Thursday 1 March 2018

Theories of Surplus Value, Part II, Chapter 13 - Part 24

Ricardo cites a further comment from Smith, which he believes demonstrates a contradiction in Smith's argument on this point. He says,

“Indeed, it is so stated in another place by Adam Smith himself, for he says: ‘The lowest price at which coals can be sold for any considerable time is like that of all other commodities, the price which is barely sufficient to replace, together with its ordinary profits, the stock which must be employed in bringing them to market.” (p 338) 

That, of course, may be the case for the total supply of coal, but that does not mean that the market price of coal is determined by the least fertile mine. In total, the supply of coal may only meet the demand for coal, at a market price that equates to the price of production. In other words, over the longer term this total supply of coal would only be forthcoming if at an industry level, average profit was achievable. But, that does not change the fact that some mines would be less efficient and make less than average profits, whilst others would be more efficient and make above average profits.

“Adam Smith is mistaken when he declares the particular set of circumstances on the market, under which the most fertile mine (or land) dominates the market, to be the rule. But provided such a case is assumed his reasoning is correct (on the whole) and Ricardo’s wrong. Adam Smith presupposes that as a result of the state of demand and because of its relative superior fertility, the best mine can only force the whole of its product on to the market if it undersells its competitors, if its product is below the old market-value. This causes the price to fall for the worse mines too. The market-price falls.” (p 339) 

As a result of the lower market price, rent also falls for the inferior mines, and for some may disappear altogether. Yet, the fact that some of these mines produce no rent does not necessarily mean that they go out of production. Landowners, like the Duke of Bridgewater, often owned the mines operated on their land, and so long as they produced profit for them, they could continue in operation.

Additionally, some of these landowners undertook other activities associated with the coal-mining. For example, iron works were frequently sited along with the coal mine. Even less profitable mines could continue in operation when they provided the coal directly for iron and steel production. Similarly, in the 19th century, gas works were sited alongside coal mines, so that town gas was extracted from the mined coal, along with the production of coke, and a variety of chemicals.

“What Smith fails to notice, is that the profit can only be diminished by this if it becomes necessary to withdraw capital and reduce the scale of production. If the market-price—regulated, as it is under the given circumstances, by the produce of the best mines— falls so low as to afford no excess above cost-price for the product of the worst mine, then it can be worked only by its owner. At this market-price, no capitalist will pay him a rent. His ownership of land does not, in this case, give him power over capital, but as far as he is concerned it annuls the resistance which other capitalists meet who wish to apply capital to land.” (p 339)

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