Smith, unlike Ricardo, analyses the source of surplus value, in production, following on from the Physiocrats. He recognises that surplus value arises because labour creates a greater value in its operation than is required for its own reproduction. As soon as landed property and capital come into existence, Smith says, this surplus value can be appropriated either as rent or profit. Smith's argument, as to how the owners of land or capital are able to appropriate this surplus value, effectively comes down to competition and supply and demand. Labour is in excess supply relative to capital, and so its market price falls. That is why Smith sees the accumulation of capital as being wholly beneficial, because he believes that the growth of capital exceeds the growth of population, so that, ultimately, labour is in short supply, wages rise, and profits are competed away.
Ricardo does not bother to analyse the source of surplus value at all, simply taking its existence for granted on the basis of some average rate of profit. Ricardo does not accept Smith's idea that profits are competed away, as wages rise, when labour becomes in relative short supply. Rather he believes that the growth of population puts increasing demands on food supply, requiring less fertile land to be cultivated, causing wages and rents to rise, thereby eroding profits.
Smith's argument, in relation to the surplus value, is inadequate, because it does not answer the question of what lies behind the supply of and demand for labour, in relation to capital. It cannot do that, because it does not distinguish between labour and labour-power. Ricardo avoids the question of the source of surplus value, but he equally cannot then provide any objective basis for his average rate of profit, because he too fails to distinguish between labour and labour-power. Without the category of labour-power, Ricardo is left with an exchange purely between capital and labour, which thereby reproduces Smith's inconsistency of the values of commodities being determined by the labour required for their production, and the quantity of labour that a commodity can command.
If the value of labour is determined by the labour-time required for its production, i.e. by the value of all those commodities required for the reproduction of the worker, then that value of labour is equal to the wage. However, if, in turn, the value of commodities is equal to the labour they command, surplus value is impossible. If the value of wage goods required for the reproduction of labour is equal to 5 hours, and these wage goods, in turn, command 5 hours of labour, the worker who then provides these 5 hours of labour, only creates, for the capitalist, 5 hours of new value. But, this 5 hours of new value, is only equal to the amount of value the capitalist must pay to the worker as wages. Consequently, no surplus value is possible.
Malthus solution to this problem was to go back not just prior to Smith, but prior to the Physiocrats, to the Mercantilists, and to explain the surplus value on the basis of unequal exchange between capital and labour. In a sense, this was progressive, because it emphasises this unequal exchange between capital and labour, and hence the exploitation of the worker. It is, of course, merely an expression of the interest of the landed aristocracy as against industrial capital, just as later the landed aristocracy were to vent their displeasure at being replaced by the industrial bourgeoisie, by voting through factory legislation and the Ten Hours Act. But, in terms of the development of political economy, it represented a big step backwards.
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