[The absence of comments on the last two posts suggests that I have finally succeeded in boring you to death. But I am having such fun expounding this material, that I am going to press on, even posting twice in one day. Perhaps it is just as well that I cannot see your eyes glaze over.]
I guess you already figured out that I cooked the books to confirm Ricardo's hypothesis. If you want to check up on me, just alter the numbers a little -- a bit more iron needed in the corn sector, a trifle less corn in the iron sector, that sort of thing -- and solve the equations again, both for the labor values and for the prices. The first thing you will discover is that the price equations cannot be solved so nicely. It is still true that the wage and the profit rate vary inversely -- that is, as Jane Austen says, a "truth universally acknowledged." But until you specify a real wage [so much corn and so much iron per unit of labor] and plug it into the equations, the system will be underdetermined. And when you do, the nice neat proportionality between prices and labor values will not hold true.
What is happening? What is it about the little system I created that yields the nice neat Ricardo-confirming results? Well, in the jargon that Marx would introduce a half century after Ricardo published his great work, I created a system that exhibits "equal organic composition of capital." That means that the ratio of labor directly required to embodied labor [or labor indirectly required] is the same in all sectors lines of production. Check it out.
Another way of saying the same thing is that in some sectors of production, the labor indirectly required has been embodied in the non-labor inputs for a longer time, and hence, when we are figuring prices and profit rates, needs to be earning more profit. Suppose, for example, that one producer is making wine, which must sit in its cask for three years before it can be sold, while another producer is making bread that is sold hot out of the ovens. They may both have the same amount of capital bound up in production, but the wine maker has to get a price that compensates him for the time his capital has been tied up. Even if they are both getting 10% annually on their invested capital, the wine maker's capital must earn 10% a year over three years, which compounded is 33.1%, whereas the bread maker turns his capital over so rapidly that he need make only a fraction of one percent on each turnover to rack up a 10% annual rate of return. These differences will, when competition works its magic, drive the price of wine up above the price of bread. But since the labor values of the wine and bread are unaffected by the amount of time capital is tied up in production -- labor values only measure the quantity of labor directly or indirectly required -- the ratio of the price to the labor value of wine will diverge from the ratio of the labor value to the price of bread. This, for those of you who have ever wondered, is what is called "the transformation problem." [By the way, some of you may in your study of economics have come across the phrase "the roundaboutness of production." That phrase refers to the same thing we have been discussing.]
Now the really interesting thing is that Ricardo knew all about this problem, and spent a good deal of his life trying unsuccessfully to solve it. He was well aware that in the general case, prices are not proportional to labor values. But the problem stumped him. It was left to Marx to think the matter through more deeply and come up with a brilliant solution that is ALMOST, but not quite, satisfactory. It is going to be some days before I get to that part of the story, so hold the thought.
Strictly speaking, we have come to the end of our discussion of Ricardo, and are ready to move on to Marx, but there is one more little matter that I should like to discuss, namely rent. This is not part of Marx's story, because Marx knew that Ricardo had solved the problem of rent, and therefore he did not bother with it. Still, it was a brilliant coup on Ricardo's part, and we ought to be able to spare a few paragraphs to pay tribute to him.
The problem, in a nutshell, is this: Entrepreneurs [which in Ricardo's day frequently meant investors renting land on which to grow grain or raise sheep] pay rent for the land they use [to the landed aristocrats, those lazy bums]. That rent is one of their costs of production, as surely as the wages they pay or the money they shell out for seed and farm machinery. But land is not a produced commodity, and does not contain embodied labor that is passed along to or embodied in the commodities produced on it. That being so, it would seem that the Labor Theory of Value cannot hold true even in the special case of equal organic composition of capital. The theory can only be true if rent is NOT a cost of production. But how can that be? Certainly, if you ask an entrepreneur in the wool or corn trade, he will assure you that the rent he pays is very much a cost of production. Why would he pay it otherwise?!
Here is Ricardo's answer: In any country, there are many different qualities of arable land, many variations in the productivity of the land. On some land, one need merely throw the grain at the ground and crops will spring up. On other land, some cultivation is required, on still other land fertilizer is needed to get a crop, and there is some land so arid and unproductive that one can scarcely grow anything on it at all. Now, at a given level of demand for corn [i.e., grain -- recall that "corn" is the English name for whatever is the dominant grain in a region, not for what we call corn, which the English call maize], entrepreneurs will compete for the best land, and they will offer rent to its owner, for they know that even after paying rent, they can make a profit on such fertile land. When all the best land has been rented, the remaining entrepreneurs will bid on the somewhat less fertile land. They will only be willing to pay lower rents, because they will not be able to compete against the investors who have snatched the best land, if they are forced to pay equally high rents. If demand presses on supply, and drives up prices in the market, more entrepreneurs will fan out and offer rents of the owners of even less fertile lands. The landowners are engaged in a parallel competition among themselves. The land is utterly useless to them unless it is rented out, so although they will press for the highest rents they can get, if push comes to shove, they will take whatever they can get.
At the margin, the least fertile plot of land will rent for virtually nothing per acre, for there is so little demand for it that the last entrepreneur who comes along and offers pennies an acre will succeed in striking a bargain. Remember, if you want to know why a landowner would rent his land out for so little, the answer is that anything is better than nothing.
Now, come harvest time, all these entrepreneurs who have been raising indistinguishable and interchangeable corn on lands of varying fertilities, on which they are paying varying rents, will bring their crops to the market, and there competition will ensure that every bushel of corn sells for the same price, REGARDLESS OF HOW MUCH OR LITTLE RENT HAS BEEN PAID FOR THE LAND ON WHICH IT WAS GROWN. That means that the corn grown on the least fertile land will fetch the same price in the market, and among the costs of production of the capitalist who grew his corn on that land, rent does not appear. Therefore, rent is NOT a cost of production.
BUT IF RENT IS NOT A COST OF PRODUCTION, WHAT IS IT?
The answer, Ricardo says, is that rent is a diversion into the pockets of the landowners of a portion of the profit earned by the capitalist class. It is, functionally speaking, identical with the money that is diverted today into the pockets of financiers, who drain the profits from capitalists just as the landed aristocracy did in the late eighteenth and early nineteenth centuries.
We are now ready to turn to Marx.