anwar shaikh, david ricardo (lecture 5 – 09/28)

Ricardo wants to know how to establish the relative influence of the relative capital-labor ratios (viz-a-viz the Z_ij term which involves the calculation of average profit-wage ratios)

(1) Numerical illustration (so the spreadsheet shows that K/L difference of 100% translates to a price difference of 10%)

(2) Z_ij depends on the profit rate. So let me hold everything constant, but vary the wage rate; even if you bring the profit rate down, enormously, relative prices will still not vary much more than 7%. The change in the relative price, in percentage terms, is going to be less than roughly 7%. [Here we have the discussion of Schwartz and the ingenious idea to compare peak to trough, which has the effect of keeping technology constant amidst turbulence—profit rates drop in a recession, but he showed that relative prices aren't terribly sensitive to a drop in profit rates]

Ricardo says that the market wage oscillates around a 'natural price of labour'--what is this natural price? It depends on the quantity of food, necessary, and conveniences which have come to be habit for the reproduction of labor. It's not a physical subsistence wage; it's a social process of producing a standard of living (pg. 96-97).

Ricardo's Theory of (Differential) Rent

We are not discussing the 'leasing' of produced goods (that's going to be derivative of the 'selling' of produced goods).

Ricardo proceeds instead in the following way.

At the beginning of the story, the price of corn is based on the cost plus the natural profit rate. But as you proceed towards less and less convenient and then fertile land, the productivity of labour will fall. The costs of production on less fertile and more fertile land will be different. Those on good land, of course, will then be able to mark up a bit. This is where rent, for Ricardo, arises. (Note that the transition from Land A to Land B depends on the price having increased enough to make it possible to make normal profits on Land B, which is a result of demand putting ever-increasing pressure on supply)

What about technical change? Well it will lower the price of corn—but it will also lower the price of steel. But there is still something specific about the price of agricultural goods, because of relative differences in fertility on land (is this why? Marx will object to this, arguing that technical change can obviate differences in fertility). For this reason, though there are various forces on this ratio, the ratio of price of agricultural goods to the price of industrial goods will rise (because the price of corn is on an upward tick, all else being equal).

The connection to rent, then, is fairly clear. It is the landlord's charge for the 'excess profits' (I can't charge you more, of course, otherwise you'll pick up and leave). The question of the length of the lease, of course, relates to this dynamic—for the producer it's better to have a longer lease b/c prices will be rising (a fixed rent), but for landlords it's the opposite.

Rent, remember, is not just affiliated to a specific class—it's an economic category. So even if I'm my own landlord, I will get an abnormal return (it will be profit + rent).

(There's a question, also, of what determines 'rent' on the very first plot—Marx will speak about this as 'absolute rent')

(A link to the question of excess profit between firms, too—can treat 'new lands' as 'new investment'. So if you want to measure the rate of profit you want to look at the rate of return on new investment, Shaikh is arguing).

If you follow the 'tiered' logic of Ricardo's argument, you will see that rent is going to rise persistently (as you move to less and less fertile land). So we've established that (1) the price of corn is going to rise, that (2) rent is grounded in the difference between ruling natural price and natural price on better lands, and that (3) rent is going to rise.

Now we may want to know about the price of land. It is, for Ricardo, the presently-discounted value of expected income from that land. It is not from the cost of land, of course, which is effectively zero, (The price of land, of course, will as a result be dependent on the interest rate. If you have land that yields rent of $100 and the interest rate is 10%, you'll sell it for the equivalent of a bond equivalent in years to the expected longevity of the land)

There is also, in Ricardo, an acknowledgement that an element of 'risk' enters into the calculation of the profit rate.

Finally, for Ricardo, the thing that makes landlords richer and richer also kills capitalists. This is Ricardo's theory of the falling rate of profit (Smith saw this, but didn't have an explanation). Because of the diminishing fertility of land, the ruling profit rate will fall (since it's set at the margin).

[There's a claim, here, about the determination/identification of the profit rate that I don't fully understand—which presumably explains how the profit rate in corn ramifies throughout the economy -->The answer to this last question, of course, is through the wage-basket. The productivity is declining in wage-basket production, which means that the price of labour will rise. And this will be behind the declining rate of profit.]

[Also interesting question regarding the relationship of the profit rate to the interest rate. Smith will argue that they're proportional. Shaikh is making the point that it will depend centrally on inflation/the price level].