There is then here no contradiction on the part of Smith, as Ricardo believed. Ricardo's argument, as Marx says, depends on the assumption of diminishing returns. In other words, he assumes that if a new mine is opened, the capital employed on it must obtain the average profit, or it would not have been employed. And, because he assumes this mine is less fertile, it could only produce the average profit, if market prices have risen. But, as Marx points out, if the new mine is more fertile, it can produce the average profit at a lower price, and this will not necessarily cause existing less fertile mines to close, or capital to be withdrawn from them.
Indeed, so long as the market price exceeds the individual price of production of the worst mines, they will be able to produce rent.
“If, with this fall of prices, the market can absorb the whole product, then the bad mines will still yield a rent provided the fall of market-price still leaves an excess of market-value over the cost-price of the poorer mines, and [the mines will] be worked by their owners, if the market-value only covers, or is equal to, the cost-price. In either case, however, [it is] absurd to say that the cost-price of the worst mine regulates the market-price.” (p 340)
The individual price of production for the worst mine determines whether or not it can be worked or only worked by the landowner. In other words, if the market price of coal is £10 per ton, and the individual price of production of coal from Mine A is £8 per ton, it is capable of being worked and producing £2 of rent. If its individual price of production is £10 per ton, it produces no rent, and would have to be worked by the landowner. If the average rate of profit is 25%, then if the price of production for Mine A is £12.50 per ton – so its cost of production is £10 per ton – it could make no profit, and so could not be operated. If its individual price of production is between £10 and £12.50 per ton, the landowner may keep it in operation to obtain some profits.
“But the fact that a piece of land or a mine of a particular degree of fertility can be exploited at a given market-price, is obviously not related to or identical with the determination of the market-price by the cost-price of the produce of these mines. If an increased market-value would make an additional supply necessary or possible then the worst land would regulate the market-value, but then it would also yield absolute rent. This is the exact opposite of the case assumed by Adam Smith.” (p 340)
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