The diminishing-return theory (or as we could also call it, the differential-cost theory), as everybody knows, is associated with the name of Ricardo, who made such a success of it that it survived into the twentieth century. It was part of the great Ricardian detour 70 for it was essential to Ricardo’s analytic pattern as a device for eliminating the land factor from the value problem (see above, sec. 2). 71 Actually, of course, rent enters or else does not ‘enter into prices’ in exactly the same sense in which the one proposition or the other is true of wages. 72 Nevertheless, Ricardo achieved his purpose of excluding rent from the price (value) problem in this way. In practice, firms operate under different cost conditions—an observation which then as now was part of the economics of the man in the street—there are ‘low-cost’ and ‘high-cost’ firms. We may, of course, array them in ascending order of costs, and we further observe without difficulty that, in a state of perfect equilibrium and perfect competition, price cannot be lower and is not likely to be much higher than the average costs of the highest-cost firm. This is what Ricardo meant when he said sometimes, for example, in Chapter 27 of the Principles, that the ‘real value of a commodity is regulated…by the real difficulties encountered by that producer who is least favoured.’ 73 Referring to this, espe- a type who could not be left out of any sociology of nineteenth-century England. The memoir by C.W.Thompson (1869), though not a great performance, is worth reading. 70 The detour character of Ricardo’s work shows in this instance with particular clarity. For he actually did begin with the price ‘which is paid…for the use of the …powers of the soil,’ a definition that contains all that is needed for a satisfactory theory of rent, and then, before our eyes, turns away from the open road and embarks upon his detour. 71 J.S.Mill and Marx also wished to eliminate the land factor from the value problem. But while this was entirely unnecessary for Mill’s set-up—as he would have been bound to see had he but stopped to think out the implication of his own ideas, it was as necessary for Marx’s as it was for Ricardo’s. What Marx actually did was to merge rent with profit into the homogeneous pool of surplus value, and then, at one remove from the fundamentals of distribution, let landlords and ‘capitalists’ fight it out. This enabled him—as mere decision to do so enabled J.S.Mill—to neglect the existence of rent in his basic analysis of value. On Rodbertus’ attempt to rationalize the way in which rent is determined, see above, ch. 4, sec. 5. 72 J.S.Mill’s attempt to get round this (Book II, ch. 16, 6) is a most instructive example of a type of specious reasoning by which we often delude ourselves when defending a proposition that, from habit, we have come to believe needs no defense at all. The case is so instructive, first, because J.S.Mill erroneously thought that he needed the proposition that rent does not enter into prices and, second, because his argument is ingenious and, at first sight, convincing. He actually arrived at the conclusion that ‘rent does not really form any part of the expenses [my italics] of production, or of the advances of the capitalist.’ And this patent absurdity is coolly upheld on the ground that ‘whoever cultivates land, paying a rent for it, gets in return for his rent an instru ment of superior power to other instruments of the same kind,’ i.e. he enjoys a differential advantage which the payment of rent does not more than compensate! 73 There is no contradiction between this and A.Smith’s apparently opposite opinion that it is the lowest-cost firm that tends to regulate price. For A.Smith thought of the History of economic analysis 642 cially in Chapter 2, he recognized that different portions of the output of a single firm may also be produced at different costs, for example, if produced on plots of different fertility; that these portions too may be arrayed in ascending order of their costs; 74 and that in a state of perfect equilibrium and perfect competition, the highest of these costs will tend to equal price. Finally, he generalized this to include the logically heterogeneous case where it is not possible to speak of different costs of the different portions of any given total output, and where every part of this output costs just as much as every other part, but where it is still possible to allocate to each successive increment of output the increase in the cost of total output which must be incurred in order to produce it. 75 Whenever we have decreasing returns in any or all of these senses, there is always 76 an element of product that is being produced without any differential advantages and for which it is therefore tautologically true that its producer does not pay for differential advantages and that payments for intramarginal advantages do not enter into marginal expenses of production. 77 Now, most of these advantages are essentially temporary—a superior type of machine tends to displace inferior types—and others are linked to persons. There are no permanent differential advantages that are linked to process by which more progressive firms crowd out less efficient ones and for a time force them to sell at losses. Ricardo described an equilibrium state. 74 The resulting ‘curve’ has been called Particular Expenses Curve by A.Marshall (Principles, p. 521). 75 This is as far as Ricardo got. That is to say, we may attribute to him—as we may to other writers of the period such as Rooke—a conception of marginal cost that differs from the modern conception only in technique. But we should not, as some interpreters do, attribute to him—or to any other writers of the period except Longfield and Thünen—an understanding of the principles of marginal productivity analysis: his theory of rent, far from amounting to a recognition of these principles in a particular case, really amounts to a denial of them. This has been obscured by the fact that some later marginal productivity theorists, in particular J.B.Clark, represented their theory as an outgrowth of Ricardo’s theory of rent and may have reached their view from a critical elaboration of the latter. Some spoke of a Law of Three Rents without making it clear, perhaps without realizing, that they were not generalizing Ricardo’s schema but upsetting it. It cannot be objected that marginal cost and marginal product are logically related and that, therefore, he who understands the one also understands the other. But this is not so: understanding a concept that implies another does not imply understanding the latter, and, to a great part, advance in theoretical analysis precisely consists in elaborating implications of older thought that had not been seen or not clearly seen before. Any doubt or confusion that may exist in the reader’s mind on the subject could best be cleared up by perusal of Longfield’s Lectures. 76 This presupposes the ordinary assumptions that every pure theory makes, continuity of schedules and absence of institutional inhibitions among others. Many objections that were raised against the West-Ricardo theory of rent did and do rest on nothing but a failure of the critic to understand what pure theory is. 77 Since these marginal expenses—under usual assumptions—equal price, it is therefore quite true that payments for intramarginal advantages do not enter into price, which is the sense in which A.Marshall upheld the Ricardian proposition—i.e. as an empty truism. General economics 643 material factors except the differential advantages of location and fertility of land 78 (and other natural agents). And it must have occurred to Ricardo that here was his opportunity to get rid of the element of rent that disturbed his labor-quantity theory of value. From the structure of his argument in Chapter 2 of the Principles, 79 it is perfectly clear that it was location and differential fertility of different plots of which Ricardo thought primarily, and that the case of decreasing effects of successive applications of equal ‘doses’ of labor to the same plot was, for him, a matter of secondary importance and was never fully absorbed into his system, though it not only came in usefully for the purpose of meeting objections but also was necessary in order to make his argument complete. There is nothing logically wrong with this device. If we do insist on a labor-quantity conception of value, or even on a theory of value that rests on real cost in the sense of disutility and abstinence, and accordingly wish to eliminate requisites of production that are costless in this sense, the device does its duty. 80 But it is not an explanation of the rent of natural agents, but only a substitute for one, which carries meaning only within that theoretical set-up and is nothing but an obstacle to the recognition of important symmetries within any other. However, instead of realizing this and forgetting about it, most economists throughout the nineteenth century treated what soon became known as the Ricardian Theory of Rent as if it had content 78 Elaborating suggestions of Ricardo (see especially Principles, ch. 14), J.S.Mill wrote a sketchy but suggestive paragraph on urban rent (Principles, Book III, ch. 5, 3) that was to be developed by Edgeworth. 79 Chs. 18 (‘Poor Rates’) and 32 (‘Mr. Malthus’s Opinions on Rent’), also his Letters to Malthus and Notes on Malthus’ Principles, are essential complements to ch. 2, and Ricardo’s views on rent cannot be fully understood without this additional material. Perusal of it, however, strengthens the impression that emphasis upon the case in which payment of rent is associated with the different effects of equal ‘doses’ of other factors successively applied to the same plot of land was the result of discussion and his own further thought rather than a ground-floor idea. Even in ch. 2 the passages on this case read like an insertion into an argument that did not originally contain them. This is why superficial readers so often raised the objection that Ricardo’s theory postulates the existence of rentless land. 80 It should not be added, however, that the diminishing-returns theory of rent has the additional advantage of bringing out certain properties of the incomes from the ownership of natural agents that are important for many purposes such as taxation. For these properties can be stated just as well from the standpoint of any other theory of these incomes, such as the marginal productivity theory. It cannot be too often repeated, in particular, that the marginal productivity of an agent that exists independently of any activity of its owner proves nothing for the income of this owner and is, therefore, in itself of no value for purposes of apologetics, though the theory has often been misunderstood in this sense. Vice versa, the Ricardian theory of rent is neither necessary nor sufficient for an attack upon the landed interest and it is nonsense to maintain, as A.Held has averred, that we must explain it by the hatred that Ricardo was supposed to harbor for the landowning class. History of economic analysis 644 irrespective of that set-up. 81 Thus, a pointless discussion of its truth or falsity grew to be a standard topic of the economic periodicals of the time. Admirers not only were in a majority but in general also had the better of the argument. For the objections that were raised rested mostly on misunderstandings, which J.S.Mill’s standard exposition 82 disposed of with ease. Some of them—such as those of Carey or R.Jones 83 —are interesting examples of typical errors that are again and again committed by would-be theorists who have disdained to learn the art of theorizing. The reader will find what he may need in J.S.Mill and in Cannan. 84 Requisiteness and scarcity 85 of natural agents being all that is necessary in order to explain the phenomenon of rent, we might expect to find, at least among votaries of the triad of factors of production, vigorous assertion of a 81 It might be objected that Anderson (see above, Part II, ch. 5, sec. 2) had taught that theory without at the same time anticipating any other part of the Ricardian system. But his teaching on rent is best conveyed by the phrases that rent is a premium paid for the privilege of using superior land and that its payment equalizes the profits of farmers tilling land of different quality. But they point toward a productivity explanation: one pays more for good than for bad land exactly as one pays more for a good than for a bad workman; and competition of capitals enforces that equalization exactly in the same way in both cases. Let us note in passing that J.S.Mill, while denying the allegation that Ricardo made the cultivation of inferior land the cause of the payment of rent on the superior, tried to mend the case by asserting instead that it was the necessity of cultivating the inferior land that causes rent to be paid (Book II, ch. 16, 5). But this is not true either; at least it is not more true than to say that it is the necessity of employing inferior workmen that is the cause of the higher wages of the superior ones. 82 As a consequence of his immature systematization that was due to the hurry in which his Principles was written, Mill impaired his treatment of the subject by dealing with it twice in two far distant chapters: Book II, ch. 16 and Book III, ch. 5. These two chapters are entirely on Ricardian lines, more so than are any others. This is another instance of Mill’s failure to see the implications of his own theoretical insight. However, he did glance in passing at cases in which rent constitutes an element of cost of the opportunity-cost type and even admitted that rent is an element of cost when it results from a scarcity value (Principles, Book III, ch. 6, prop. IX), without realizing the damaging nature of these concessions that give the whole case away. 83 R.Jones, An Essay on the Distribution of Wealth (1831), of which only Part I, ‘On Rent,’ was completed. 84 Did space permit, I should, however, advert to a class of objections that arose from Ricardo’s and his followers’ carelessness. They spoke of ‘doses’ of capital and labor that were being applied to land—the term was introduced by James Mill—without making any attempt at dealing with the problems incident to the composition of these doses. Nor did they take account of the difficulty that land cannot be satisfactorily graded as to fertility without reference to given uses. And they committed many other peccadillos. Objections of this kind are not decisive. But neither are they mistaken. We cannot stay, however. 85 Scarcity, it should be observed, does not imply decreasing returns. Rent would be paid if successive ‘doses’ of capital yielded increasing quantities of product up to the nth dose and nothing at all from the nth on. General economics 645 productivity theory of rent. But, as we have seen on other occasions, mere recognition of the element of productivity does not help us much unless it is streamlined by the notion of marginal productivity, exactly as the element of utility will not produce any serviceable theory of price unless streamlined by the notion of marginal utility. A marginal productivity theory was, in fact, presented by Longfield, who not only anticipated the theory that was to win out in the last decades of the nineteenth century, but in addition said practically all that needs to be said from this standpoint on the West- Ricardo theory. Nobody paid much attention, however, and J.B.Say’s conception of incomes as prices of productive services—which he himself spoiled by attributing the price of the services of land to the institution of private property in land—also remained sterile for the time being. So great was Ricardo’s success that even some writers, who adopted Say’s schema in other respects, inserted into it a Ricardian treatment of rent without betraying any symptom of logical discomfort: J.S.Mill himself is the outstanding example and Roscher is another. But application of the supply and demand apparatus, which was being slowly perfected, should have been sufficient to straighten the matter out and to end all doubts as regards such points as whether improvements in agricultural methods of production benefit or injure the landowner’s interest. It would be, therefore, a useful exercise for us to analyze the position of Malthus, since he was as prominent among the builders of the Ricardian theory of rent as he was among the builders of the supply and demand apparatus. We cannot, however, go beyond the following comments. 86 In his Inquiry of 1815, Malthus developed a view that looks much like West’s and Ricardo’s. The latter evidently was of this opinion since he stated in the preface to his Principles that Malthus and West ‘presented to the world…the true doctrine of rent.’ But even there we may observe the seeds of the controversy that was to follow. 87 Among other things, Malthus insisted on the proposition that rent is a surplus that we owe to the bounty of nature. Now this clumsy phrase, which has been much misunderstood, 88 adumbrates a productivity explanation of rent. The reason why it was in-acceptable for Ricardo was not that it complimented the landlord: his not less clumsy phrases about the ‘niggardliness of nature’ mean not more than that land is not a free good, a fact that is just as necessary for a productivity explanation as is the bounty. The reason was that this idea was incompatible 86 Malthus’ chief contributions to the pure theory of rent are his Inquiry into the Nature and Progress of Rent (1815), ch. 3 of his Principles, and his answer to question 3341 in the Third Report on Emigration (1827). 87 For Ricardo’s side, see especially ch. 32 of his Principles and Notes on Malthus’ ‘Principles of Political Economy’ (Hollander and Gregory, ed., 1928). We shall neglect the disagreement between Ricardo and Malthus concerning the relation of the landowners’ interests to those of society, which produced nothing worthy of attention. 88 Some critics saw nothing in it but an attempt at ‘justifying’ the landlord’s income. I cannot see, however, that it improves the case for the landlord if he be represented as intercepting nature’s bounty, which is the obvious conclusion for enemies of private property in land to draw. History of economic analysis 646 with his value theory. 89 And so we have after all, in spite of the acknowledgment in Ricardo’s preface, a fundamental theoretical difference between the two from the start. Actually, Malthus did not need diminishing returns to account for the emergence of rent. But he did not grasp this clearly and, as was his wont, looked for concrete facts associated with the phenomenon to be described, whether they were essential to it or not. Eventually he produced a mongrel, which was much more vulnerable to Ricardo’s rapier than a correct statement need have been, of what he ineffectually strove to express. He even had trouble with rentless land and could not quite assimilate the notion of the rentless last dose of capital. He attached explanatory significance—we sense amusement in Ricardo’s comment in the chapter on Malthus’ opinions on rent—to the fact that land can produce more than is necessary for the maintenance of the labor employed on it. 90 He was not less sure of the importance of the further fact, already stressed by A.Smith, that agrarian production was peculiar in that it created, as it expanded, additional demand for its products, not in the sense of Say’s law, but because increase in food spelled increase in population—which is not true even according to his own (later) views. And so he got the worst of it, although there was a strong case behind all his irrelevancies. 91 Finally, another range of topics must be touched upon. West and Ricardo looked upon their theory of rent as an explanation of a particular branch of income that goes to a particular class. They did notice in passing, but did not make much of the fact, that the income of this class comprises not only payments ‘for the use of the original and indestructible powers of the soil’ but also payments for the improvements the landlords have made on it. They might have noticed that, in a short-run that may extend over many decades, payments for these improvements do not display any economically significant differences from those elements of the ‘rent’ which the farmer pays that may be interpreted as being paid for those ‘original’ powers. In other words, they might have discovered the phenomenon of quasi-rent. This would not have materially affected their theoretical structure in general or the nature of their rent concept in particular. But other generalizations of this concept did affect 89 Recall: from the standpoint of a value theory that rests upon ‘labor embodied,’ neither bounty nor niggardliness of nature can have anything to do with the value of the product; but the idea of an addition to product value by something that is not labor would seem from this standpoint particularly objectionable. 90 It is not without melancholy interest to note how often both in the theory of rent and in the theory of profits this ‘argument’ recurs in nineteenth century literature: dozens of authors thought that they were saying something when they gravely pointed to the fact that the productive process produced more than is necessary in order to maintain the labor employed. 91 Occasionally, however, Malthus made a good point. His view that improvements in agricultural technique affect rent favorably is indeed not truer than is Ricardo’s opposite view. But he was right in pointing out in his Principles that, this time, Ricardo argued the short-run case (as he did more often than either he or his followers realized), and Ricardo seems to have admitted as much. General economics 647 its meaning—and were indeed nothing but steps in the inevitable process of disintegration of the original West-Ricardo ‘theory’ of the rent of land. We have noticed above the analogy that exists between payments for the services of superior land and payments for the services of superior work. Samuel Bailey was the first to turn this fact into an objection to the West-Ricardo theoretical pattern. He was right, though many later authors, Senior in particular and also J.S.Mill (Principles, Book III, ch. 5, 4), generalized the West-Ricardo concept of rent without polemical intention. 92 There are generalizations that spell additional success for a theory: they enrich and extend, but do not endanger, its original interval of application. But there are others that spell or foreshadow the break-up of the theory: by showing that properties which the theory holds to be peculiar to a given phenomenon are also to be found in others, they destroy its original significance and substitute a new for its old meaning. Generalization of the rent concept was a case of the second kind. By virtue of it, rent, the specific return on unimproved soil, merged into the logically distinct category of Costless Surplus, 93 of which the Rent of Ability, recognized by Mill and put to good use by von Mangoldt, is the most important instance. (h) Distributive Shares and Technological Advance. The study of the nine-teenth-century literature on this topic is a tedious task. But it may bring solace to the hearts of those who despair of the value of the technique that developed in the last decades of that century, 94 for the superiority of that tech- 92 J.S.Mill was no more aware of the implications of this generalization than he was of the dangers that lurked behind his admissions of the opportunity-cost type. 93 During the period under survey, this meant, primarily, returns that are earned above other people’s return without an increase in ‘sacrifice’ (‘real’ cost in this sense). But later on it was realized that such a surplus may also be defined in terms of the opportunity-cost analysis. It then means a surplus above what would be necessary in order to draw a service to any particular employment (transference cost). At the moment, we are only concerned with those generalizations that emerged during the period. Reference should, however, be made at once to F.A.Fetter: ‘The Passing of the Old Rent Concept,’ Quarterly Journal of Economics, May 1901. 94 Some familiarity with the elements of modern technique is in part necessary in order to appreciate the argument of this subsection. The reader finds all he needs for this purpose in J.R.Hicks, Theory of Wages, 1932; see especially ch. 6. I wish to point out, however, that in analyzing the effects of factor-saving machinery (no matter whether the factor saved is ‘labor,’ ‘land,’ or ‘technological capital’ itself), we must be careful to distinguish two cases. Technological improvement may impinge upon the productive process from outside, that is to say, through some innovation that revolutionizes the technological horizon of producers (changes their ‘production functions’). The ‘classic’ writers thought exclusively or almost exclusively of this case and hardly every realized—an exception was Barton—that there is another case the effects of which differ substantially from the first: machines may also be introduced that are no novelties to producers and, so far as technological knowledge is concerned, could have been introduced but were not introduced before, because it would not have been profitable to do so. Owing to a change in the relative prices of factors (e.g. an increase in wage rates), their introduction may, however, become profitable. Here we have no change of technological horizons but a change in the combination of factors within History of economic analysis 648 nique—so often called into question—in the solution of practical problems nowhere stands out better than it does in this field. So do, by the same token, the shortcomings of ‘classical’ analysis. The economists of that period were unable to see the general problem at all: they tried to forge different doctrines for the effects of technological advance on the rent of land and on wages. They had to consider the problem separately, as a semi- independent side issue of the theory of distribution or as something to build onto the latter’s main structure instead of solving it on the ground floor of the main structure. We have seen, in fact, that in their analysis of fundamentals they made, and had to make, the assumption that the ratio between wage capital and technological capital is constant and that new savings—this does not apply to Marx, however—are invested in the same ratio. Finally, they were unable to follow the effects of technological advance through the economic system as a whole but picked out bits of them here and there, so that frequently such disjointed elements of what should be a comprehensive theory were marshalled against each other as if they involved different theories. 95 In order to bring this out clearly, we shall confine ourselves to the problem of how technological advance affects the interests of labor 96 and in addition posit this restricted problem in the form in which it posited itself to Ricardo in the famous Chapter 31, ‘On Machinery,’ which he added to the third edition of his Principles, that is, in the form that occurs naturally from the wage- fund standpoint and indeed is an excellent illustration of the wage-fund doctrine, considered as a method of analysis. We shall ask: how does the introduction of a newly invented machine 97 affect the size of the wage fund? Long before the industrial revolution, people realized the obvious fact that machinery often displaces labor. As we have seen above, governments and writers worried about this and labor groups and citizens’ guilds fought against machinery, the more so because immediate effects of this kind are concentrated in time and place, whereas the long-run effects on general wealth are much less visible in the short run and much less easy to trace to the machine. The public, too, did not in general look with favor upon machine production because, in addition to being associated with unemployment and child labor, it was then also associated with inferior quality of product. The growing laborist literature 98 voiced those observations and feelings not more strongly than unchanging production functions. A third case was recognized by A.Smith, namely the case where the introduction of a machine that had been known before becomes profitable as soon as output expands beyond a certain figure. 95 These shortcomings were not so much due to faulty handling of the ‘classic’ apparatus of analysis but to deep-seated faults of this apparatus itself. These faults were many. But if we were called upon to name one as more important than others, we should have to name once more the failure of the ‘classics’ to understand substitution (both of factors and of products) in its full importance. 96 On the ‘classic’ theory of the effects of technological advance on the interests of landowners, see above, ch. 6, sec. 6h. 97 See first footnote of this subsection. 98 As a typical example, see Observations on the Use of Machinery in the Manufactures of Great Britain… By a Mechanic, 1817. General economics 649 did some writers of scientific standing, such as Sismondi, 99 who, mostly, derived from them another argument against saving. Most English economists saw deeper than that and did in this matter exactly the same kind of thing that they did in others, as, for example, in the matter of international trade: preoccupied with what they considered to be fundamental truth and fighting the public’s propensity to attend too exclusively to temporary phenomena, they attended too little to temporary phenomena themselves. With the engaging frankness that was justly commended by Marx, Ricardo explained on the first page of his chapter on machinery that he had shared the prevailing view that, barring temporary difficulties of transition, 100 labor-saving machinery had no effect other than to benefit all classes as consumers. Like increase in foreign trade, therefore, the process of mechanization was a matter of welfare—which it was sure to increase—rather than a matter of that value (Ricardian value), with which he was chiefly concerned, except of course that mechanization would reduce the real and the relative values of the products affected by it, a fact to which Ricardo points again and again. 101 The reason why he thought that no (permanent) reduction in wages (total real wages in our sense of the word) would be induced by it, was that mechanization would not decrease the wage fund. 102 But then he went on to confess that he had discovered reasons for believing that it would. Before presenting Ricardo’s argument, I shall introduce a book that evidently had more to do with Ricardo’s change of mind on the subject of machinery than his reference to it suggests: John Barton’s Observations on the Circumstances which influence the Condition of the Labouring Classes of Society (1817). It is a remarkable performance and far above the rest of the literature that currently criticized the ‘classic’ leaders for their lack of realism, actual or supposed. There is even a small element of 99 French economists of the ‘conservative’ type, such as de Villeneuve-Bargemont (see above, ch. 4, sec. 4) and L.G.A., Vicomte de Bonald (see Oeuvres complètes, ed. J.P.Migne, 1859, vol. II) went still further than Sismondi. But even Sismondi’s argument is, so far as its analytic aspects are concerned, nothing short of deplorable in places. See, e.g., his reasoning in Nouveaux Principes, vol. I, pp. 375–80, and in ‘Du revenu social’ in the 1st vol. of the Études sur l’économie politique (1837–8). 100 Marx, with glowing rhetoric, was to point out the terrors that may be and sometimes were covered by that cool phrase. It would have been more to the point, however, if he had pointed out, even though at some sacrifice of rhetoric, that displacement of labor by machines may be temporary so far as the effects of each distinct act of mechanization is concerned, and yet explain permanent presence of unemployment on the assumption that such distinct acts occur often enough. This point should not be overstressed, but a little overstressing of it would have supplied Marx with a theory of permanent unemployment that would have been much less untenable than was his own, besides saving all the trouble and bile he wasted upon the effort to refute what he called the theory of compensation. 101 It may be noted in passing that the long-run prediction about the course of relative values, which follows from Ricardo’s theory of value, constitutes its main factual justification: clearly products that embody less and less labor per unit as time goes on have historically fallen in price, at least relatively to the others. History of economic analysis 650 102 We see here, clearly and instructively, the effects of Ricardo’s general set-up which hid from his eyes any analogy between rent and wages. truth in the note that Professor Foxwell put on the copy that is in the Kress Library: ‘a very able tract… Its solid and weighty character contrasts in a marked way with Ricardo’s flimsy and unreal speculations’ [sic!]. Barton knew better than to object to abstract reasoning per se or to point to facts that seemed to contradict Smith’s or Ricardo’s conclusion: he knew how to reason and to indicate the cause of those dis crepancies between theory and facts. Thus his ‘reconciliation’ of the views of Ricardo and Smith on the subject of the fall in the rate of profits (op. cit. p. 23n.) is as simple as it is ingenious. But we must confine ourselves to the only proposition that is relevant to the point in hand. He denied that demand for labor always and necessarily increases proportionately to the increase in total wealth (capital plus revenue, according to A.Smith) and that it cannot increase for any other reason (as asserted in the Poor-Law Report of the House of Commons, which appeared shortly before the publication of Barton’s book). 103 And the reason why he denied it was that annual savings do not necessarily issue in proportional increases in fixed and circulating capital (meaning technological and wage capital) but may increase the one more than the other, according to which of the two is more profitable. He explains correctly that if wage rates rise relatively to commodity prices, ‘masters’ will try to use as much machinery as possible, whereas in the opposite case they will be induced to hire more hands: here, then, we have a clear perception of the relation of substitutability between capital and labor that improved upon Lauderdale’s and anticipated Longfield’s but was also ignored by the more influential writers. But though Ricardo did not realize the importance of this principle, he at least accepted the idea that the introduction of machinery into the productive process may injure the interests of manual labor (irrespective of the temporary disturbances that do so in any case) by reducing the total demand for it; and he illustrated this by a numerical example that differs but little from Barton’s (op. cit. p. 15). Ricardo argued like this. A ‘capitalist,’ who so far has employed a certain number of laborers with a certain amount of ‘fixed’ capital, decides to introduce a newly invented labor-saving machine and lets part of these laborers produce this machine, which in his balance sheet now stands for part of the wage capital that he used to reproduce, with a profit, 104 year after year before. His motive for doing so is that, since not all firms adopt a new machine simultaneously, a temporary profit is attached to the introduction of the machine. In Ricardo’s example, the ‘capitalist’s’ capital remains intact—it neither increases nor decreases in value. But it has changed its organic composition. Wage capital has been converted into technological capital—there is now more of the latter and less of the former. When the temporary gain has been eliminated by the competition of other firms who do the same thing, then it is possible that the amount and rate of profit on the total capital will be what they were before the insertion of the machine. Prices of commodities will fall, however, and the manufacturers’ wage fund will be permanently 103 He also denied that ‘liberal reward of labour, as it is the effect of increasing wealth, so it is the cause of increasing population.’ But into his argument against this we cannot enter here. 104 In this chapter, Ricardo comes nearer than he does anywhere else to the profit analysis that Marx was to make his own. Nowhere else is their relation so clearly the relation of Professor Ricardo and General economics 651 . History of economic analysis 644 irrespective of that set-up. 81 Thus, a pointless discussion of its truth or falsity grew to be a standard topic of the economic periodicals of the. understanding of the principles of marginal productivity analysis: his theory of rent, far from amounting to a recognition of these principles in a particular case, really amounts to a denial of them of different plots of which Ricardo thought primarily, and that the case of decreasing effects of successive applications of equal ‘doses’ of labor to the same plot was, for him, a matter of