis, let us assume that the quantity of DR2 in plot E at the market price of 20 satisfies the AR demanded by the owner of plot E.

In this context, the rent for plot E is substantially DR2. However, if plot E remains unrented because the surplus profit there is less than the minimum ground rent demanded by plot E’s owner, the rent in this case is AR. 

This AR’s amount is indeterminate and dependent on each owner’s demand. Using the concept of new institutionalism, Evans (1999b, 2306-7) considered AR a reservation price or a similar transaction cost. Alternatively, we can use the distinction between intrinsic and objective value in the recent Unoist strategy (Obata 2016, 24). Specifically, while the quantity of AR has no objective value in production, competition and restraint among owners of comparable lands in the market result in a price level for AR.

Moreover, there are various plots where the same AR arises at the same market price, as shown in Figure 9.

Figure 9. The same amount of AR in different plots

 

AR is the region bounded by the y-axis, the horizontal line of price 20, and each plot’s curve (Figure 9). Each curve is designed so that every area has the same size.

V. DR and AR in Type 2, Patented Knowledge

Obata (2009) provided the following description of Type 2 rent. Consider that the cost of producing the same commodity by a patented gasoline engine is 100 yen, while the cost of producing the same item by a non-patented steam engine is 110 yen. The nature of the rent accruing to the owner of the gasoline engine patent is AR because using a gasoline engine is not subject to quantitative restrictions (Obata 2009, 341). Obata concludes his explanation at this point, but further elaboration is possible.

As with traditional theories of ground rent, we assume that the owners of intellectual property (the licensor) and the users (the licensee) belong to distinct classes. For the patent holder of the gasoline engine, it is advantageous that all products are manufactured by gasoline engines. As knowledge of the gasoline engine can be pervasive, the production by gasoline engines is regulating condition. This meets Hidaka’s requirement 1. In contrast, the steam engine is not employed. The amount of AR can increase until it is just below the price level at which the unused steam engine would become a regulating condition, as shown in Figure 10.

Figure 10. AR in patented knowledge

 

Next, consider the scenario where multiple patents have varying levels of productivity. These engines are categorized into three types: a highly productive engine with Patent 1; a less productive engine with Patent 2; and the least productive, which is a non-patented engine. Intellectual property typically necessitates a substantial departure from existing knowledge; consequently, there are unlikely to be numerous minor variations in productivity. This meets Hidaka’s requirements 2. In contrast to Type 1’s continuous curve, we should consider relatively discrete and finite differences.

Like Figure 10, the upper limits of AR reflect the difference between the price levels needed to achieve average profits using patented engines 1 and 2, and the price level needed to achieve the same profits under non-patented conditions. (Figure 11).

Figure 11. When two patented knowledge are used

 

The total royalty (rent) for the engine 1 patent holder is [AR1 × production volume by engine 1]. Likewise, for the engine 2 patent holder, it is  [AR2 × production volume by engine 2]. Here, there are two distinct amounts, AR1 and AR2. Both amounts are sufficient for industrial capitals to pay for these patents, as paying either would allow them to earn only the average rate of profit. Consequently, both production by engine 1 and production by engine 2 are the regulating conditions of production.

However, if the patent holder of engine 1 reduces the per-unit licensing fee below [AR1 − AR2], the situation changes (Figure 12):

Figure 12. Reduction of multiplexing

 

As industrial capitals using patent 2 will no longer achieve average profit, patent 2 becomes unused, and only patent 1 remains as a regulating condition. The total patent royalty for patent 1 will be [(AR1 − AR2) × total production volume]. Consequently, the per-unit AR decreases.

The holder of patent 1 will determine the amount of AR between AR1 and [AR1 − AR2] by comparing the sizes of AR1 and AR2. If AR2 is comparable to AR1, the licensing fee will be set at AR1, and the market will be shared with engine 2 production. If AR2 is significantly smaller than AR1, the holder of patent 1 could increase the licensing fee to just below [AR1 − AR2], thereby eliminating the use of patented engine 2 and increasing the total volume subject to royalties and the overall ground rent.

VI. Conclusion

Paradoxically, the Uno School’s ground-rent theory is more suitable for Type 2 of the original powers of nature. This is because traditional rent tables assume a limited range of land plots with discontinuous differences in productivity levels. When these differences are continuous and minute, DR1 becomes irrelevant and essentially only DR2 exists. Under these circumstances, AR does not affect the market price. AR becomes attainable when land use is restricted until the DR2 on a particular plot reaches a minimum level.

As we expand the ground-rent theory into the realm of knowledge, it is essential to understand land and knowledge as two distinct types of natural origin powers. These types should be conceptualized as two polarities. Type 2 knowledge is presumed to be infinitely replicable. Nevertheless, when an industrial capital restricts its patented knowledge to internal use, this knowledge transforms into Type 1, thereby generating a DR, which is equivalent to extra surplus value. In this case, the class division between the owners and licensees of knowledge is less pronounced than that in land ownership, thus requiring a more abstract approach to analysis in the principle of political economy. However, in actual capitalism, we can also consider some intermediate forms between Types 1 and 2.

The methodology used in this paper suggests multiple potential avenues for future research.

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