Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

Since the population will grow thanks to investment and rising wages, and more and more food will need to be produced to feed everyone, at some point all the best land for corn production will be spoken for. Less fertile or productive land will then be cultivated. However, since all the corn is sold at one price to the workers, who are on subsistence wages, the more productive land already in use yields a higher profit than the less productive land. Here Ricardo developed his celebrated theory of rent.

Ricardo defined rent as a transfer of profit to landlords simply because they had a monopoly of a scarce asset. There was no assumption, as in modern neoclassical theory (reviewed in Chapter 2), that these rents would be competed away. They remained due to power relationships inherent in the capitalist system. In Ricardo’s time much of the arable land was owned by aristocrats and landed gentry but worked by tenant farmers or labourers. Ricardo proposed that the rent from more productive land always goes to the landlord because of competition between tenants. If the capitalist farmer – the tenant – wants to hang on to the largest possible profit by paying less rent, the landlord can give the lease to a competing farmer who will pay a higher rent and therefore be willing to work the land for only the standard profit. As this process goes on, land of increasingly poor quality will be brought into production, and a greater portion of the income will go to the landlords. Ricardo predicted that rents would rise.

More significantly, rising rents were the flipside of rising food prices, caused by lack of good-quality agricultural land. More costly food increased the wages workers needed for subsistence. This growing wage share, Ricardo believed, put a squeeze on profits in other sectors such as manufacturing. As economic development proceeded, the profit rate – basically the manufacturing capitalist’s return on capital – would fall. The profit share – the part of the national income going to capitalists – would also fall. Correspondingly, the wage share going to manufacturing workers would rise. But the extra wages would have to be spent on food, which was more expensive because landlords were charging higher rents. As a result, much of the nation’s income would ultimately go to landlords. This would halt further economic growth and investment in, say, manufacturing because the low returns would not justify the risks. 37

By highlighting the different types of incomes earned, such as rent, profits and wages, Ricardo drew attention to an important question. When goods are sold, how are the proceeds of that sale divided? Does everyone involved get their ‘just share’ for the amount of effort they put into production? Ricardo’s answer was an emphatic ‘No’.

If some input into production – such as good arable land – is scarce, the cost of producing the same output – a given quantity of corn – will vary according to availability of the input. The cost is likely to be lower with good land, higher with inferior land. Profits, instead, are likely to be higher with good land and lower with inferior land. The owner of good land will pocket the difference in profit between the good land and inferior land simply because he or she has a monopoly of that asset. 38Ricardo’s theory was so convincing that it is, in essence, still used today in economics to explain how rents work. 39Rents in this sense could mean a patent on a drug, control of a rare mineral such as diamonds, or rents in the everyday sense of what you pay a landlord to live in a flat. In the modern world, oil producers like those of the Organization of Petroleum Exporting Countries (OPEC) collect rents from their control of an essential resource.

Ricardo’s gloomy picture of economic stagnation is relevant to a modern debate: how the rise of the financial sector in recent decades and the massive rents it earned from speculative activity have created disincentives for industrial production. Some heterodox economists today argue that growth will fall if finance becomes too big relative to the rest of the economy (industry) because real profits come from the production of new goods and services rather than from simple transfers of money earned from those goods and services. 40To ‘rebalance’ the economy, the argument runs, we must allow genuine profits from production to win over rents – which, as we can see here, is exactly the argument Ricardo made 200 years ago, and John Maynard Keynes was to make 100 years later. 41

Indeed, as is also argued today, Ricardo believed that the pool of (mainly unskilled) workers held the losing ticket. In Ricardo’s day, agricultural labour flocked to the fast-growing cities and the supply of unskilled labour exceeded demand for it. Without bargaining power, these workers were paid a meagre subsistence wage. Ricardo’s portrayal of rents dominating production also had a political impact. It helped to persuade Britain to abolish the Corn Laws in 1846 and embrace free trade, which diminished the power of big vested interests and allowed production costs, rather than embedded monopoly and the privileges that went with it, to govern production. The ensuing decades saw Britain become the ‘workshop of the world’. But the abolition of the Corn Laws brought about a political transformation as well as an economic one: it tipped the balance of power away from aristocratic landlords and towards manufacturing as the nineteenth century wore on. Value theory influenced political behaviour, and vice versa – the performativity referred to in the Preface.

Other lessons about the sources of value and who generates it can be drawn from Ricardo’s model of accumulation. Like Smith, Ricardo was concerned with understanding how the economy reproduces itself. Like Smith, he focused on the difference between investment in durable capital and consumption: ‘When the annual productions of a country more than replace its annual consumption, it is said to increase its capital; when its annual consumption is not at least replaced by its annual production, it is said to diminish its capital.’ 42Ricardo hastened to add, though, that all goods produced – from clothes to carts – must be consumed or used; otherwise they would depreciate just like inventory.

Here Ricardo made a fundamental point about consumption, by which he means consumption by capitalists, not just households. As with production, consumption can be productive or unproductive. The productive kind might be a capitalist who ‘consumes’ his capital to buy labour, which in turn reproduces that capital and turns a profit. The alternative – unproductive consumption – is capital spent on luxuries that do not lead to reproduction of that capital expenditure. On this matter, Ricardo is absolutely clear: ‘It makes the greatest difference imaginable whether they are consumed by those who reproduce, or by those who do not reproduce another value.’ 43

So Ricardo’s heroes are the industrial capitalists, ‘those who reproduce’, who can ensure that workers subsist and generate a surplus that is free for the capitalist to use as he or she sees fit. His villains are those ‘who do not reproduce’ – the landed nobility, the owners of scarce land who charge very high rents and appropriate the surplus. 44For Ricardo, capitalists would put that surplus to productive use, but landlords – including the nobility – would waste it on lavish lifestyles. Ricardo echoes Smith here. Both had seen with their own eyes the extravagance of the aristocracy, a class which often seemed better at spending money than making it and was addicted to that ultimate unproductive activity – gambling. But Ricardo parted company from Smith because he was not concerned about whether production activities were ‘material’ (making cloth) or ‘immaterial’ (selling cloth). To Ricardo, it was more important that, if a surplus was produced, it was consumed productively.