Absolute rent and real estate

Part 2

In memory of Ben Kleinstille. May your spirit soar forever.

1994—2023

The construction industry is a distinct economic sector independent of production and services. There is significant ambiguity as to what actually counts as construction employment. Most reports on the health of the industry such as KPMG’s or Wells Fargo, content themselves with interviewing firm executives; architects more or less function as the middle management wing of the industry; and, of course, there is a vast sea of the actual carpenters and labors who produce on site. Ranko Bon, in his 1992 essay “The future of international construction”, notes that most definitions of the industry have a site-only myopia and thus miss out on “a growing range of construction-related activities that take place off the construction site”. Within the construction process, “the materials and components are supplied by a variety of industries in the manufacturing sector; they are delivered to the site by the transportation and trade sectors; the assembly proceeds in accordance with plans, designs, and management procedures supplied mainly by the business services industry in the service sector; most of the funds required for construction are supplied by the financial services industry in the service sector; and a significant part of the output supplied by the construction sector is delivered to the real estate industry in the service sector”. For the sake of clarity, I will borrow Bon’s narrow definition of “construction activity”, focusing intently on the processes of production as carried out at the actual construction site, in the same way that discussions of manufacturing generally consign capital inputs, transportation, etc. to “beyond the scope of this discussion”. With respect to accounting within the sector, there is a high-level split between residential and non-residential construction, as well as more fine-grained divisions into construction for healthcare, government, and power and utilities.

A definition of the construction sector is crucial to developing an accurate understanding of the rate of profit within the sector as a whole at the national level, and thus making sense of absolute rent. Though Marx deals mainly with differential rent in Capital Volume 3 as he is specifically responding to Ricardo, the concept of absolute rent is further fleshed out in Theories of Surplus Value Volume 2. This should function as proof of Marx’s intention (not to get too Marxological, because I don’t care). In any case, absolute rent stands on its own. As Robin Murray writes in Part 1 of his exceptional “Value and Theory of Rent” essays, the concept was “the culmination of an attack on Ricardo's failure to distinguish between constant and variable capital, and therefore between values and prices of production . As such it was as much a part of Marx’s value argument as was the transformation problem”. Specifically, this explains away Ricardo’s rather nonsensical claim that the least fertile agricultural land (or, in an urban context, an undeveloped property with no structures, infrastructural hookups, or street access) commands no rent or payment. Except in very rare circumstances, no landlord-capitalist is letting land or residential units for free, no matter how squalid they may be.

Here the question of landlord-capitalist “class power” appears again, as a sort of katechon, preventing capital from “freely flowing onto the land”. This is to be considered inter-sectorally; for example, capital flows relatively freely from the manufacturing sector to finance and back again, i.e. there is nothing requiring a capitalist to invest profits from manufacturing labor back into manufacturing plant, wages, etc. Likewise, in fact, with the developed real estate market. However, investment in real estate, that is, the purchase and ownership of fixed capital structures with a long duration of consumption, is not actually investing in the land itself – as we see, for example, with private equity firms like Blackrock, who seem to suffer from absolutely zero restrictions on their ownership of property capital. However, this was not Marx’s point, and in fact the definition of Bon’s from the paragraph above of real estate as a services sector industry is illuminating. Real estate is, very crucially, not construction; absolute rent concerns the specific issues with the equalization of rates of profit between sectors of the economy. Construction, contrary to any other sector, is ringed round by sentinels of landlord-capitalists in the aspect of owners of land. These proffer to other capitalists their land capital, and thus have the capacity to prevent the investment of capital from other sectors in construction by refusing to furnish the fundamental commodity necessary to ‘host’ free flowing capital. This effectively means that construction is (somewhat) insulated from equalization between sectors of the economy insofar as there is a tendency to equalize rates of profit. Marx writes of this equalization between other sectors:

“Capital withdraws from a sphere with a low rate of profit and invades others…this incessant outflow and influx…creates such a ratio of supply to demand that average rate of profit in the various spheres of production becomes the same, and values are, therefore, converted into prices of production.”

On the whole, this means that in construction “prices will continue to reflect their value rather than the post-equalization prices of production. The difference between prices of production and value is excess profit. It is this excess profit which is taken by the landlord, even on the marginal land, in the form of rent”.

Again, this may seem contrarian – but it is important to note that here, as seen in Murray’s quote above, this is not a rent relation between tenant and landlord-capitalist but between capitalist and landlord-capitalist, the latter of which is not claiming individual rent payments for use of a particular housing unit but is opening the floodgates and allowing capital to spill from other sectors onto their land. This spillage is managed by the construction industry – it is their reason for being. Rent appears here in a more general sense as the form in which construction firms realize their profits. In the course of their communication of capital (realized elsewhere as surplus value) onto the property of any given landlord-capitalist, and then furnish this completed commodity to the owner of the initial capital. The construction industry produces values like any other production industry, determined, as ever, by the socially necessary labor time required to create it. There is a tendency for prices of production to oscillate around the value of any given commodity, and the completed construction output (a building) is no different. This socially necessary labor time is defined on a sectoral level, relative to the particular capital-labor ratio within the sector.

Given the specifications and site-by-site requirements of visiting capital upon the wild array of property the world over, standardization (in the form of fixed capital investment on the part of the construction industry) remains difficult, dramatically lower organic composition of capital than the social average. Bulldozers and other construction machinery are a drop in the bucket compared to the extensive capital outlays required for manufacturing production (and in fact, many are rented for a job from other petty capitals within the construction sphere, meaning fixed capital investment remains even lower since any given piece of machinery may be used by many different firms in many different contexts and locations before its valorization). Instead, construction remains labor intensive relative to modern industrial production, despite repeated (failed) attempts to standardize and develop mass market prefabrication strategies. Even enormous jobs like Olympic construction, railroad building, and highways like depends on extensive press-ganging from the reserve army of capital on a seasonal basis, especially given the decimation of union construction labor in the past several decades. All in all, we may say that construction in general has a relatively much lower amount of capital in the production process than labor, and as Marx says, this means that the building could be relinquished to the landlord-capitalist (developer) at the actual price of production, given the simple fact that there is less need to charge for upkeep of fixed capital, etc. However, no construction firm does this, and to claim as such is just as nonsensical as Ricardo’s claim that the least fertile land is let free of charge. The profit remainder that the construction firm claims over and above the price of production is called, you guessed it, absolute rent.

Absolute rent, then, is the province of sectors with low rates of capital to labor with a comparative monopoly power against capital more broadly. It is not a rule of history but it has been in place for the entirety of capitalism’s existence owing to the simple fact that ownership of landed property predates the existence of capital in general – and throughout the centuries, owners of land capital have always been selective in the sales of their property and thus kept it somewhat removed from the exigencies of the world market and its free flow of capital and thus, via sectoral regulating capitals, the tendency to equalize rates of profit.

Furthermore, one should be careful when considering the actual price of a building, say, in New York City, which clearly is bought and sold at a price much higher than its value and/or price of production. Here, the real estate sector reappears, occupying a role relative to the building-commodity similar to the one the transportation sector has for manufacturing commodities. Though, of course, buildings and infrastructure are fixed, they do not realize their value, same as any other commodity, until they are sold. A building which stands unbought is, considering exchange value, worthless, even if it may provide shelter and so on given its existence as a building. Real estate facilitates the ownership of construction commodities which, given their potentially long production times and the amount of labor required to produce them, demand a dramatically high price relative to commodities in manufacturing. To put it simply, real estate as a sector simply presents construction commodities to buyers, and has been empowered to offer credit to prospective buyers in order to realize those sales quickly and easily. These activities, then, dovetail with the finance sector, as everyone knows. But they are not, strictly speaking, the province of construction. The real estate sector exists as an intermediary to bequeath onto certain individuals the powers of being a personification of property capital.