The critical economists, and neoclassical economy, essentially starts from Adam Smith's cost of production theory of value, but it takes the marginal production analysis, undertaken by Ricardo and Marx, to explain rent, on the basis of surplus profit, derived from variations in the marginal product, arising from additions of land or capital, and turns this into a theory by which each of these factors is thereby an independent source of value, proportionate to its marginal product.
The marginal analysis undertaken by Ricardo, Marx and Engels, is an analysis of productivity. In other words, it is an analysis of how the output of use values rises as a consequence of additions of land, labour and capital in varying proportions. But use value is not value. Productivity is a measure of the output of use values, not of value. If 1,000 units of use value A are produced by 100 hours of labour, there is no increase in value if, as a result of a rise in productivity 2,000 units of A are now produced by the same 100 hours of labour. It simply means the unit value of A has halved from 0.10 labour hours to 0.05 labour hours.
Marx and Ricardo's marginal analysis, in analysing rent, illustrates that, if we take these two situations above as being, say, for the production of corn, on two different types of land, the individual value of the output on both lands is 100 hours of labour. If we give an hour's labour the name of £1, each produce £100 of value. But, the latter land produces 2,000 kilos, whereas the former produces only 1,000 kilos. The individual value of the more fertile land is £0.05 per kilo, as opposed to £0.10 per kilo on the less fertile land. Marx and Ricardo assume that the less fertile land is only cultivated if the price of corn is high enough to ensure that the capital employed on it obtains the average profit, and so that determines the market value. In that case, the capital employed on the more fertile land will sell its output of 2,000 kilos at this market value of £0.10 per kilo = £200, and will thereby also produce a surplus profit of 2,000 x £0.05 = £100, which is appropriated by the owner of the more fertile land as rent.
Critical economy and neoclassical economy eradicate this distinction between use value and value. For neoclassical economy, the fact that the more fertile land produces twice as much corn is equivalent to producing twice as much value. The additional value is then attributed to the land, and the owner of the land is thereby entitled to a revenue equal to the added value their land has created, i.e. £100 of rent.
The value created by each factor of production is thereby reduced to its marginal physical product, multiplied by the price of the product, i.e. marginal revenue product. The value of commodities is then comprised of the marginal revenue product of each factor of production, whilst, at the same time, the marginal revenue product is determined itself by the price of the product. This is a circular argument that appears to be a contradiction, but is within the constraints of this particular theoretical system, one that flows from the reality itself.
“Capital—as an entity—appears here as an independent source of value; as something which creates value in the same way as land [produces] rent, and labour wages (partly wages in the proper sense, and partly industrial profit). Although it is still the price of the commodity which has to pay for wages, interest and rent, it pays for them because the land which enters into the commodity produces the rent, the capital which enters into it produces the interest, and the labour which enters into it produces the wages, [in other words these elements] produce the portions of value which accrue to their respective owners or representatives— the landowner, the capitalist, and the worker (wage-worker and industrialist). From this standpoint therefore, the fact that, on the one hand, the price of commodities determines wages, rent and interest and, on the other hand, the price of interest, rent and wages determines the price of commodities, is by no means a contradiction contained in the theory, or if it is, it is a contradiction, a vicious circle, which exists in the real movement.” (p 498-9)
This is essentially the same argument that took place a century later between Cambridge, England and Cambridge, Massachusetts. In other words, if we accept the theoretical assumptions underpinning both systems of thought, then neoclassical theory as described in the General Equilibrium model (as opposed to the partial equilibrium model) is internally consistent. The problem is, as the Cambridge, England economists showed, that the assumptions required for the General Equilibrium model bear no resemblance to real world conditions, as Sue Himmelweit describes.
“General equilibrium theory is internally consistent and complete for where Cambridge, England claimed a theory of class struggle was needed, Cambridge Massachusetts and their many followers throughout the world already had a theory. This was the determination of factor prices (within a general equilibrium framework) by individual preferences for leisure rather for labour and consumption now rather than later. Thus, precisely by returning to the consistency of an individualistic basis, general equilibrium theory was defended. But, it was a weak defence, and showed up the weakness of the whole theory. For the orthodox answer, which explained the current distribution of income on the basis of initial endowments and individual preferences, left unanswered the question of where these preferences and endowments came from. It simply removed the question of distribution a stage further back.
Orthodox theory came out of this fray logically intact but clearly shown up for its inability to provide a fundamental explanation for such an immediate characteristic of society as the distribution of income and wealth. Still less can it explain the deeper processes that bring about such observable phenomena. The logical inadequacy of the easier versions of orthodox theory which are taught to undergraduates and used by ordinary economists in place of general equilibrium theory heighten the latter's irrelevancy.”
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