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Friday, January 28, 2011


[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.


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.


English Jerk said...

I'm not bored--keep 'em comin'!

john c. halasz said...

Oh dear. I'm not really sure that "round-aboutness" of production and different lengths of time in producing an item quite captures the point. There is an assumption of long-period equilibrium, as a device for analytic purposes, such that for each such hypothetical production period, momentary fluxuations in supply-and-demand and thus in relative prices reciprocally cancel each other out, to arrive at "natural prices". So the relevant difference is not between lengths of time between production processes, since, by analytic assumption, they're all taking place in the same period, but rather between the differing amounts of capital (qua accumulated labor-time from prior production periods) and direct labor applied in different production sectors during the same period. The different "organic composition of capital" between different production sectors refers to the differing capital-intensity of production between sectors and especially to the different amounts of fixed or constant capital stock investment, ("plant and equipment"), vs. variable capital investment, (advances for wages and material inputs), respectively involved. So, say, the iron sector requires a blast furnace which is 50% of investment cost, but the corn sector only requires a plow, which is 10% of investment cost. Of course, these differences are built up over time, but they also carry over into time, and hence never equalize or "iron out", so to speak. In the meantime, increasing capital-intensities replace labor in some sectors, which means that displaced labor must be putatively re-deployed in other, perhaps new sectors of production.

The "Austrian" notion of "round-aboutness" derives from the notion that interest is a reward for the virtue of savings/deferred consumption, and, abstracting subjectively such different "time-preferences", attempts to use it to explain the production process. But production is an ongoing, continuous social process, and an inter-sectorally integrated one. And likewise, the rate-of-interest is an expression of the corresponding, ongoing demand for money, mostly from those whose incomes far exceed their consumption needs. These are socially objective and structural facts, not reducible to subjectively abstracted "preferences".

These issues come home to roost, when the "mass" of available labor-value confronts the imperative to maintain the "value" of capital stocks, which get traded off against each other in "contradictory" fashion.

john c. halasz said...

BTW Ricardo's main line of attempted solution to the conundrum involved IIRC the construction of a basket of commodities, from which an average labor-value and thus wage-rate could be derived. It might be helpful to explain why that doesn't quite work out.

john c. halasz said...

It's not as if Marx didn't pay attention to rents: they, after all, are a key factor in the distribution of surplus-value. And rents are an expression of the role that resource availabilities play in contributing to production possibilities and ratios. But also they don't just magically occur without the application of direct and indirect labor bringing them into the orbit of an economy's production system, which "activates" them.

Something of the "justificatory" burden of Ricardo's account of rent is that it wouldn't be abolished simply by eliminating aristocratic landlords, since that would only mean that someone else would gain the productive advantage accruing to resource differences underlying rents, (maybe agricultural capitalists and laborers, variously situated).

And it's from Ricardo's account of land rents that the whole subsequent discussion of economic rents derives. Neo-classical economics tends to define them as excessive profits compared to what would be the case under perfectly competitive conditions. But that last is a largely counter-factual supposition. I think a better definition would be profits or surpluses that have been detached and displaced from underlying costs-of-production, (such that someone else bears those costs). In that light, Marx' whole account of "surplus-value" could be seen as deriving from Ricardo's account of rents.

john c. halasz said...

BTW when you put Ricardo's theory of rents together with his theory of the inverse distribution between profits and wages, his doctrine of comparative advantage in international trade follows as a ready "deduction". Ricardo was worried that high agricultural rents would mean high food prices and thus a high necessary subsistence wage, such that profits from emerging industrial production would be drained off by landlords and further formation of productive industrial investment would be inhibited. So he hypothesized that trading industrial goods for agricultural imports, (from countries with higher natural fertility, but lower industrial capacity), would take lower quality land out of the "equation" and thus lower rents and thus food prices/subsistence wages.

There may be a comparative advantage effect from international trade, as economists rest their case upon, though it's scarcely the only effect among countervailing tendencies. But it's worth remembering the quite specific historical context and the quite specific sectoral/class interest from which the initial theory and its "universal" claim derived.

Robert Paul Wolff said...

All of that sounds very impressive but is actually rather obscure, and not at all as clear as what I wrote. Instead of trying to sort that all out, I am just going to carry on making this as clear and simkple as I can. Nothing is gained by making it jumbled.

Eggs Maledict said...

Given what Ricardo said about rents, does that mean that in some sense it is in the interest of the entrepreneur to take lower-quality land since it will be cheaper? Or is the potential benefit outweighed by the lower production capacity of the lower-quality land?

Unknown said...

No, please keep going.

Unknown said...

What does it mean to say 'rent is not a cost of production'?

I don't get what it means more than 'relative commodity price-per-unit' is unaffected by 'relative-rent-input-price-per unit'? But this is true for any production-input, so it must mean more.

Robert Paul Wolff said...

Quick answers: The entre[prenerus using the better land make a bigger return on their invested capital, but must pay more of it in rent. Competition equilibrates the profit rate, so that those using the least good land make the same rate of return on their invested capital as those using the best land. The difference is in how much they are compelled to transfer to the land owners. In that sense, there is no advantage, ultimately, in using the better land, in long run equilibrium, although all of the capitalists are constantly trying to get an edge, which leads them to hunt out the best land they can get and try to score a short term super profit before compeitition eliminates it.

A change in the rents does not affect the price of commodities [in my little model], but a change in the cost of production inputs will in fact affect the price of commodities. If you cheapen one of the inputs [by lowering the quantity of some input required for the production of one unit of it] you will affect all of the prices.

Unknown said...

I understand that (I think). But why does this not apply to anything?

Let's say there are different quality machines entrepreneurs can rent to build woggles, with better quality being more expensive to rent. Competition will mean all woggles cost the same. The entrepreneur will gain nothing long term as the extra output will be channeled (as rent/hire) to the owner of the woggle-makers. Hence machine hire is not a cost of production?

I take it this is the exact same logic as land-rent. And it goes for more than rent, but for any productive input.

Take labour: Different labour needed to make woggles have different quality. But woggles sell at one price. The extra productivity gets channeled to the worker as the 'owner' of his labour-power. Hence there is no long-term benefit to hiring better workers and labour is not a cost of production.

But this is absurd. Where have I gone wrong?

Robert Paul Wolff said...

The problem is that machines are not, like land, non-reproducible things ownership of which allows you to extract a "rent" for them. The word "rent" is being used in a quite different sense when we speak of renting a machine. If there is enough demand for rental machines [or rental trucks, or whatever] the manufacturers of the machines or trucks will find it profitable to produce more of them. When things settle down and equilibrate, thanks to competition in a free market, it will not make any fundamental difference whether a manufacturer buys trucks and then has them depreciate over time [setting something aside in a depreciation fund to replace them when they wear out] or rents the trucks and returns them to the owner when he is done with them [in which case the owner builds the depreciation cost into the rental fee].

Land is different because there is a fixed amount, and there is no more available [at least in England], so those who, in Smith's owords, have "appropriated" it, can exact a tribute, or rent.

The situation of laborers is different, and we will get to that -- it is central to Marx's analysis.

I hope that helps.

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Noumena said...

I read all this in Understanding Marx last semester, which is why I haven't had any questions or comments (yet). I am enjoying this, though!

Here are some historical questions:
- I also read (the first half of) Williams' Capitalism and Slavery last semester. Williams point, as I understand it, is that the British abolition of slavery was driven by a complex of economic factors, including especially US independence and the exhaustion of the English-held Caribbean sugar plantations. Ricardo was presumably working on his ideas around that same time. Was Ricardo involved in any of those economic, colonial, or slavery debates?

- Chinese mathematicians knew how to set up and solve systems of linear equations a couple thousand years ago; Newton developed the first European method. So presumably mathematicians in Ricardo's day would have been able to follow your examples and show that Ricardo's arguments only work in special systems -- the equal organic composition of capital business. Did they? The narrative you're giving here and in Understanding Marx suggests that there were no mathematically sophisticated analyses of these arguments until Sraffa in the mid-twentieth century, and that part of Marx's brilliance was recognizing these assumptions without the benefit of sophisticated math.

Unknown said...

Ok, that helps. Am still not quite there, so one more.

So 'rent' basically means 'rent of non-reproducible'.

I still don't see what difference that makes that gets us to 'rent is not a cost of production'. I guess the underlying idea is:

(1) In some sense, each factor of production makes a percentage-contribution to the eventual cost.
(2) [At least part of] the price paid for land is just due to the institution of private ownership of land, and not to any productivity of the land.
(3) The reproducibility of other commodities destroy the possibility of such a premium for such commodities.

Is this correct?

If the above is correct: why buy (1)? Now, obviously, each factor gets paid a fraction of total costs. But is it anything more than metaphysics to equate a surface phenomenon like production costs (or: such costs minus rent) with some underlying 'contribution'?

An alternative view would be as follows: factors can contribute as necessary, sufficient or contributory conditions. For most commodities labour, land and capital are necessary conditions of production. Disentangling this into percentage-contributions would be like trying to see which of the sun, plants or water contributes most to photosynthesis. So disentangling the real-world prices of production into underlying 'actually productive' factor contributions (and ultimately relating these to labour-power expenditure) is meaningless.

If my understanding of the underlying view is wrong, kindly ignore. (An alternative statement of my question is this: Marx thinks that supply and demand are surface phenomena that track underlying quantities. What reason do we have to suppose there is anything under the surface?)

john c. halasz said...

Prof. Wolff:

I don't see that my above comments were unclear, jumbled and obscurantist. (But, hey! Who am I to judge?)

The basic point is this: labor-values as slices-of-time are simultaneous or synchronic in any given production period, forming an aggregate "mass" that may or may not be deployed by capitalists. As a first approximation, capital goods are produced means of production and embody prior labor-value, whereas land (natural resources) and labor (population) are unproduced inputs and held constant. But there is no need to infinitely regress capital stocks to the beginning of time, not just because the relevant quantities become minute, but because capital and labor are traded-off and admixed always in the present period. Over time, technical improvement in the produced-means-of-production, "capital stocks", will raise the productivity of labor and increase the size and diversity of the physical surplus-product. But, as I understand the matter, that is not accounted as an increase in the available "mass" of labor-value, which always faces the available means-of-production in generating surplus-value anew.

And that point will be important in dealing with difficult, contentious issues later about the "transformation problem" and the falling rate-of-profit.

On the other hand, Marx' account of the role of labor-time is much different from the "Austrian" neo-classical account of psychological utility and subjective time-preferences as the root of production. And that will be one of the main explanatory burdens here, which has been the subject of much debate and confusion: why does Marx feel the need for an objective account of "value", in contrast to nominal price formation, (the truism of supply-and-demand), and why does he use labor time/value as his unit of account? Isn't such an objectivistic account of "value" a monstrously retrograde piece of 19th century metaphysics, as opposed to the sober positivism that we have now advanced to? (As JP insinuates in comments that I found a bit jumbled and hard to construe).

BTW I didn't find your toy "model" simpler and clearer than mine. You added on an extra consumption good. wine, and two extra production periods, whereas I just added on an implicit capital goods sector to the corn-and-iron account. My worry, which stimulated my comment, was that you might be confusing or begging the question as to how many production periods it would take to achieve the rate-of-profit equilibriating allocation of investment (Which Austrian-style "round-aboutness" attempts to explain as necessarily occurring).

john c. halasz said...

Also, you did cause some confusion is saying rents (like taxes) are not a cost-of-production. To put it more clearly, the point is that a) rents, (as opposed to the natural resource availabilities they are imposed on), do not add value to production, and b) rents are not earned income, but simply accrue to incumbents. That's different from the functional effects of rents, since rising rents indicate resource constraints-, (and it is always best to use the cheapest resources first),- so that they stimulate either economizing on or substituting of raw inputs or the search for new sources of raw materials.

The upcoming question will then be whether profits are earned income or not, and the functional roles and effects they have in adding value and increasing output. (Hence I suggested that Marx was following up on Ricardo). But it's also not quite correct to say that Marx didn't add on to Ricardo's account of rents, since it will turn out that rents are one form that surplus-value takes, and that, in fact, cost-prices of production, (the Marxian equivalent of Ricardo's "natural prices"), can't be determined without first determining the distributions of surplus-value.


I'm not trying to step on your toes here. Just adding on my thoughts. You can play your viola as you please. I'll just play my stringed bass.

john c. halasz said...

Oops! My second-to-last comment was sent and seemed to register, but I didn't save a copy. And it's now gone. So my last comment is a bit of a stray. I'm too weary now to attempt any reconstruct, so that's the breaks.
No further attempt at "clarification" from the likes of me.