There is still another possibility, however. Resort might be had to emigration and colonists might be encouraged to cultivate the best soils of distant lands, soils equal in fertility to those in the first class. The products of such lands would be got in exchange for the manufactured goods of the home country, to which the law of diminishing returns does not apply. But some account of the cost of transport, which increases the cost of production, must be taken, and this leads to the same result, namely, a rent for those nearest the market, because of the advantages of a superior situation. Distance and sterility, as J. B. Say remarks, are the same thing. If land in America yields corn at 10s. a bushel and freightage equals 5s., it is clear that corn imported into England must sell for 15s.—exactly the same condition of things as if land of the second order had been cultivated, and English landlords of the first class will still draw a rent of 5s. This third possibility was scarcely mentioned by Ricardo, and he could hardly have foreseen the wonderful developments in transportation that took place during the next fifty years, which resulted in a reversal of the law of diminishing returns and the confuting of the prophets.[332]
The great Ricardian theory, prima facie self-evident, is in reality based upon a number of postulates to which we must pay more attention. Some of them must be regarded as economic axioms, but the validity of others is somewhat more doubtful.
In the first place there is the assumption that the produce of lands unequally fertile and representing unequal amounts of labour will always sell at the same price, or, in other words, will always possess the same exchange value. Is this proposition demonstrably sound? It is true when the product in question—for example, corn—is of uniform quality and kind. When the goods offered on the same market are so much alike that it is a matter of indifference to the buyer whether he takes the one or the other, then it is true that he will not pay a higher price for the one than he will for the other. This is what Jevons called the “law of indifference.”[333] In the second place it is implied that this exchange value, uniform for all identical products, is determined by the maximum amount of labour required for its production, or, in other words, by the amount of labour necessary for the production of the more costly portion.
This brings us to the Ricardian theory of value. We know that he considered that the value of everything was determined by the amount of labour necessary for its production.[334] Adam Smith had already declared that value was proportional to the amount of labour employed, but that this was the case only in primitive societies. “In civilised society, on the contrary, there is a still smaller number [of cases] in which it consists altogether in the wages of labour.” Labour was regarded by Smith as one of the factors determining value—though by no means the only one, land and capital being obviously the others.
But Ricardo simplified matters, as abstract thinkers frequently do, by neglecting the last-named factors. This leaves us only labour. Land is dismissed because rent contributes nothing to the creation of value, but is itself entirely dependent upon value.[335] Corn is not dear because land yields rent, but land yields rent because corn is dear. “The clearly understanding this principle is, I am persuaded, of the utmost importance to the science of political economy.” As for capital, why should we make a special factor of it, seeing that it is only labour? Its connotation might be extended so as to include “the labour bestowed not on their immediate production only, but on all those implements or machines required to give effect to the particular labour to which they were applied.”[336] But Ricardo was not thoroughly satisfied with this identification of capital and labour, and, great capitalist that he was, it must have caused him much searching of heart. Furthermore, it was not very easy to apply the conception to such commodities as timber and wine, which increase in value as they advance in age. In a letter to McCulloch he admits the weakness of his theory. After all the study that he had given to the matter, he had to confess that the relative value of commodities appeared to be determined by two causes: (1) the relative quantity of labour necessary for its production; (2) the relative length of time required to bring the commodity to market. He seems to have had a presentiment of the operation of a new and distinct factor, to which Böhm-Bawerk was to ascribe such importance.
The usual method of stating the Ricardian theory of value is to say that value is determined by cost of production. It is also the correct way, inasmuch as he stated it thus himself. It is, however, quite a different thing to say on the one hand that value is determined by labour and on the other that it depends upon the sum of wages and profits (supposing we omit rent).[337] On this point, as on several others, obscurity of thought alone saves Ricardo from the reproach of self-contradiction.
Suppose we proceed a step farther. The statement that value is determined by labour is not enough to account for the phenomenon of rent. Let us imagine a market where three sacks of corn are available for sale. Let us further suppose that the production of each involved a different quantity of labour, one being produced on land that was very fertile, the other on soil that was less generous, etc. Every sack will sell at the same price, but the question is, which of those different quantities of labour is the one that determines the price? Ricardo replies that it is the maximum quantity, and the value of the corn is determined by the value of that sack which is produced under the greatest disadvantages. But why should it not be determined by the value of the sack grown under the most favourable circumstances, or by the value of that other sack raised under conditions of average difficulty?
That is impossible. Let us imagine that the three sacks of corn came from three different kinds of land, A, B, and C, where the necessary quantities of labour were respectively 10, 15, and 20. It is inconceivable that the price should fall below 20, the cost of production of corn grown on C, for if it did C would no longer be cultivated; but the produce of C is ex hypothesi indispensable. The market price cannot rise above 20, for in that case lands of the fourth class would be brought under cultivation, and their yield would be added to the quantity already on the market. The supposition is that the quantity of corn on the market is already sufficient to meet the demand, and the increase in supply would soon cause the price to fall again to the irreducible minimum of 20.
We cannot but admire the ingenuity of a demonstration that seeks to explain a phenomenon like rent—which is a revenue obtained independently of all labour—by the aid of a generalisation which regards labour as the one source of value. But the explanation is ingenious rather than convincing, for it is quite clear that only in the case of one of the sacks do value and amount of labour actually coincide. In the two other instances the quantity of labour and exchange value are absolutely and indefinitely divergent.
Most contemporary economists, while denying that value is solely the product of labour and preferring to regard it as a reflection of human preferences, would willingly recognise the element of truth contained in the Ricardian view. But it must be understood in the sense that competition, although tending to reduce price to the level of cost of production, cannot reduce it below the maximum cost of production, or the price necessary to repay the expenses of producing the most costly portion of the total amount demanded by the market.[338] In this sense it is true not only of agricultural but also of all other products, and it has a wider scope than was at first ascribed to it by its authors. Rent is nowadays recognised as an element which enters into all incomes. But with an extension of sway has gone attenuation, and the term has lost something of its original significance and precision. To-day rent is treated as the outcome of certain favourable conjunctures, which are to be found in all stations in life, and it is no uncommon thing to speak of consumer’s rent even.
The Ricardian theory, moreover, presupposed the existence of a class of land which yielded no rent, the returns which it gave being only just sufficient to cover cost of production. In other words, Ricardo only recognised the existence of differential rents, and dismissed the other cases mentioned by Malthus.
It really seems as if Malthus were in this instance more correct than Ricardo. It is quite possible that in the colonies, for example, there may be lands which yield no rent because of the superabundance of fertile land. Or the same thing may occur in an old country because