[CHAPTER X] Ricardo’s and Adam Smith’s Theory of Cost-price (Refutation)
[1. Collapse of the Theory of the Physiocrats and the Further Development of the Theories of Rent]
“With Anderson’s thesis (partly also contained in Adam Smith’s work): It is not […] the rent of the land that determines the price of its produce, but it is the price of that produce which determines the rent of the land…” the doctrine of the Physiocrats was overthrown. The price of the agricultural produce, and neither this produce itself nor the land, had thus become the source of rent. This finished the notion that rent was the offspring of the exceptional productivity of agriculture which again was supposed to be the offspring of the special fertility of the soil.” (p 161)
If a particular soil is very fertile than a given amount of labour, applied to it, will produce a larger quantity of output, than the same amount of labour, applied to some less fertile soil. But, the value of output is the same, in both cases, because both require the same amount of labour time. The value of each unit of output, on the more fertile land is, therefore, lower than that from the less fertile land. It can never be the case that the value of each unit of output is higher from the more fertile land. That is verified by looking at the prices of commodities produced under these more favourable conditions. If the more fertile soil thereby reduces the value of each unit of output produced on it, it cannot be the case that the soil itself is the source of additional value. But, if the soil was not thereby a source of additional value, nor could it be the source of a surplus value extracted as rent.
““The notion of agriculture yielding a produce, and a rent in consequence, because nature concurs with human industry in the process of cultivation, is a mere fancy. It is not from the produce, but from the price at which the produce is sold, that the rent is derived; and this price is got not because nature assists in the production, but because it is the price which suits the consumption to the supply.” [David Buchanan in Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Vol. II, Edinburgh, 1814, p. 55, note; quoted from David Ricardo, On the Principles of Political Economy, and Taxation, third edition, London, 1821, p. 66, note.]” (p 162)
Once the Physiocratic doctrine and explanation of rent is overthrown the following alternatives are proposed.
Firstly, rent is a result of a monopoly price. On this view, the monopoly ownership of landed property means that agricultural products are sold at a monopoly price, which is above their value. The rent is the difference between this value and the monopoly price. But, this begs the question of why supply does not rise so that the market price falls to the commodity value, so that the difference between the value and a monopoly price disappears and the rent along with it.
The Ricardian theory is also based on the price being above the value, for products produced on rent bearing land. But, for Ricardo the least fertile land in cultivation pays no rent, because the price of its output is equal to its value. The land that pays rent does so, because the price its output sells at is determined by the value of the product of the least fertile land. It is the individual value of the output of these more fertile soils that is below the price, not the social or market value. Consequently, it does contradict the theory of value.
“ Here too, the price of the agricultural products that bear rent is above their individual value, and in so far as rent exists at all, it does so through the excess of the price of agricultural products over their value. Only here this excess of price over value does not contradict the general theory of value (although the fact remains) because within each sphere of production the value of the commodities belonging to it is not determined by the individual value of the commodity but by its value as modified by the general conditions of production of that sphere. Here, too, the price of the rent-bearing products is a monopoly price, a monopoly however as it occurs in all spheres of industry and only becomes permanent in this one, hence assuming the form of rent as distinct from excess profit. Here too, it is an excess of demand over supply or, what amounts to the same thing, that the additional demand cannot be satisfied by an additional supply at prices corresponding to those of the original supply, before its prices were forced up by the excess of demand over supply. Here too, rent comes into being (differential rent) because of excess of price over value, [brought about by] the rise of prices on the better land above the value of the product, and this leads to the additional supply.” (p 162-3)
Thirdly, rent is considered to be merely interest on the capital sunk in the land. This concept shares the rejection of the possibility of absolute rent with a Ricardian theory, and the notion that all rents are differential rents. But, it can't explain the existence of rent on land where no capital has been invested.
“It was, in fact, nothing but an attempt from a capitalist point of view, to save rent despite Ricardo— under the name of interest. (p 163)
Finally, if Ricardo's false assumption that prices revolve around values, rather than prices of production, is dropped the problem is solved. The value of the output of the worst land can then be above its individual price of production. In that case, an absolute rent can be charged on the difference between its individual price of production, and its individual value. This forms a basic absolute rent for all cultivated land with a differential rent them also arising on all more fertile land.
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