## Monday, 8 January 2018

### [3. Analysis of the Tables]

The tables show a wide variety of scenarios, whereas “Ricardo, because he had a false conception of the general law of rent, perceived only one side of differential rent and therefore wanted to reduce the great multiplicity of phenomena to one single case by means of forcible abstraction.” (p 270)

#### [a)] Table A [The Relation Between Market-Value and Individual Value in the Various Classes]

Table A
 Class C Capital £'s T Output Tons TV Total Value £'s MV Market-Value £'s Per Ton IV Individual Value £'s per Ton DV Differential Value £'s per Ton CP Cost-Price (price of production) £'s per ton AR Absolute Rent £'s DR Differential Rent £'s AR in T Absolute Rent in Tons DR in T Differential Rent in Tons TR Total Rent £'s TR in T Total Rent in Tons I 100 60 120 2.00 2.00 0 1.833 10 0 5 0 10 5 II 100 65 130 2.00 1.846 0.153 1.692 10 10 5 5 20 10 III 100 75 150 2.00 1.600 0.400 1.466 10 30 5 15 40 20 Total 300 200 400 30 40 15 20 70 35

In Table A, the market value, per ton, is determined by Mine I. This requires that demand effectively outstrips supply, so that all of the 200 tons supplied can be sold at a price that returns the average rate of profit to Mine I, after the payment of absolute rent. The market value cannot be higher than the individual value of the output from Mine I, which is the least productive. That does not mean that the market price might not be higher. If the market value is £2 per ton – Mine I's output has an individual value of £120 for 60 tons = £2 per ton – and total output from all mines is 200 tons. If however, demand, at a price of £2 per ton, was 220 tons, demand would exceed supply, and market price would rise to a level whereby demand was choked back to 200 tons. This would be market price rising above market value, because of not being able to expand supply.

In order for even an absolute rent to be possible, it is necessary that demand exceeds supply at the individual price of production of the least productive capital. For example, if the price of production of Mine I's output is £1.80 per ton, and demand, at £1.80 per ton, is only 200 tons, equal to the total industry output, Mine I can only just make average profit, and can pay no rent. To be able to pay even absolute rent of some amount, the demand for coal must exceed 200 tons, at this price of production of £1.80 per ton. Say demand at that price rises to 200 tons, so that it exceeds supply. The market price would then rise to choke back demand to 200 tons. Only if demand exceeds supply to an extent that the market price rises to £2 per ton, the individual value of Mine I's production, would it be able to make a profit in excess of average profit, sufficient to pay the absolute rent in full.

In Table A, the market value is £2 per ton, equal to the individual value of Mine I, and demand is equal to 200 tons, at this price. At this price, Mine I makes the average profit of 10% = £10, and also produces a surplus profit of £10, which is taken as absolute rent. Mines II and III, which have higher productivity produce outputs with lower individual values. This means that besides making average profit, they also make a surplus profit of £10, which is appropriated as absolute rent, but they both make an additional surplus profit, equal to the differential value of their respective outputs, and this is appropriated as differential rent.

Mines II and III, have lower individual values and prices of production than I, because they have higher levels of productivity. They could sell their output for less than the £2 per ton market value, but there is no reason for them to do so. Firstly, in this case, Mine I accounts for the bulk of supply. If they reduced their selling prices it would not affect the overall market price, dominated by I's larger production. Demand, at £2 per ton absorbs all of the output, and so, if they reduced their selling price, they would merely reduce the amount of profit they made on their output unnecessarily. Only if they could significantly increase their output, and then needed to make space for it in the market, would they have a basis for selling at a lower price.

“This law, that the market-value cannot be above the individual value of that product which is produced under the worst conditions of production but provides a part of the necessary supply, Ricardo distorts into the assertion that the market-value cannot fall below the value of that product and must therefore always be determined by it. We shall see later how wrong this is. (p 271)

This concept is also at the heart of marginalist analysis, and the basis of a supply curve that slopes up to the right, as a consequence of diminishing returns.

“It is clear that when the particular quantity required to satisfy demand is supplied, and gradation takes place in the productivity of labour which satisfies the various portions of this demand, whether the transition is in one direction or the other, in both cases the market-value of the more fertile classes will rise above their individual value; in one case because they find that the market-value is determined by the unfertile class and the additional supply provided by them is not great enough to occasion any change in the market-value as determined by class I; in the other case, because the market-value originally determined by them—determined by class III or II—is now determined by class I, which provides the additional supply required by the market and can only meet this at a higher value, which now determines the market-value.” (p 272)

In other words, if production is primarily taking place on the less productive land, if demand rises – a shift in the demand curve to the right – and it is satisfied by production from more productive land, there will be no reason for the producers on this land to sell at a lower price. They will sell at the higher market value, creating a surplus profit above their individual price of production. Where it is already the more productive land that is meeting the existing demand, a similar shift in the demand curve that brings in less productive land, will only occur where this new capital can sell its output at a price that provides it with the average rate of profit, after covering the absolute rent. In other words, the market value must rise so that it now stands above the individual value of output of the previous mines.