A farmer with a capital of £10,000, Marx says, first examines the market value of the output that will result from that investment. That market value is something that the farmer has to take as given. The various revenues, such as rent, profit and wages are a consequence not a cause of that value. In other words, the value that the farmer obtains from the sale of the output then resolves itself into the revenues that the farmer pays to the workers as wages, to the landlord as rent, and to themselves as profit. The farmer will only advance their capital, ultimately, if the value they obtain from the sale of their output is sufficient to cover what they have to pay their workers as wages, what they have to pay to cover the constant capital they have consumed in production, what they have to pay in rent, and still leaves sufficient for them to obtain the average profit. This is also the basis of Ricardo's argument in relation to the investment of the additional £1,000. However, in practice, Marx says, things are not that simple.
“If the farmer adds another £1,000, he only considers whether, at the given market-price, it yields him the usual profit. Ricardo therefore seems to think that the cost-price is the determining factor and that profit enters into this cost-price as a regulating element, but rent does not.” (p 333)
Firstly, as set out above, profit is not a determining element of the price of production. Each capital has to take the average profit as given, which results from the action of capital on capital, via competition. The individual capitalists do not have some subjective notion of a minimum rate of profit below which they will not invest, as Ricardo is led to believe, because he has no objective basis for determining the average rate of profit. This is also a problem with all those theories of crisis that base themselves on the law of falling profits.
Unlike landed property, or interest-bearing capital, which has no objective spur to always lend greater amounts of land or money-capital, productive-capital is always forced to accumulate, because such accumulation is the only way for each capital to beat the competition, and those capitals that do not beat the competition are themselves beaten and die.
Even where additional investment leads to a lower rate of profit, therefore, industrial capitals are led to undertake such investment, in conditions where the market is expanding, because if they do not, their competitors will. As Marx says, if such investment leads to overproduction, each capital will not blame its own investment, but that of its competitors. Ricardo believes that,
“If the capitalist found that the £1,000 did not yield the usual profit, he would not invest it. The production of the additional food would not take place. If it were necessary for the additional demand, then the demand would have to raise the price, i.e., the market-price, until it yielded the profit. Thus profit—in contradistinction to rent—enters as a constituent element, not because it creates the value of the product, but because the product itself would not be created if its price did not rise high enough to pay the usual rate of profit as well as the capital expended. In this case, however, it is not necessary for it to rise so high as to pay rent. Hence, there exists an essential difference between rent and profit, and in a certain sense, it can be said that profit is a constituent element of price, whereas rent is not.” (p 334)
But, Marx says, this is only correct in this specific case, and it is only correct here, “because in this case landed property cannot confront capital as landed property, thus the very combination [of circumstances] under which rent, absolute rent, is formed, is not present—according to the assumption. The additional corn produced with the second investment of £1,000, provided the market-value remains the same, in other words when an additional demand arises only on the assumption that the price remains the same, must be sold below its value at the cost-price. This additional produce of the £1,000 thus occurs under the same circumstances as when new worse land is cultivated, which does not determine the market-value, but can provide the additional supply only on the condition that it supplies it at the previously existing market-value, i.e., at a price determined independently of this new production. (p 334)
In other words, this is a situation, as described previously, in relation to differential value. Existing supply cannot meet demand. A small additional amount of land, or in this case capital, expended on the worst existing land, provides the additional supply. Demand and supply are then in balance, at the existing market price. But, this market price is not sufficient to cover the absolute rent and average profit. For this additional land or capital, it is as though there is a negative differential rent. But, it is manifest in either a reduction, or as here, the negation of the absolute rent.
“Under these circumstances it depends entirely on the relative fertility of the additional soil whether it yields a rent precisely because it does not determine the market-value. It is just the same with the additional £1,000 on the old land. And for this very reason, Ricardo concludes conversely, that the additional land or the additional amount of capital determines the market-value because, with a given, quite independently determined market-value, the price of its product yields not rent, but only profit, and only covers the cost-price but not the value of the product. This is a contradiction in terms.” (p 334)
It is also, at heart, the basis of marginalist theories of value.
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