The search for an invariant standard of value is not really a part of our story, but there is an interesting side to Ricardo's quest that is worth talking about for a bit. What follows is something of a specialist nature, and will perhaps capture the imagination only of the graduate economics students among you, but since I think it is rather fun, I shall indulge myself for the next several paragraphs.
Ricardo had the lovely idea of trying to imagine a sector of the economy in which there is only one commodity. He fixed on the grain, or as the English would say the corn, sector. In that sector, corn is the output. Furthermore, it is, in a manner of speaking, the only input, because the workers eat corn [i.e. wheat] as the staple of their diet and use seed corn as their only capital input [we conveniently ignore the use of shovels, hoes, harrows, and so forth. Just stay with me on this one.]
Now since this is a one-commodity sector, the profit rate is determined without the intermediation of a price system. It is simply the ratio between the corn output and the corn input in the form of real wages and capital. Since competition establishes an economy wide rate of profit, this profit rate in the corn sector, which is just the physical ratio of corn output to corn input, must be the profit rate for the entire economy. And since nothing can affect the price of corn save the conditions for producing corn [level of technology and the like], using corn as money will give us an invariant standard of value against which we can track and measure changes in the prices of all other commodities in the market.
Why on earth is this interesting? Well, one hundred and forty-three years after the publication of the first edition of the Principles, Piero Sraffa [the editor of the complete works of Ricardo] published a brilliant little book called Production of Commodities By Means of Commodities in which he developed a fascinating formal analysis of a Ricardian economic system, using precisely this notion of a single-commodity economy. Sraffa first identified those commodities in an economy which serve, directly or indirectly, as inputs into the production of all other commodities. He called them Basic Commodities. [All the others he called Luxury Commodities.] The wage goods consumed by the workers obviously qualify as Basic Commodities, because every line of production uses labor, and the laborers consume the wage goods. Iron is certainly a Basic Commodity, because every sector in the economy either uses iron, or uses something that is made with iron, or uses something that is made with something that is made with iron and so forth. [For those cognoscendi among you, let me just say that when you take the square matrix of unit input coefficients, substituting the real wage for the money wage, and partially decompose it so that there is a null submatrix in the upper right hand quadrant, the rows of the non-null submatrix in the upper left hand quadrant represent the Basic Commodities. Clear? Humph.]
Sraffa then considered an economy on a maximum growth path, in which all profits are ploughed back into expanded production and none is wasted on luxury production [a sort of Adam Smith dream economy with no landed aristocratic parasites]. He formed the idea of a notional Standard Commodity consisting of bits of each basic Commodity in just the proportions required for balanced growth, and proved that for any economy capable of generating an annual physical surplus, there must be such a Standard Commodity. And then he invoked Ricardo's odd notion of a single commodity economy, arguing that a complex economy on a balanced maximum growth path [what is sometimes called a von Neumann balanced growth path in honor of a nice theorem proved by the genius John von Neumann] is essentially a single commodity economy in which a quantity of the Standard Commodity is consumed as input in each cycle of production, and a larger quantity of the same Standard Commodity is produced as output, the profit rate being simply the ratio between the two as in Ricardo's corn sector.
Isn't that just gorgeous? Well, I think so. Thank you for staying with me. Now back to our regular programming.
You will recall that at the very beginning of Chapter One, Ricardo announces his intention not to concern himself with " rare statues and pictures, scarce books and coins, [and] wines of a peculiar quality, which can be made only from grapes grown on a particular soil, of which there is a very limited quantity." His interest is in reproducible commodities. But there is one scarce item available in the market that cannot so easily be brushed aside, namely land. There is, at least in the England of the early nineteenth century, a fixed and finite amount of arable land, on the cultivation of which the entire economy [and the population] depends. The price commanded by the input into production is called rent, and unlike the price of wool or farm tools or indeed even labor itself, a rise in rent does not evoke an increase in its production. Rent, as Adam Smith made bitterly clear, is a kind of ransom that the landed gentry exact from the rest of England. The majesty of the law stands behind their refusal to allow entrepreneurs access to the land save at the payment of a rent, even though the entire nation depends upon that access for its survival.
Now, any capitalist engaged in the production of corn and other agricultural goods will tell you that rent is one of his costs of doing business. When he is sitting in his study late at night, tallying up his outlays and comparing it with his receipts to determine whether he is turning a profit, he will list the rent he pays to the landlord in the same column of expenses in which he has entered the money he lays out for ploughs and seed corn and fertilizer and the wages he has paid to his farm workers. They are all costs of production, and so surely they all play a role in determining the price of the corn he sells in the marketplace. This is what came to be called the "adding up" theory of price, which Ricardo rightly recognized as no theory at all, despite its superficial plausibility.
Now the land on which the rent is charged was not originally brought into existence by labor [save for the Labor of the Almighty in the act of Creation, of course], so it cannot be conceptualized in some manner as embodied labor, being passed along imperceptibly to the crops grown on it. This quite obviously poses a very serious problem for Ricardo's revolutionary version of the Labor Theory of Value. The only way in which he can salvage that theory is by demonstrating that, counter to common sense and the universal conviction of previous Political Economists, rent plays no role in the determination of natural price. And that is precisely what Ricardo proceeds to do, in Chapter II of the Principles.
Since I am writing a mini-tutorial for a blog, and not a scholarly paper for publication in a peer-reviewed journal, I am at this point going to allow myself an autobiographical indulgence. Clipped to the first page of Chapter II in my copy of the Principles is a yellowing piece of paper, on which I have recorded my thoughts a propos the theory of rent set forth by Ricardo in the chapter. There are three notes, written at different times, two in black and one in red. All three date, I believe, from the late Seventies. I am going to reproduce them here, as an evidence of the workings of my mind. I apologize if this somewhat partakes of the mindset of Mr. Toad in the Wind in the Willows.
The first note reads: "Ricardo, Principles, Chapter II. The theory of rent is a key to the argument of the entire book. But it is somewhat puzzling. It makes sense only if, either there is free, unclaimed land lying about, or else the owner of the marginal land is assumed to have invested capital in it, in the form of buildings, etc., so that he has some incentive to make it available to a tenant farmer at a price which (in Ricardo's view) contains no factor of true rent. If neither of these assumptions is true, it would seem that even the marginal land would command a price -- is that price "rent," or a monopoly price? What is its logical status? After all, if I own a piece of marginal land and there is only sub-marginal land left unclaimed, there may be no tenant farmer willing to pay me for the use of the land; but why ought I to permit him to use the land rent-free?" This is followed at a later time by a notation that reads "See the quote from Adam Smith, pp. 329-30 below, which Ricardo endorses. They see the point." Finally, at yet a later time, I wrote in red, "Whoops. I am, apparently, a 'superficial reader.' See Schumpeter's remark. quoted by Dodd, p. 69, in Theories of Value."
This series of comments is a rather nice representation of my on-going effort to understand and internalize Ricardo's sophisticated argument.