Marx' Conception
The objection had to do with land and rent. On the one hand, land rent seems to be a cost of production -- shouldn't the "natural price" of an agricultural product depend on the rent of land? On the other hand, labor will be more productive on land that is more fertile. Crops grown on fertile land will cost less labor. Does that mean it has less value?
What Ricardo discovered is that the rent of land would be just enough to offset the differences in labor cost, so that the value of agricultural products would be the same regardless of the fertility of the land where they were produced. That is because rent is based on differential productivity.
Suppose you were a farmer, and you could rent either of two pieces of land, the north field and the south field. With the same labor and other inputs, the north field will produce more output than the south field. Let's say the output of the north field is worth 1100 labor-days and the output of the south field is worth 1000 labor-days, for a difference of 100 labor-days. Then you would be willing to pay up to 100 labor-days' more rent for the north field than for the south field, right? And the landowner, knowing that, wouldn't take less than 100 labor-days of additional rent for the north field, so the rent on the north field will be 100 more than the rent on the south field. That is, the difference in rent is the same as the difference in productivity.
But what will the total rent be, on each parcel of land? Let's suppose a third field, the east field, is so infertile that it isn't worth any rent at all. The east field, and any land so poor it isn't worth any rent, is called "marginal land." Let's suppose the east field can produce 800 labor days' worth of output, and that just pays the cost of cultivation, so there is nothing left for rent. We have seen that the north field produces 300 more labor-days of output than the east field, so it will get 300 more rent. That's 300 more than zero, so -- in other words -- the north field gets 300 man-days of rent in all. And the south field gets 200 labor-days' worth of rent in all.
Ricardo drew two conclusions:
Thus, Ricardo saved the Labor Theory from what might have been a troubling criticism. In the process he did two other things. First, he discovered a theory of the rent of land. Ricardo's theory of land rent is still regarded by modern economics as the correct theory. Second, Ricardo provided a theory of the distribution of income between landlords and other classes that is also still thought of as correct, but that has some important implications. This theory is not especially favorable to the landlords. According to Ricardo's theory, rents are determined by market processes in which the landlords need not do anything -- just let the farmers compete among themselves to rent the best land. This was no great surprise: everyone knew that landlords could be idle beneficiaries of their wealth -- but Ricardo's theory of rent made that seem, for the first time, an inevitable result of the market process.
Some of Ricardo's other contributions to economic thought were to raise further questions about the labor theory, though. In his discussion of the theory of international trade, in which he (again) discovered principles still central to modern economic theory in the field -- Ricardo stressed that trade would occur only on the basis of differences in the productivity of labor in different countries. That is, each country would export the product in which it had the comparative advantage of relatively lower labor cost. If there were no differences in labor costs, there would be no trade. But, again, this raises the question: if different producers have different labor costs, which labor costs determine exchange-value? Ricardo gave some examples in which the costs in one country or the other prevail, but that didn't settle the question. Later, John Stuart Mill suggested that in many cases, exchange values in international trade would be determined by "supply and demand." This insight would be extended by later economists to become the more modern theory of "exchange value," or rather, market price.
Ricardo also recognized, and to some extent explored, the role of machinery in production, which was growing rapidly at that time. This discussion was to lead to a very tricky problem in the labor theory of value, but no-one would know that until later.
Ricardo left the labor theory a logically sounder and far better entrenched theory than it had been. Nevertheless, it appeared that there were three major exceptions to the labor theory:
Marx' Conception
