Ricardo criticises Smith for arguing that absolute rent is possible on agricultural land. In relation to Smith's analysis of rent on mines, Ricardo says,
““The whole principle of rent is here admirably and perspicuously explained, but every word is as applicable to land as it is to mines; yet he affirms that ‘it is otherwise in estates above ground…’” (l.c., p. 392).” (p 336)
Smith, Marx says, senses that under certain conditions, landed property can come into play against capital to demand an absolute rent, but those conditions do not always exist,
“... that in particular however the production of food establishes the law of rent, whereas in other applications of capital to land, the rent is determined by the agricultural rent.” (p 336)
In his response to Smith, Ricardo comes close to providing a correct concept of rent. Suppose there was no land that did not produce rent, Ricardo says. In that case, he goes on, the rent of the worst land would be equal to the amount by which the “value” of the output exceeded the “the expenditure of capital and the ordinary profits of stock” (p 336), i.e. the price of production. Ricardo sets out the correct principle here, but his conclusions are wrong, because the terms he uses are ill-defined. So, for example, Ricardo believes that absolute rent is not possible because he believes that value and price of production are the same thing, as did Adam Smith. But, of course, as Marx has described, they are not. They vary according to the organic composition of capital, and the rate of turnover of capital.
Ricardo has then set out the principle that lies behind absolute rent, but rejected its possibility by defining value and price of production as identical. Ricardo then goes on to correctly identify that if an absolute rent existed, on this worst land, a differential rent would then arise on all superior lands, because for these lands, the excess would be greater than on the worst land.
But, there is a further error arising from Ricardo's failure to properly determine terms, in particular the differences between individual value and market value. If we take the output of the worst land, for example, its individual value might also be equal to the market value, which is the basis of the market price. In that case, it will determine the market price at which the output of all the different lands is sold. If the market value is say £100, the price of production of land type A is £100, B £90, C £80 and so on. For Ricardo then, A would produce no rent, whilst B would produce £10 of differential rent, and C £20.
But, it may be the case that the output of A does not determine the market value. It may instead be set by B. In that case, A and C would also sell their output for £90 not £100. In that case, A would make £10 less than the average profit, B would make average profit, and C would now produce only £10 of surplus profit rather than £20.
“For the actual amount of rent paid by the worst land depends not, as Ricardo thinks, on the excess of the value of its own produce over its cost-price, but on the excess of the market-value over its cost-price.” (p 337)
Marx had described previously the situation where such conditions are created according to the actual relations of supply and demand. Ricardo, as with the marginalists, assumes diminishing returns. In other words, there is a presumption that existing production is taking place on the most favourable terms. It is a rise in demand that then calls forth additional supply, but in order to create this additional supply, resort must be had to less fertile soil etc. This assumption has been shown to be completely false. Marx has indicated the various reasons that agriculture, mining etc. may first take place on less favourable land, and which enables a movement to more favourable land, as demand rises, and additional capital can be employed. This is the basis also of the economies of scale. In the case of industry, as Marx points out, it is never the case that firms introduce less efficient, less profitable machines, or processes.
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