Theories of Surplus Value, Part II, Chapter 9 - Part 5

[5. Ricardo’s Denial of Absolute Rent—a Result of His Error in the Theory of Value]

Ricardo denies the possibility of absolute rent. He does so, because, on the basis of his theory that market prices revolve around exchange-values, the existence of absolute rent would destroy the basis of the theory of value as determined by labour time. Marx avoids this dilemma, because he showed that Ricardo's theory that market prices revolve around values (Ricardo conflates value with exchange-value, which he calls relative value) was wrong. Market prices revolve around prices of production, under capitalism, not exchange-values. The average price, or price of production, of a commodity, is its cost of production plus the average profit, i.e. k + p. But, k is c + v, or more correctly, c + v + d, i.e. the value of the laid out constant capital and the variable capital, plus the value of wear and tear of fixed capital. Where the value of the commodity is c + v + s, its price of production is then c + v + p, because p, the average profit may be more or less than s.

In c + v + s, the value of c is equal to the labour time required for the reproduction of the constant capital consumed in production, i.e. its current reproduction cost. The value of v + s, the new value created by labour, is equal to the actual amount of abstract labour performed by the living labour. The value of v is equal to the current reproduction cost of the labour power consumed, so that s is the difference between the value of v and the total new value created by labour. Consequently, s itself represents a quantity of labour time. The total of profits is equal to the total of surplus value, and consequently, p, is also equal to a quantity of labour time being the pro rata share of the total social surplus value/labour time. In that case, k + p, also represents a quantity of labour time, although a different quantity than c + v + s, for each capital, dependent upon whether its organic composition is higher or lower than the average. But, for Ricardo, the average price is c + v + s, and market prices revolve around it. However, this poses a problem for him in respect of absolute rent.

“Supposing, that a capital produced a higher value than the average price, just because it was operating in a particular element, an element of nature, say land, then the value of this commodity would be above its value and this excess value would contradict the conception of value being equal to a certain quantity of labour-time. An element of nature, something heterogeneous from social labour-time would he creating value. But this cannot be. Hence capital invested in land pure and simple cannot bear a rent. The worst land is land pure and simple. If the better land bears a rent, then this only shows that the difference between the individually necessary labour and that which is socially necessary becomes permanently established in agriculture because it has a natural basis, whereas in industry it is constantly disappearing.” (p 130)

In other words, if we follow Ricardo, the market price for agricultural products, is set by the worst land. Capital will only be invested on it if it can sell the output at the average price or value. That for Ricardo is c + v + s. If the capital employed on it had to pay an absolute rent then either the rent would be deducted from the profit of the capitalist, in which case they might invest their capital elsewhere, or else the rent must represent an additional value added to the value of the commodity. But, that would destroy the theory of value, because land has no value. It is not the product of labour. It's not like the value of constant capital contained in seeds, fertilizer, or wear and tear of machinery, that forms part of the value of the output. All of the former are themselves the product of labour, but land is not. If the land, as a factor of production, added value then this would mean that something other than labour could create new value.

Ricardo, has no problem justifying differential rent, because he can simply argue that the value of the output of more fertile lands is greater than the individual value of their output, due to them having greater fertility, and so producing at a lower cost. In that case, the differential rent does not represent any new value created, but merely the difference between the social value/market price, and the individual value of the production. For example, if capital of £1000 is invested in one hectare of land, type A, the worst land, it produces 100 kilos of grain, which sells at the market price of £1200, or £1.20 per kilo. £200 is the surplus value, produced in this production, and so, for Ricardo, no rents can be levied, because, otherwise, either it would mean a deduction from this surplus value or else it would mean that the market price would have to be higher than £1.20 by the amount of the rent, which would then constitute a new source of value. However, if £1000 is then invested in land type B, which produces 200 kilos of grain, whilst the market price remains £1.20 per kilo, explaining the differential rent is easy. The cost per kilo, on land type A was £1, whereas on land type B, it is only £0.50. The individual value of a kilo of wheat on land type B is only half the social value. The capital on land type B sells its output for £2400, whereas the value of this output, for this capital, was only £1200 (c + v + s). So, it obtains a surplus profit of £1200, by selling the output above its individual value. The lower individual value is due to the lower costs it faces due to the more fertile land. So, despite paying a rent of £1200, this capital sells its output only at its social value.

As Marx says, because Ricardo assumes, as the basis of his theory, that cultivation takes place on the most fertile land, and progresses to the less fertile land – though he knew, in practice, this is not always the case –

“All this has a more or less logical coherence.” (p 131)

The denial of absolute rent can be expressed in two different ways, Marx says. Firstly, it can be expressed in the way described above. That is that if the worst land bore a rent it would mean that the same quantity of labour would produce different values if employed in different spheres of production. In other words, if the value of constant capital is set to zero, 10 hours of abstract labour employed on the worst land, in agriculture, might produce 12 hours of new value, whereas 10 hours of abstract labour, employed in cotton spinning, would produce only 10 hours of new value. In both cases, there might be, say, 5 hours of paid labour and 5 hours of profit, but in agriculture there would be 2 hours, which was absorbed in rent. 

“…this means that the quantity of labour in itself does not determine the value, and products which contain the same amount of labour are not equal [in terms of value].”(p 131)

The other way of denying absolute rent would be that if equal amounts of abstract labour produce equal amounts of new value, then, in the above example, 10 hours of abstract labour, in both agriculture and cotton spinning, produced 10 hours of new value, divided equally between wages and profit, but that the additional 2 hours of value created in agriculture is new value created by the land, and absorbed as rent.

“But this would amount to saying that the land as such creates value, thus invalidating the concept of value itself.” (p 131)

However, what appears to have "a more or less logical coherence", in theory, does not conform with a reality in which such absolute rent is levied on the worst land. The problem disappears, as soon as it's recognized that commodities do not sell at their values, but at the price of production. Commodities would exchange at their exchange-values if it were not for competition. As Marx set out, wherever exchange-values exceed price of production, surplus profits exist. Those surplus profits encourage additional capital into that sphere. That increases supply of the commodity until its market price equals its price of production, at which point, the surplus profit disappears. This can be seen with all new spheres of production, where the organic composition is low, and so the rate of profit is high. The commodities sell at or around their market value, and surplus profits are obtained. The existing capital in this sphere expands, and other capitals join it in search of the higher profits, the supply rises and market prices, for the commodity, incrementally fall. Each individual capital, in the sphere, seeks to gain specific advantage by reducing labour and raising productivity, so that the organic composition of capital also rises. The surplus profit is eroded and the market price settles around the price of production.

As soon as this is understood, then it becomes clear that an absolute rent can be levied wherever a surplus profit exists, in a particular sphere, but where the free inflow of capital, in search of those higher profits, can be restricted. Once that occurs – the same thing applies with companies that obtain patents on products – the commodity can continue being sold at its exchange-value, rather than at its price of production, and the difference between the two is absorbed as rent by the owner of that particular resource, e.g. a landowner, patent owner etc.

Ricardo understood that there was a problem, but could not resolve it. He tried to reconcile the difference in market prices by competition. Whilst Ricardo knew that the ““relative values” of commodities are modified according to the varying proportion of fixed capital and capital laid out in wages, which enter into their production” (p 132), he does not recognise that the real division is between constant capital (fixed and circulating) and variable capital, i.e. the organic composition.

“For example, the same ratio may exist between capital laid out in wages and fixed capital in the mining and fishing industries, as between that laid out in wages and in raw materials in tailoring.” (p 132)

Ricardo only introduces the division between fixed capital and wages as a means of trying to explain an average profit, together with average prices, which he assumes to equate with values. He also assumes that this equation of values with the average prices exists in agriculture as much as in industry. The problem exists for Ricardo, because he correctly defined value as labour, and the amount of value as being measured by labour time, whilst incorrectly believing that market prices revolve around those values – average prices – rather than the price of production. He, therefore, cannot reconcile the existence of these average prices with an average rate of profit. Whilst recognizing the need for such an average rate of profit, arising out of competition, therefore, but assuming that agricultural products produced on the worst land determine the average price, he cannot logically concede the existence of absolute rent.

For Roscher, the problem is resolved by simply abandoning the law of value, and excepting the land is also an independent source of new value.

“With these fellows, the phrase “production costs” is meaningless. We see this with Say. The value of the commodity is determined by the costs of production, capital, land, labour. But these are determined by demand and supply. In other words, no determination is taking place. Since the land performs productive “services”, why should not the price of these “services” be determined by demand and supply, just as the services performed by labour or capital? And since the “land services” are in the possession of certain sellers, why should their article not have a market-price, in other words why should not rent exist as an element of price? (p 133)

In other words, the basis of the marginal productivity theory of value, whereby different factors of production – land, labour, capital – are independent sources of new value, and each contributes towards the value of output, with the owners of these factors then obtaining revenues proportionate to the value contributed. In this way, we return to the fallacy of Adam Smith, continued by later economists, down to the present day, that the value of output is equal to the value of factor incomes, which is equal to expenditure.

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