Value and Distribution Historical Origin Analytical I

In this lecture I shall give you a superficial view of the emergence of the nineteenth-century classical view, or views, on value and distribution. I warn you that I shan't be finished with the subject this time. What I shall do is to is to give you a brief account of how it emerged in the pamphlet literature and in a definite political controversy. And I hope, if I get through, that I shall then have prepared the way for a systematic survey of each of the main theories, which takes some time and will require rather more intricate analysis than anything I have dealt with so far.

Now, I am going to give you this historical account in terms of the controversy relating to the reimposition of control of the import of corn, which emerged, as we shall see, toward the end of the Napoleonic Wars. Let me warn you that this account is slightly superficial in the light of Professor Hollander's [1979] researches, only recently given to the world. Professor Hollander thinks that Ricardo had in mind his theory of distribution before he became interested in its application to the Corn Law controversy, and he produces very interesting examples of correspondence between Ricardo and Malthus, which we now owe to the labours of Mr Sraffa, to refine that view. I am not going to go into these arcana; I propose to give you a pretty straightforward account of something which was connected with this controversy.

Now, the historic background that you ought to know is, what you probably do know, that the Napoleonic Wars cut off the supplies of corn from abroad. Well, this meant two things. Firstly, high prices. Thus, at an earlier time in the eighteenth century, from 1711 to 1794, the price of wheat was never above just over 60 shillings per quarter; by Michaelmas 1795 it was 92 shillings; on Lady Day 1801 it was 177 shillings, and from 1808 to 1813 the price did not fall below 90 shillings. If you are interested in these statistics, look up Cannan, Theories of Production and Distribution [1924], page 148.1 He takes his statistics from Tooke, who is not always completely reliable.

Now, you mustn't think that all this rise in price of wheat was due to the particular circumstance of the import of corn being cut off from abroad. As we shall see next term, there was an inflation going on, and, needless to say, agricultural products were subject to inflation equally with other goods. But the shutting off of imports of corn by the war played its part, and as a result of the high prices of corn—I use the word "corn" in its generic sense to cover wheat and rye and oats and so on—as a result of this change of prices there was an extension of cultivation. And again, if you look up Can-nan's early book on Theories of Production and Distribution [1953, p. 118] you will see a table showing the correlation—a rough correlation—be-tween the average price of wheat and the number of Enclosure Acts. Those of you who come from abroad should know that there were common lands which were used by the common people for tethering their cattle and so on and so forth, and gradually they were, from the reign of Elizabeth onwards, subject to enclosure, and enclosure was quickened up very much by the high prices of the Napoleonic Wars.

Well, the agricultural community viewed the prospective end of the war with apprehension. They were in a panic lest the cessation of the mutual blockade should mean that the high prices were brought down by imports from, let us say, Poland, and elsewhere. Poland was a great source of wheat in those days. It was argued by the agricultural interests—the agriculturalists, the landowners and farmers, and possibly anyone who was articulate on behalf of the agricultural labourers—that it was in the interests of the nation to keep prices high. If it was not done, then corn land would go out of cultivation, and there would be in the end a greater shortage of corn than ever before. And so committees of both Houses of Parliament were appointed, and they collected evidence which went to show that the lands recently taken into cultivation were more expensive to cultivate, and therefore that if prices fell they would go over to grass again.

Well now, these facts—and they were facts—were very significant for the opponents of the reimposition of duties. If they could show, firstly, that increased investment of capital in agriculture was diminishingly efficient, and, secondly, that the price of corn was to some extent determined by the quantity of labour employed in production, then they could argue that the recent rise in the price of this essential food was due to the extension of cultivation and the consequent increase of labour necessary to produce what we should call the "marginal" bushel. And so, they argued, it was obviously fruitless to divert investment to encouraging domestic agriculture and to abstain from importing cheaper corn from abroad.

Four theories sprang out of this discussion—theories which, in some respects, followed Adam Smith, but in other respects called Adam Smith in question, and in other respects introduced elements which Adam Smith had not thought of. The so-called Law of Diminishing Returns in agriculture was almost formulated by some of the witnesses before the House of Lords Committee, which on balance I think is—for graduates amongst you who are interested in this subject—the more interesting of the two committees. And reading the evidence of these witnesses, Ricardo and a man I've not mentioned to you hitherto, Edward West—who became a high official in the service of the East India Company and wrote a very interest ing tract in the 1820s on money and all that sort of thing—Ricardo and West were struck by the implication of the evidence given to the committees in Parliament, and they rushed into print with their theories almost simultaneously. Sraffa, in his edition of Ricardo, reproduces an inscription in Ricardo's hand saying that his pamphlet was written before West's pamphlet appeared, and since Ricardo was one of the most truthful and candid persons that God ever made, we must accept his evidence.

But I'm going to quote to you Edward West's essay. It's entitled An Essay on the Application of Capital to Land, with Observations Shewing the Impolicy of Any Great Restriction of the Importation of Corn [1815]. You notice the moderation of the title. And Ricardo was moderate in a sense that shocked some of his followers, because he thought that, insofar as there were special burdens on agriculture, a slight duty counterbalancing those burdens could be retained on the importation of corn. But that is quite incidental to his system, and henceforward I shan't mention that exception to the strong argument which Ricardo brought against the limitation of imports.

But let me read you a bit from West's pamphlet. West's pamphlet is much the more readable of the two. You will remember that Ricardo was always protesting that he was a stockbroker and had not had systematic education, although his writing is, while occasionally obscure, very vivid and lingers in one's mind. But West obviously had the quality of clear exposition although, as you will see in the next second or so, he failed to make an analytical distinction which is quite important, or failed to realise all that could be made of it. He says:

each equal additional quantity of work bestowed on agriculture, yields an actually diminished return, and of course if each equal additional quantity of work yields an actually diminished return, the whole of the work bestowed on agriculture in the progress of improvement, yields an actually diminished proportionate return. [West, 1815, pp. 6-7]

Now, you see, he has hit on the distinction between average and marginal returns in that sentence. What he doesn't realise is that the average and the marginal are not coincidental, save in exceptional circumstances. Do I need to put a Knightean curve on the blackboard to show you the difference? Well, West has enunciated a law of diminishing returns, although he failed to distinguish the point at which marginal and average returns diminish.

Well then, the second theory which arose out of the discussion was of course the labour theory of value. Now, as I need hardly remind you, Adam Smith had coquetted with a labour theory of value in his so-called parable of the beaver and the deer. In the rude state of society preceeding the appropriation of land and the accumulation of stock, the quantity of labour, said Adam Smith, was the circumstance which determined the normal rate at which commodities exchanged for one another. The market rate might fluctuate, but the market rate would tend to come to the normal rate indicated by the ratio of the quantity of unskilled labour. Then he went on to refine it, and when he came to deal with the accumulation of stock—useful machines and wage goods accumulated and so on—and the appropriation of land by the landowners who loved to reap where others had sown, his theory of value undergoes a transformation in kind. It's no longer concerned with quantity of labour; it's concerned with value of labour, value of the use of stock—profit—and value of the use of land—rent.

Now, to Ricardo and his friends, surveying the rise of price in the light of their new-found law of diminishing returns, this substitution by Adam Smith of a cost of production theory of normal value for his quantity of labour theory of value must have seemed a change for the worse, which is absolutely clear nowadays, although you won't find it in the comparatively recent literature always. For instance, Jacob Hollander [1910], who is no relation of Sam Hollander, in his rather excellent survey of Ricardo's life and contribution, thinks that Ricardo only gradually perceived the modifications that had to be made to the labour theory of value to get it right. But we now know that he did perceive them at an early stage, but he did say that they were rather unimportant, which has led George Stigler [1958], in his excellent article on the Ricardian theory in general, to call it—What is it? Does anyone remember it?—the 92V2 percent labour theory of value, or ninety-three.

At any rate, Ricardo and his friends were therefore apt to revert to the theory implied by the parable of the beaver and the deer. And you can see the application thereof if you look at Ricardo's Essay on the Influence of a Low Price of Corn on the Profits of Stock. I am not quite sure whether Sam Hollander would agree with me in the light of his discoveries in correspondence between the lines, but I am still inclined to regard Ricardo's Essay on the Influence of a Low Price of Corn on the Profits of Stock, which together with West's book was published in 1815, as the great seminal tract of this part of classical economics. And the critical passage is here, and I'll read it to you. This is in the Essay on the Influence of a Low Price of Corn on the Profits of Stock; it is not an extract from the Principles:

The exchangeable value of all commodities, rises as the difficulties of their production increase. If then new difficulties occur in the production of corn, from more labour being necessary, whilst no more labour is required to produce gold, silver, cloth, linen, etc. the exchangeable value of corn will necessarily rise, as compared with those things. On the contrary, facilities in the production of corn, or of any other commodity of whatever kind, which shall afford the same produce with less labour, will lower its exchangeable value. [Ricardo, 1815, p. 16]

Clear enough, although if you read Ricardo in the Principles [1817] you will find more difficulty in disentangling, because Ricardo's theory in the Principles is concerned not only with the causes of changes in value, but also with the measure of value, for which, to the end of his life, he was, in a way, vainly searching. In the Principles, he assumes the measure to be an invariable gold, after qualifying that in various ways, but in the Essay, these arcana, although quite important, do not obtrude themselves.

And so, after the passage that I have read you, he goes on to argue [Ricardo, 1815, pp. 17-18] that improvements in modes of cultivation will lower value, and then—and now we come to the controversial point—since importing the product of superior lands abroad is like having recourse to an improvement at home, to prohibit importation is similar to prohibiting improvements [ibid., pp. 20-25]. Perhaps I have used the word "superior" in a sense which is a little misleading in this respect. I think that you should substitute the word "cheaper," although when I come to deal with Ri-cardo's theory of international trade I will tell you why I have done it. So to prohibit importation is similar to prohibiting domestic improvements. Now, there you have the raison d'être of the law of diminishing returns and the labour theory of value.

A theory of rent and a theory of profits were also the outcome of these discussions, and, indirectly, a theory of wages too. Let us look a little more closely at the way in which they developed.

Take rent first. In the earlier days before the eighteenth century, high rents were looked upon as a sign of prosperity. And quite clearly this was due to the fact that, in those days, the governing class, the oligarchy, was on the whole composed of landowners, and they felt, and their apologists felt, that when rents were high that was a sign that the nation was doing pretty well, whereas low rents were thought to be a sign that the country was going to the dogs. And these views were not contradicted by earlier theoretical discussions. The physiocrats thought that a high net product, composed mainly of agricultural and—in brackets—extractive production, was to be the aim of economic policy. They then added, which you must never forget, that they thought that all taxation must fall on the net product. And Adam Smith did not think that the interests of the landowners were particularly opposed to the interests of society. His reasons for that are not absolutely clear, considering that he had said that the landowners, like all other men, loved to reap where they hadn't sown [Smith, 1776, 1:51]. But certainly, if you read through the very long chapter on rent in Adam Smith's book, you don't find rent held up as the villain of the piece—far more high profits and the interests of merchants and manufacturers, for whom he is supposed by ignorant people to be the apologist.

But with the Corn Law controversy this thing came into prominence, and while Ricardo and West were reflecting on the law of diminishing returns and all that, Malthus published a pamphlet entitled Inquiry into the Nature and Progress of Rent [1815]. And this is an interesting and illuminating book, and Malthus' other pamphlet, actually apologising for the Corn Laws [1814], is by far the most intelligent apology of the multitudi-

nous literature apologising for the Corn Laws. Quite worth reading, and worth reading his arguments with Ricardo. But in the Inquiry into the Nature and Progress of Rent, which is more theoretical, he argues that rent is due to three causes:

1. Land produces a surplus over the expenses of cultivation;

2. That this surplus always creates in the long run new demand—the argument of his theory of population; and

3. That the most fertile land is scarce. [Malthus, 1815, p. 8]

And therefore, for these three reasons, rent is to be regarded as a beneficial feature—a beneficial social institution.

Now, this didn't appeal at all to Ricardo. And if you read the superficial books, you will find that Ricardo is represented as being an apologist for stockbrokers, but by the time that Ricardo took part in this controversy, he was at least as much a landowner as he was a holder of stock. Indeed, in one of his letters to Malthus he said he simply would not know how to value his estate in those terms. And he was a rich man. Starting from zero, roughly speaking, and never indulging in risky speculation, he accumulated a fortune of something like three-quarters of a million pounds, which in those days was big money—much more than Keynes accumulated in our own day. Keynes left, roughly speaking, a million pounds, and some pictures which, of course, would be very much more valuable now.

But Ricardo was against high rents for intellectual reasons, and he realised that Malthus' number 3—the scarcity of the most fertile land—was the means of turning the tables on Malthus. And so he argues in this pamphlet that I am discussing, the Influence of Low Price of Corn on Profits of Stock, that only Malthus's third reason is responsible for rent. The fact that land produces a surplus over expenses of cultivation doesn't mean that rent should exist if it produced an indefinite surplus and the surplus was always creating new demand. That would be too dogmatic for Ricardo, who realised that the surplus need not create a new demand always. Rent was only paid because—famous phrase—of the niggardliness of nature in providing fertile land, and rent only consists of profits transferred from the investors to the landlords. He says:

If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. ... It is only, then, because land is not unlimited in quantity and uniform in quality, . . . that rent is ever paid for the use of it. [Ricardo, 1821, p. 70]

There you have the Ricardian theory of the origin and cause of rent.

But that wasn't all. Having shown rent to be an indication of poverty rather than riches, Ricardo went on to try to show by a complicated argument that the interests of the landlord were always opposed to the interests of society, at any rate in the short run, in that, he argued, the progressive improvement or the admission of cheap corn always diminished rent. You've seen already from what I have read to you how he compared improvement with cheap corn, and he dwells on this with unusual rhetoric. He says:

If the interests of the landlord be of sufficient consequence, to determine us not to avail ourselves of all the benefits which would follow from importing corn at a cheap price, they should also influence us in rejecting all improvements in agriculture, and in the implements of husbandry; for it is as certain that corn is rendered cheap, rents are lowered, and the ability of the landlord to pay taxes, is for a time, at least, as much impaired by such improvements, as by the importation of corn. To be consistent then,

let us by the same act arrest improvement, and prohibit importation. [Ricardo, 1815, pp. 49-50]

So that landlords were to be watched. But what about the interests of the capitalists?

Well, this brings us to the theory of profit. And what I am about to say, I warn you is extremely superficial; I shall be devoting half a lecture to the theory of profits next week, but I want to give you the controversial side of the Corn Law debate before I get down to analytical detail. Ricardo thought that, in the end, wages would tend to subsistence level, although he was aware by that time that subsistence level would be a psychological subsistence level and not a physiological subsistence level. I shall come back to that next time. Profits, according to Ricardo were a residue—something left after wages and rents had been paid. So that if corn was made more expensive by extension of cultivation at the margin— and by the margin he clearly had in mind the less fertile land, or the marginal return to the more fertile land when additional investment was put on it—if corn was made more expensive—the labour theory of value and the Law of Diminishing Returns—then wages must rise, and the amount left for the profit maker must fall in consequence, so that the influence of the profit maker was opposed to the interests of the landlords. For the landlords, the prohibition of importation was desirable because it made corn dear and rents high. For the capitalist it was undesirable because it made corn dear, wages had to rise in consequence, and consequently less was left for profit.

But you must not leave it there. Ricardo, with Smith, thought that the interests of the wage earners were to be fostered by accumulation, and accumulation was chiefly out of profits. He hoped that the stationary state was not near. Professor Hollander proves that he thought that it might be far distant. He hoped that accumulation, mainly out of profit, would go on outstripping subsistence wages and therefore raising wages, and he hoped that would go on long enough for the labourers to learn expensive habits, and, consequently—and this is a modern phrase but I just use it to make vivid my point—the psychological subsistence level would be raised.

Well, there is the controversial part of the emergence of the classical theory of value and distribution. I want now to go on to discuss the analytical development by Ricardo in the Principles, in Torrens' Essay on the External Corn Trade, and so on.

Well, I think that I have time to deal with the Law of Diminishing Returns, which you hear so much about in modern theory that I can, I think, assume that I can go very quickly.

The classical economists on the whole were inclined to confine the Law of Diminishing Returns to agriculture, and to it they opposed the Law of Increasing Returns in manufacture—rather ill-defined, not always appealing to the extent of the market as Adam Smith had done. But in modern times West's distinction between marginal and average returns has been emphasised, and with the Knightean production function, which, you know, shows aggregate returns rising to a maximum aggregate, and then the inflexion of the curve shows marginal returns beginning to diminish, and the tangent to the aggregate curve shows average returns beginning to diminish.

Well, in modern times again—and this started before modern times; you find it in Senior to some extent, but it must be regarded as figuring large in modern analysis—the Law of Variation of Returns has been generalised in the shape of the production function, and you can draw a simple production function in three dimensions and get most out of it that way, if you like. The production function derives from what Edgeworth [1911], with his rather amiable way of inserting a comic jest in order to drive home his analysis, which was not always as clear, as is comic jest, talked about, first of all, dosing—which is a very common word—dosing land with increasing amounts of capital and labour. And Edgeworth suggested: Well, why not reverse the relationship between patient and dose, and dose a constant of labour with varying amounts of land? And you will get a production function of roughly speaking the same sort of curvilinear order.

And thirdly, in modern times, the original Law of Diminishing Returns has been supplemented. The nineteenth-century classical economists did not succeed in supplementing it as well as Adam Smith had supplemented his treatment of the division of labour by his emphasis on the extent of the market. The classical economists and the neoclassical economists under the leadership of Marshall got all muddled up by trying to apply the conception of increasing returns to two-dimensional diagrams showing the increasing returns curve as a function two variables, whereas, as Allyn Young [1928] points out—and I talked to you about this when I was talking about Adam Smith's chapter—increasing returns through a society as a whole is a function of the disintegration of industry with the increasing division of labour.

So much for the diminishing returns side of the controversy. Next time I will plunge into the arcana—and there will be more of Keynes than hitherto—of the classical theory of value and distribution and its modifications.

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