University of DhakaLand and Labor

In Partial Fulfillment of the Requirement for Obtaining theDegree of Master of Social Science (MSS)

Submitted byName: Sadia AfrinClass Roll: 08Exam Roll: 5231Registration No: 2010- 715- 121Session: 2014- 2015MSS(1st semester)DS- 4th Batch

Date of Submission: 4th June, 2015

University of DhakaEconomics Theories of Land and labor & its Relevant to Developing Countries

In Partial Fulfillment of the Requirement for Obtaining theDegree of Master of Social Science (MSS)

Submitted by:Name: Sadia AfrinClass Roll: 08Exam Roll: 5231Registration No: 2010- 715- 121Session: 2014- 2015MSS (1st semester)DS- 4th Batch

Submitted to: Dr. Rashed Al Mahmud TitumirAssociate ProfessorDepartment of Development StudiesUniversity of Dhaka Date of Submission: 4th June, 2015

DeclarationI certify that this research does not incorporate without acknowledgement any material previously submitted for a degree or diploma in any university; and that to the best of my knowledge and belief it does not contain any material previously published or written by another person except where due reference is made in the text

Class roll-08Exam Roll: 5231Registration No: 2010-715-121Session: 2014-15 MSS (8th Semester) 4th Batch

Supervisors DeclarationI believe that this research is properly presented, conforms to the best specifications of thesis presentation in the university and is prima facie worthy of examination.

FacultyDepartment of Development Studies University of Dhaka

Dedications:

This paper will be dedicated to my parents and honorable teachers

Tables of contentsList of Tables.viList of Graphs...viiAcknowledgement.viiiAbstract:..ixAbbreviations...x Introduction1.1 Introduction..11.2 Objective of the study:..31.3 Research question.....31.4 Limitations of the study...............3 1.5 Conclusion...3Different school of thoughts.....................................................................2.1Introduction:..52.2 Different Theoritical perspectives about Land and Labor:.................5 2.2.1Classical theories52.2.2 Neoclassical Theroies:.17 2.2.3 Other theories.......182.3 Conclusion......27Criticism3.1Introduction.28 3.2 Criticism of Marxist labor theory of value:293.3 Criticism of Ricardian labor theory of value:.31 3.4 Post Keynesian Criticism...32 3.5 Criticism of Sharecropping System32 3.6 Criticism of Ricardian Rent theory............34 3.7 Criticism of Distribution Theory.. 3.8 Conclusion.....41 Relevent to Developing Countries.............................................. 4.1 Introduction...........424.1 State of land in developing countries:the case of Bangladesh .424.2Agricultural sector and labor in developing countries..............................................434.3 Conclusion:44Conclusion 5.1 Concluding Remarks....46References.......................................................................................................................48

List of TablesTable 2.1: Average Firm size and Gross Output24Table 2.2: Average Firm Size and Income Acre 25Table 4.1: Distribution of Firm Holding According to Size43

List of FiguresFigure 2.1: Ricardian Rent Theory16Figure 2.2: The Tenant Model 23Figure 2.3: The Landower Model 24

AcknowledgementAt first, we would like to give my cordial gratitude to the almighty Allah for giving me enormous strength which helps to do my tasks efficiently and complete my research work. It is a great fortune for me to get an opportunity of doing research under Md. Rashed Al Mahmud Titumir, Associate professor, Department of Development studies. His enormous supports and proper guidelines help me to complete my thesis paper. I hope that I will able to apply my knowledge which gain from doing my thesis paper in my professional life. I am also indebted to my beloved and respected parents and also my elder sister for their encouragement in my hard times which give me strength to complete a hard work like thesis paper successfully. Especially I am owed to my sister for helping me to complete some difficult tasks such as data entry and analysis.

AbstractFactors of production,resources orinputsare what is used in the production process in order to produce output that is, finished goods. The amounts of the various inputs used determine the quantity of output according to a relationship called theproduction function. There are threebasicresources or factors of production:land,labor and capital. The number and definition of factors varies, depending on theoretical purpose, empirical emphasis, orschool of economics.Theclassical economicsofAdam Smith,David Ricardo and their followers focuses on physicalresourcesin defining its factors of production, and discusses the distribution of cost and value among these factors. Adam Smith and David Ricardo referred to the component parts of price. According to Marx Labor is the key factor of production for Marx and the basis for Marx'slabor theory of value. Inneoclassical economics, thesupply and demandof each factor of production interact in factor markets to determine equilibrium output, income, and the income distribution. Sometimes theoretical understanding contradicts the empirical studies. The agricultural condition of third world countries can be analyzed from theoretical perspectives. In Bangladesh, The local elite and powerful people absorbed the benefits of land reform and became the owners of vast areas of land, in the context of Bangladesh. However, the transition in land structure has been resulted in fragmentation of the large farm and proliferation of the small and marginal farms. As stated in table 4, the distribution of marginal and small farms has increased to 38.63% and 49.86% of the total farm holdings respectively in 2005 from 24.06% and 46.28% in 1983-84. In Other developing countries, main features of agriculture sector are subsistence farming, cooperative farming, sharecropping, tenant farming and large scale farming.

Abbreviations

GDP Gross Domestic ProductLDCs Least Developed Countries

x

Chapter 1Statement of the study1.1 Introduction: One of the basic elements of economic analysis is the relation of inputs that is the ingredients of means of production required for a process of production, to outputs of commodities and of produced inputs. Natural resources are inputs compulsory for production which cannot themselves be produced. In a modern industrial economy, the vast majority of inputs to any typical process of production are themselves produced outputs of a previous process though natural resources have entered into them in greater or lesser degree at an earlier stage. However, the most basic characteristic of land, its extent and location is not reproducible nor are some of the special qualities of particular pieces of land which allow the production of particular outputs. The basic element in production is work. No production can take place without human labor- even robots must have been made by men. Men cannot be treated merely as a factor of production on the same level as natural resources and other inputs. The manner in which work is organized, and the manner in which the product is distributed, depended partly on technical relationship and partly one type of social system in which work take place. To produce an output, a worker requires both space and time and some pre existing materials on which to operate. Following our prescription of ruthless simplification , we will first consider an economy in which production takes place by means of work applied to one non-reproducible means of production, land, with input of a single homogeneous produce commodity, corn, , which is also the only output of the system. In schematic terms, Work +land + corn. A long established tradition is assumed to have determined methods of production. There is no technical change but the tradition contains knowledge of how different intensities of cultivation, different ratios of work to land, affect the level of output. These technical conditions are such a severe simplifications that we cannot pretend to give an account of actual historical situations but it is intended to show the main principles underlying identifiable periods of economic evolution.Land is needed for all production, for all human life and activity of any kind. When most people think of "land," their mental picture is of farm land: crops, orchards, pastures. But in fact, the most valuable natural resource in modern society is urban land. In cities, activities take less land area per head, but more land value, because the price of city land (per unit of area) is hundreds, sometimes thousands of times higher than the price of rural land. The entire material universe is exclusive of people and their products. Everything physical (other than human beings) which is not the result of human effort is within the economic definition of land. This concept thus includes not merely the dry surface of the earth, but all natural materials, forces and opportunities. The trees in a virgin forest are land; in a cultivated forest they are wealth.Labor is a main factor of production. The size of a nations labor force is determined by the size of its adult population, and the extent to which the adults are either working or are prepared to offer their labor for wages. Mental toil is labor as well as muscular effort. All who participate in production by their mental and physical effort are laborers in the economic sense Labor theory of value.In the pre-industrial world, the relationship between land and people shaped the basis of the economy, and so determined access to wealth, power, comfort, and security. How different societies constructed this relationship was shaped both by the physical environments people occupied and by differing political, social, and cultural traditions. As a result, societies around the world developed a wide variety of systems with which to deal with problems of land and labor, including serfdom, wage labor, and slavery. Many complex societies depended heavily on unpaid labor in one form or another to build roads, for agricultural enterprises, or to produce goods. Frequently, power was determined by how much labor the leaders of societies could mobilize and control. Abundant land and limited labor in the post-1500 Americas led Europeans to look outward to other continents, and embellish existing forms of forced labor for their own capitalist purposes. Transatlantic slavery and forced labor on a massive scale thus came to characterize the period between the sixteenth and nineteenth centuries. For some, this traffic in humans brought wealth and power; for others, it brought misery.Conditions of production depend on unit, stock and social relations. What is the unit of labor? We must first consider how to measure manpower. Traditionally, men, women, and children do different jobs, and their respective roles are different in various societies. We consider a family as consisting of a number of standard men though in some communities the work is mainly done by women. Next we must specify work per man. This is less simple. We need a unit in terms of man hours spread over a year. The seasonality of work in agriculture is a serious problem in reality; for instance, in a particular district there may be an acute shortage of labor at a rush season, and long periods of undesired idleness during the rest of the year. This is another matter which is too complicated for our simple model. We avoid it by supposing that the technique requires a particular succession of operations over a year. Our unit of work then is a number of man hours per year in particular pattern over the year.Production takes times, but a man must eat every day. The cycle of production must always begin with a carry-over from the past, to provide seed and to feed the family of the cultivator till the process of production yields an output. So the stock is required for production consists of a part of each harvest , stock required for production consists of a part of each harvest set aside to provide seed and to support life until next year. Just after the harvest, the stock stays alive as a heat of grain. As the year goes by, it exists as seed in the ground and as a dwindling supply of food plus the gradually growing crop in which the work of the cultivators is embodied. Immediately before the next harvest, the stock consists of a small keep plus the ripe corn in the fields, at the harvest; it reappears once moreasaheapofgrain.Social relation of production is practical relations which survive in every kind of society. But production is not merely a technical process; it involves social relations as well in particular legal rules and accepted conference concerning claims to property. In all societies, the mean of production are owned and controlled by someone, whether it is an individual, organization, or national state. The social relations inherent in the control of the means of production influence not only the manner, by which the technical requirements of production are met but also how much is produced and how the fruits of the production are distributed.1.2 Objectiveofthe study: To find out the main ideas of different school of thought about factors of production and its relevanttodevelopingcountries.1.3 ResearchQuestion: What are the basic theoretical understandings about factors of production?1.4LimitationoftheStudy:Lack of knowledge about land and labor is the first limitation of the study. Besides, it is quite impossible to read the whole theories in a short period of time. The study will be conducted based on secondary data. But considering primary data is important for understanding empirical phenomenon. 1.5 Conclusion:The First factor of production is land, but this contains any natural resource used to produce goods and services. This consists of not just land, but anything that comes from the land. Some common land or natural resources are water, oil, copper, natural gas, coal, and forests. Land resources are the raw materials in the production process. These resources can be renewable, such as forests, or nonrenewable such as oil or natural gas. The income that resource owners earn in return for land resource iscalledrent.The second factor of production is labor. Labor is the effort that people contribute to the production of goods and services. Labor resources include the work done by the waiter who carries your food at a local restaurant as well as the engineer who designed the bus that transports you to school. It includes an artist's creation of a painting as well as the work of the pilot flying the airplane overhead. If you have ever been paid for a job, you have contributed labor resources to the production of goods or services. The income earned by labor resources is called wages and is the largest source of income for most people. The production process desires inputs to produce output. Different school of economic thought attempted to understand the relationship between factors of production and its contribution to produce final output. It is important to understand different economic concept about land and labor relationship to produce final result.

Chapter 2Different School of Thoughts2.1Introduction:Ineconomics,factors of production,resources orinputsare what are used in the production process in order to produce output that is finished goods. The amounts of the various inputs used determine the quantity of output according to a relationship called theproduction function. There are threebasicresources or factors of production:land,labor and capital. Factors of production may also refer specifically to theprimary factors which areland,labor andcapital goodsapplied to production. Materials and energy are considered secondary factors in classical economics because they are obtained from land, labor and capital. The primary factors facilitate production but neither become part of the product nor become significantly transformed by the production process. Land consists of not only the site of production butnatural resourcesabove or below the soil. Recent usage has distinguishedhuman capital from labor.Entrepreneurship is also sometimes considered a factor of production.Sometimes the overall state oftechnologyis described as a factor of production.The number and definition of factors varies, depending on theoretical purpose, empirical emphasis, orschool of economics.Theclassical economicsofAdam Smith,David Ricardo and their followers focuses on physicalresourcesin defining its factors of production, and discusses the distribution of cost and value among these factors. Adam Smith and David Ricardo referred to the component parts of price. According to Marx Labor is the key factor of production for Marx and the basis for Marx'slabor theory of value. The hiring of labor power only results in the production of goods or services when organized and regulated. How much labor is actually done depends on the importance of conflict or tensions within the labor process. Inneoclassical economics, thesupply and demandof each factor of production interact in factor markets to determine equilibrium output, income, and the income distribution. Factor demand in turn incorporates theproductivity relationship of that factor in the output market.Analysis applies to not only capital and land but the distribution of income in labor markets.2.2 Different theoretical perspectives about land and labor2.2.1 Classical theories:2.2.1.1 Labor theory of value by Adam Smith According to Adam Smithvalue refer to the amount of labor necessary to the production of a profitable commodity, including the labor necessary to the development of any real capital employed in the production certain questions regarding value, or price that should be reserved separate were sometimes puzzled by early economists. What determine the price of a good? In the language of modern economics, what determines relative prices? What determines the common level of prices? What is the best measure of wellbeing? The first and third questions are part of modern microeconomics the second, although is usually incorporated under the large umbrella of macroeconomics. Smith did not provide a definite answer to any of these different questions. His treatment of them is confusing in this regard because he interning led his discussion of what decide relative prices with his attempt to find out ameasureofchanges. It is not surprising that historians of economic ideas have argued over Smith's true opinion. One group of writers holds that Smith had three theories of relative prices (labor cost, labor command, and cost of production) and a theory explaining the general level of prices. Another group preserves that he developed on a cost of production theory of relative prices, a theory measuring changes in welfare over time and a theory of the general level of prices. The latter group refute that Smith had a labor theory of relative prices. We believe that Smith experimented with all these theories: a theory of relative prices consisting of labor cost and labor command for a primitive society and cost of production for an advanced economy; the formulation of an index measuring changes in welfare over time; and a theory explaining the general level of prices. RelativePrices: Although Adam Smith gave justification relative prices as determined by supply or costs of production alone, he did not totally overlook the role of demand. He assumed that market, or short-run, prices are determined by both supply and demand. Natural or long-run equilibrium, prices generally depend upon costs of production, although Smith sometimes confirmed that natural price depends upon both demand and supply. These opposition present plenty opportunities for historians of economic theory to debate Smith'srealmeaning.Smith's analysis of the arrangement of relative prices in the economy of his time distinguishes two time periods such as the short run and the long run and two broad sectors of the economy such as agriculture and manufacturing. During the short-run or market period, Smith found downward-sloping demand curves and upward-sloping supply curves in both manufacturing and agriculture depends upon demand and supply. Smith's analysis of the more complex natural price which occurs in the long run includes some contradictions. For the agricultural sector, natural price depends upon supply and demand because the long-run supply curve is upward-sloping which indicates increasing costs. But for the manufacturing sector, the long-run supply curve is at times assumed to be perfectly elastic (horizontal) which represents constant costs and in other parts of the analysis is downward-sloping indicates decreasing costs. In manufacturing, when the long-run supply curve is perfectly elastic price depends entirely on cost of production; but when it is downward-sloping, natural price depends upon both demand andsupply.There are a number of possible interpretations of Smith's statements with regard to the forces determining natural prices for manufactured goods. One may assume that he was merely not reliable possibly because of the long period of time, it took him to write Wealth of Nations or that he thought these issues were of insignificant. Another approach is to select one of his statements on manufacturing costs as representative of "the real Adam Smith." It makes little difference which approach is employed because Smith consistently noted the role of demand in the pattern of natural prices and in the distribution of resources among the various sectors of the economy. The major emphasis in the determination of natural prices is on cost of production.The scholastics became interested in the question of relative prices because they were concerned with the ethical aspects of exchange and the mercantilists considered it because they thought wealth was created in the process of exchange. Even though Smith on occasion discussed prices in ethical terms, he had a more important reason for being interested in the factors determining relative prices.Once an economy practices specialization and division of labor exchange becomes necessary. If exchange takes place in a market such as the one existing at the time Smith wrote, certain obviousproblemsarise.TheMeaningofValueSmith assumed that the word value has two different meanings and sometimes states the utility of some particular object and sometimes the power of purchasing other goods which the ownership of that object expresses. The one may be called "value in use" and the other, "value in exchange." The things which have the greatest value in use have frequently little or no value in exchange and on the contrary those which have the greatest value in exchange have frequently little or no value in use. According to Smith, value in exchange is the power of a commodity to buy other goods its price. This is an objective calculate expressed in the market. His concept of value in use is unclear. It is resulted in a good part of his difficulties in clearing up relative prices. On the one hand, it has ethical associations and is therefore a return to scholasticism. Smith's own puritanical standards are particularly noticeable in his statement that diamonds have hardly any value in use. On the other hand, value in use is the want-satisfying power of a commodity. The utility received by holding or consuming a good. Several kinds of utility are received when a commodity is consumed: its total utility, its average utility, and its marginal utility. Smith's focus was on total utility the relationship between marginal utility and value was not understood by economists until one hundred years after Smith wrote and this hidden his understanding of how demand plays its role in price determination. It is clear that the total utility of water is greater than that of diamonds. This is what Smith was referring to when he pointed to the high use value of water as compared to the use value of diamonds. However, because a commodity's marginal utility often decreases as more of it is consumed; it is quite possible that another unit of water would give less marginal utility than another unit of diamonds. The price we are willing to pay for a commodity. The value we place on acquiring another unit depends not on its total utility but on its marginal utility. Because Smith did not distinguish this, he could neither find a satisfactory solution to the diamond-water paradox nor see the relationship between use valueand and exchange value.SmithonRelativePricesBecause Smith was somewhat puzzled about the issues determining relative prices; he developed three separate theories relating to them. A labor cost theory of value A labor command theory of value, and A cost of production theory of value. He assumed two distinct states of the economy: the early and rude state or primitive society, which is defined as an economy in which capital has not been amassed and land is not appropriated; and an advanced economy in which capital and land are no longer free goods. Laborcosttheoryinaprimitivesociety.In the early and rude state of society which leads both the growth of stock such as capital and the appropriation of land, the proportion between the quantities of labor necessary for obtaining different objects seemed to be the only circumstance which can pay for any rule for exchanging them for one another. If among a nation of hunters for example it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth twodeer.According to Smith's labor cost theory, the exchange value, or price, of a good in an economy in which land and capital are nonexistent, or in which these goods are free, is determined by the quantity of labor required to produce it. This brings us to the first difficulty with a labor cost theory of value. How are we to measure the quantity of labor required to produce a commodity? Suppose that two laborers are working without capital that land is free and that in one hour laborer Jones creates one unit of final product and laborer Brown produces two units. Assume that all other things are equal or to use the shorthand expression of theory, ceteris paribus so that the only reason of the disparity in productivity is the difference in the skills of the workers. Does a unit of output require one hour of labor or two? Smith renowned that the quantity of labor required producing a good cannot simply be measured by clock hours, because in addition to time, the ingenuity or skill involved and the hardship or disagree-ableness of the task must be takenintoaccount.Labor theory in an advanced economy. Smith's model for an advanced society varies from his primitive economy model in two important respects such as capital has been gathered and land appropriated. They are no longer free goods and the final price of a good also must consist of returns to the capitalist as profits and to the landlord as rent. Final prices yield an income made up of the factor payments of wages, profitsandrents .Cost of production theory of relative prices. Smith wrestled with developing a labor theory of value for an economy that included more than labor costs in the final prices of goods, but finally discarded the idea that any labor theory of value was applicable to an economy as advanced as that of his times. Once capital has been accumulated and land appropriated and once profits and rents as well as labor must be paid. The only appropriate explanation of prices, he seems to have found, was a cost-of-production theory. In a cost theory the value of a commodity depends on the payments to all the factors of production: land and capital in addition to labor. In Smith's system, the term profit includes both profits as they are understood today and interest. The total cost of producing a beaver is then equal to wages, profits and rent, TCb = Wb + Pb + Kb; likewise for a deer, TCd = Wd + Pp + R-d- The relative price for beaver and deer would then be given by the ratio of TCb/TCd- Where Smith assumed that average costs do not increase with increases in output, this calculation gives the same relative prices whether total costs or average costs are used. Where Smith assumed that average costs change with output, prices depend upon both demand and supply. However, in his analysis of the determination of long-run natural prices, Smith emphasized supply and cost of production, even when the supply curve was not assumed to be perfectly elastic. Where competition prevails, he maintained, the self-interest of the businessman, laborer, and landlord will result in natural prices that equal cost of production.2.2.1.2Labor theory of value by David Ricardo:He started with the critic of labor theory of value by Adam Smith. For Ricardo, the core of the theory of value of Smith lies in the principle of thedetermination of value such as it was formulated in the two texts referred to above.Ricardo supports his own embodied labor theory of value by giving assent to the theoryof Smith. But, according to Ricardo, Smith was not consequent on this point andhalfway introduced another measure of value incompatible with the aforementionedprinciple of the determination of value. It is there that he begins his criticism. 'AdamSmith, who so accurately defined the original source of exchangeable value and whowas bound in consistency to maintain that all things became more or less valuable inproportion as more or less labor was bestowed on their production has himself erectedanother standard measure of value and speaks of things being more or less valuable inproportion as they will exchange for more or less of this standard measure. Sometimeshe speaks of corn, at other times of labor, as a standard measure; not the quantity oflabor bestowed on the production of any object, but the quantity which it can commandin the market: as if these were two equivalent expressions'Classical economist David Ricardo's labor theory of value holds that thevalueof agood(how much of another good or service it exchanges for in the market) is proportional to how muchlaborwas necessary to produce it including the labor required to produce the raw materials and machinery used in the process. David Ricardo stated it as, "The value of a commodity or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labor which is necessary for its production, and not as the greater or less compensation which is paid for that labor. In this heading, Ricardo looks for to make different the quantity of labor necessary to produce a commodity from the wages paid to the laborers for its production. However, Ricardo was concerned with some variation in prices from proportionality with the labor required to produce them. Of course, a capitalist economy stabilizes this inconsistency until the value added to aged wine is equal to the cost of storage. If anyone can hold onto a bottle for four years and become rich that would make it hard to find freshly corked wine. There is also the theory that adding to the price of a luxury product increases its exchange-value by mere prestige.The labor theory as an explanation for value contrasts with thesubjective theory of value which says that value of a good is not determined by how much labor was put into it but by its usefulness in satisfying a want and its scarcity. Ricardo's labor theory of value is not anormativetheory, as are some later forms of the labor theory, such as claims that it isimmoralfor an individual to be paid less for his labor than the total revenue that comes from the sales of all the goods he produces.It is arguable to what extent these classical theorists held the labor theory of value as it is commonly defined. For instance,David Ricardotheorized that prices are determined by the amount of labor but found exceptions for which the labor theory could not accountAdam Smiththeorized that the labor theory of value holds true only in the "early and rude state of society" but not in a modern economy where owners of capital are compensated by profit. As a result, "Smith ends up making little use of a labor theory of value.2.2.1.3Labor theory of value by Karl Marx:Marx used the concept of "socially necessary abstract labor-time" to introduce a social perspective distinct from his predecessors andneoclassical economics. The simplest definition ofsocially necessary labor timeis the amount of labor time performed by a worker of average skill and productivity, working with tools of the average productive potential to produce a given commodity. This is an "average unit labor-cost", measured in working hours. If the average productivity is that of a worker who produces a commodity in one hour, while a less skilled worker produces the same commodity in four hours then in these four hours the less skilled worker will have only contributed one hour's worth of value in terms ofsocially necessary labor time. Each hour worked by the unskilled worker will only produce a quarter of thesocialvalue produced by the average worker.But the production of any commodity generally requires both labor and some previously produced means of production like tools and materials. The amount of labor so required is called thedirectlabor input into the commodity. Yet the required capital goods have in their turn been produced (in the past) by labor and other capital goods and so on for these other capital goods, and so on. The sum of all the amounts of labor that were direct inputs into this backwards-stretching series of capital goods produced in the past is called theindirectlabor input into the commodity. Putting together the direct and indirect labor inputs, one finally gets the total labor input into the commodity, which may also be called the totalembodied laborin it, or its direct and indirect labor contents.However, it ought to be said that by "socially necessary labor" Marx refers specifically to the total labor-time which on average iscurrentlyrequired to produce an output. It is this current labor cost which determines the value of output. So in a developed market Marx's exchange value refers to the average quantity of living labor which must be performed under currently prevailing conditions to produce a commodity. It is obvious that these conditions are incessantly changing, both in relation to quality of labor, quality of machinery, quality of distribution, and volumes of labor, machinery, sales in the branch, so estimating 'current' requirements is very much an exercise in approximation and dependent on the scales involved. Determined more by societal standards than by individual conditions. This explains why technological breakthroughs lower the price of commodities and put less advanced producers out of business. Finally, it is not labor per se, which creates value, but labor power sold by free wage workers to capitalists. Another distinction to be made is that betweenproductive and unproductive labor. Only wage workers of productive sectors of the economy produce value.2.2.1.4 The Ricardian theory of rentThe Ricardian theory of rent follows from the views of classical writers about the operation of law of diminishing returns in agriculture. Classical authors, West, Torrents, Malthus and Ricardo, each of them independently formulated the theory of differential rent. However, the classical theory of rent in the form presented and elaborated by David Ricardo has become more popular, though the ideas of all of them concerning the land rent are fundamentally same. Ricardo gave credit to West and Malthus as his forerunner in the development of the theory of rent.Ricardo defined rent as follows: Rent is that portion of the produce of earth which is paid to the landlord for the use of the original and indestructible powers of soil.It should be noticed that land rent, according to Ricardian definition, is a payment for the use of only land and is different from contractual rent which includes the return on capital investment made by the landlord in the form of hedges, drains, wells and the like. When return on the capital investment made by the land owner is deducted from the contractual rent, what is left is pure land rent which is the price for the use of only land or the original and indestructible powers of the soil.Assumptions of Ricardian Theory:It will greatly help in the understanding of the Ricardian model of rent determination, if we clearly state the various assumptions made by him. Those assumptions are given below Ricardo considers the supply of land from the viewpoint of the whole society and takes the quantity of land as completely fixed. No amount of higher price for the use of land can call forth an increased supply of it. Thus the total supply of land is perfectly inelastic and unresponsive to any changes in rent. The does not take into account the various alternative uses to which land can be put. He assumes the land to be used for growing a single composite crop corn. Thus land has been taken to be completely specific to one crop such as corn. In this way, in Ricardian model, either land is to be used for growing of com or alternatively it has be left idle. There are only two alternative uses of land: its use for growing of corn or no use at all. Thus he takes the transfer earnings of land as zero. No land owner would like to leave the land idle and therefore every land owner will be would prepared to give it for any rent however little it may be provided that perfect competition prevails. He assumes that land differs in quality. There are various grades of land, differing from each other in respect of fertility and location. Some pieces of land are more fertile than others and, as compared to others some are better located or near to the market centers. He assumes that there is perfect competition in the market for land. In other words, there are many land owners who are to give their land on rent and there are many farmers who are to get land on rent for the purpose of growing corn. Further, each individual land owner and farmer has no influence over rent i.e., the price for the use of land.Given the above assumptions, according to the Ricardian theory, rent arises due to two reasons. Firstly, if land is homogeneous, i.e., of uniform quality and same location, the scarcity of land relative to demand will give rise to rent. Ricardo calls it a scarcity rent. Second, when land differs in quality, i.e., in fertility and location, the scarcity of superior grades of land will give rise to differential rents.Scarcity Rent:The emergence of land rent in the classical theory can be easily explained by imagining that a new island is discovered and some people come to settle there. We suppose that all land in this island is completely homogeneous or is of uniform quality. In other words, all pieces of land in this island are equally fertile and equally well-situated.The quantity of land available for cultivation on this island is fixed and is therefore completely inelastic to changes in the price for its use. Land is to be used for the cultivation of a single crop com. Land is assumed to be having no other alternative uses.When the people come to settle on this island, they will use the land for producing corn by applying labor and capital on it. When all the available land is not yet put in use, the price of the corn will be equal to the average cost of output incurred on labor and capital, with the farmers working at the minimum point of the average cost (exclusive of land rent).The price of the corn must at least be equal to the average cost (exclusive of land rent) in the long run if the use of labor and capital is to be worthwhile. Since we are assuming perfect competition in the market for corn, the farmers equilibrium will be established at the lowest point of long-run average cost curve (exclusive of rent).As long as some land is idle, the production of corn will be increased by bringing new land under cultivation. .Thus until land is not scarce. Some land is yet idle the price of corn cannot rise permanently above the average cost of labor and capital cost.Since the price of corn is, in long-run equilibrium, equal to the average cost of only labor and capital, as long as all land is not yet in use, there will be no surplus left to be earned as rent on land. In other words, it means that so long as there is some available land which is not yet brought into use, farmers will not have to pay any rent to the landlords for the use of their land.Provided the competition among landlords is perfect. The rent will not arise when there is still surplus land for use because the demand for land is relatively less than the supply of it. In other words, land is yet not scarce relative to demand.Price of any things arises only when it is scarce in relation to demand. If any landlord tries to charge any rent when there is still some land lying idle with other landlords, farmers will go to take up that land for cultivation.The landlord need not be paid rent for the use of land since its only alternative use is keeping it idle. To sum up, so long as land is not scarce, rent cannot arise, since price will equal minimum average (labor and capital) cost.Suppose that the population continues increasing so that the demand for corn becomes so large that all available land is brought under cultivation. If the population of the island further increases beyond this, it will raise the demand for the product which will bring about rise in the price level above the minimum average (labor and capital) cost per unit of output giving rise to rent on land. Since it has arisen in due to scarcity of land, it has been called scarcity rent.

Figure: 2.1

MC

ACp1

Price

F

p0E

L

M1M0

Cost Curve

Ricardian concept of Scarcity rent is illustrated in Fig. 2.1. Where AC and MC curves show average and marginal cost per unit output of corn incurred on labor and capital. Price of corn must be equal to OP0if land is to be cultivated at all.Note that price OP0is equal to the minimum average cost per unit of corn output on labor and capital. At price OP0there is no surplus over cost of production and therefore no rent accrues to the land. In other words, supply of land is not scarce in relation to demand for it up to price of corn equal to OP0.2.2.2 Neoclassical theories:2.2.2.1 Distribution theory:The basic idea in neoclassical distribution theory is that incomes are earned in the production of goods and services and that the value of the productive factor reflects its contribution to the total product. Though this fundamental truth was already recognized at the beginning of the 19th century, its development was impeded by the difficulty of separating the contributions of the various inputs. To a degree they are all necessary for the final result: without labor there will be no product at all, and without capital total output will be minimal. This difficulty was solved by J.B. Clark with his theory of marginal products. The marginal product of an input, say labor, is defined as the extra output that results from adding one unit of the input to the existing combination of productive factors. Clark pointed out that in an optimum situation the wage rate would equal the marginal product of labor, while the rate of interest would equal the marginal product of capital. The mechanism tending to produce this optimum begins with the profit-maximizing businessman, who will hire more labor when the wage rate is less than the marginal product of additional workers and who will employ more capital when the rate of interest is lower than the marginal product of capital. In this view, the value of the final output is separated (imputed) by the marginal products, which can also be interpreted as the productive contributions of the various inputs. The prices of the factors of production are determined by supply and demand, while the demand for a factor is derived from the demand of the final good it helps to produce. The word derived has a special significance since in mathematics the term refers to the curvature of a function, and indeed the marginal product is the (partial) derivative of the production function.One of the great advantages of the neoclassical, or marginality, theory of distribution is that it treats wages, interest, and land rents in the same way, unlike the older theories that gave diverging explanations. (Profits, however, do not fit so smoothly into the neoclassical system.) A second advantage of the neoclassical theory is its integration with the theory of production. A third advantage lies in its elegance: the neoclassical theory of distributive shares lends itself to a relatively simple mathematical statement.An illustration of the mathematics is as follows. Suppose that the production function (the relation between all hypothetical combinations of land, labor, and capital on the one hand and total output on the other) is given as Q = f (L,K) in which Q stands for total output, L for the amount of labor employed, and K for the stock of capital goods. Land is subsumed under capital, to keep things as simple as possible. According to the marginal productivity theory, the wage rate is equal to the partial derivative of the production function, orQ/L. The total wage bill is (Q/L) L. The distributive share of wages equals (L/Q) (Q/L). In the same way the share of capital equals (K/Q) (Q/K). Thus the distribution of the national income among labor and capital is fully determined by three sets of data: the amount of capital, the amount of labor, and the production function. On closer inspection the magnitude (L/Q) (Q/L), which can also be written (Q/Q)/(L/L), reflects the percentage increase in production resulting from the addition of 1 percent to the amount of labor employed. This magnitude is called the elasticity of production with respect to labor. In the same way the share of capital equals the elasticity of production with respect to capital. Distributive shares are, in this view, uniquely determined by technical data. If an additional 1 percent of labor adds 0.75 percent to total output, labors share will be 75 percent of the national income. This proposition is very challenging, if only because it looks upon income distribution as independent of trade union action, labor legislation, collective bargaining, and the social system in general. Obviously such a theory cannot explain the entire real economic world. Yet its logical structure is admirable. What remains to be seen is the degree to which it can be used as an instrument for understanding the real economic world.2.2.3 Other theories:2.2.3.1 Sharecropping: Share tenancy is one of a great number of arrangements in the peasants economics which substitute in some way for full working markets in farm inputs or farm outputs. It is a rental market for land which is substituted by the arrangement of sharecropping. Sharecroppingis a system of agriculture in which a landowner allows a tenant to use the land in return for a share of the crops produced on the land. Sharecropping has a long history and there are a wide range of different situations and types of agreements that have used a form of the system. Some are governed by tradition and others by law such as legal contract system. Sharecropping has benefits and costs for both the owners and the croppers. It supports the cropper to remain on the land throughout the harvest season to work the land, solving the harvest rush problem. At the same time, since the cropper pays in shares of his harvest, owners and croppers share the risk of harvests being large or small and prices being high or low. Because tenants benefit from larger harvests, they have an incentive to work harder and invest in better methods than in a slave plantation system. However, by dividing the working force into many individual workers, large farms no longer benefit from economies of scale. On the whole, sharecropping was not as economically efficient as the gang agriculture of slave plantations.In the U.S. "tenant" farmers own their own mules and equipment, and "sharecroppers" do not, and thus sharecroppers are poorer and of lower status.Sharecropping agreementsTypically, a sharecropping agreement would identify which party was expected to cover certain expenses like seed, fertilizer, weed control, irrigation district assessments and fuel. Sometimes the sharecropper covered those costs, but they expected a larger share of the crop in return. The agreement would also indicate whether the sharecropper would use his own equipment to raise the crops, or use the landlord's equipment. The agreement would also indicate whether the landlord would pick up his or her share of the crop in the field or whether the sharecropper would deliver it.For example, a landowner may have a sharecropper farming an irrigated hayfield. The sharecropper uses his own equipment and covers all the costs of fuel and fertilizer. The landowner pays the irrigation district appraisal and does the irrigating himself. The sharecropper cuts and bales the food, and delivers one-third of the baled food to the landlord's feedlot. The sharecropper might also leave the landlord's share of the baled hay in the field, where the landlord would fetch it when he wanted hay.Another arrangement could have the sharecropper delivering the landlord's share of the product to market in which case the landlord would get his share in the form of the sale proceeds. In that case, the agreement should indicate the timing of the delivery to market, which can have a significant effect on the ultimate price of some crops. Themarket timingdecision should probably be decided shortly before harvest, so that the landlord has more complete information about the area's harvest, to determine whether the crop will earn more money immediately after harvest, or whether it should be stored until the price rises. Market timing can entail storage costs and losses to spoilage as well, for some crops.Share tenancy model:There are some models for understanding the sharecropping. Those are given below:The tenant model: In this approach the share tenant is taken to be a profit maxi miser in a competitive market subject to the output shares being fixed in advance it is convenient to refer to the share of output going to the land owner as S and the share going to the tenant as (1-S). Thus if the shares were 60% and 40% then S would equal .60 and (1-S) would equal .40. The farm has the total output response to the input of tenant family labor shown by the total product curve (TVP). The tenant only receives a proportion (1-S), of the total product. Thus as perceived from the viewpoint of the tenant economic interest the relevant output response to labor is given by (1-S) TVP

Figure-2.2:

TVC

Y2

Y1

Total OutputATC

DC(1-s)TVP

OL2L1

Labor Input

Given a with respect to (1-S) TVP by operating at point A with labor input L1. This gives a lower competitive market wage which represents the opportunity cost of labor time to tenant family the profit maximizing position with respect to labor input can be examined. It is rational for the tenant to maximize total profit (EC) and lower output (Y1) than profit (BD) and output (Y2) which could have obtained by maximizing on TVP .The use of the variable input labor is sub optimal and sharecropping is inefficient. The landowner model:In this model the landowner is a profit maxi miser who can vary the amount of land at his disposal, decide the number and size of land parcels distributed amongst share tenants, decide the rent share and stipulate in the share contract the amount of tenant labor input which is required. The only constraint on the landowner is the market wage: the share tenancy contract must permit the tenant to obtain at least the same income as could be obtained by working as wage labor or no tenants will offer themselves as sharecropper

EH

MVP(Farm)MarginalValue Product

(1-S) MVP(tenant)WWAG

FB

OL2L1

Labor Input

As set up in this way an entirely different conclusion is reached. Since the landowner now sets the labor input of the tenant, profit maximization ensures that this occurs where the MVP of labor equals the wage at a labor input L2 in figure. The landowner will adjust the number of tenancies, tenancy size, and share rate so that the implicit rent per unit land is equal to the marginal product of land. With both these conditions satisfied sharecropping becomes efficient. In effect this model turns the landowner into a capitalist farmer. The income distribution resulting from the share tenancy is the same if the landowner managed the land and hired in a labor at the market wage. Gone is the advantage of sharecropping to tenants over wage labor implied by the extra FGA2.2.3.2 Farm Size and Productivity: Is is convenient to examine the relationship of farm size and productivity in two separate steps. The first step focuses on the physical productivity of farms of different sizes. It is concerned with relative tecnical efficiency. The second step focuses on factor market imperfections which result in different outcomes for small and large farms of correct private allocative behavior by both of them. There is an inverse relationship between farm size and yields per unit area. We reproduce parts of two tables. The first of these refers to a farm survey undertaken in northeast Brazil in the early 1970s. The range of farm is large and the gross outputs per unit area indicate an agriculture of low productivity throughout. But the examples serves to reveal in an extreme form the strength of the inverse relationship which has excited attention in the literature. The second example refers to a survey undertaken across India, again in the early 1970s and extracts from the relevant are given belowTable 2.1Size groupAverage farm sizeGross output per hectare

0-9.93.785.92

10-49.925.530.73

50-99.971.916.19

100-199.9138.98.80

200-499.9313.25.00

500+1178.02.20

Table 2.2Size Group Average farm size Income per acre

0-5 2.95 737

5-15 9.30 607

15-25 19.50 482

25+ 42.60 346

Again continuous decline in the area productivity of farms appears to occur as farm size increases such that the productivity of the largest size category of farms is less than half that of the smallest category. More research has been undertaken on this inverse relationship between in India than elsewhere and its validity is one of the most debated issues in Indian agriculture economics. We return to some of the conceptual and statistical problems below but in the meantime we consider the proximate technical reasons for the inverse relationship which are noted in various studies. Land use intensity: Average figures for land productivity such as those cited in the tables 1 and 2 are obtained by dividing total farm output by the total farm. In many cases the inverse relationship between farm size and yield is explained by a parallel inverse relationship between farm size and the proportion of farm area in productive use. In other words, declining land productivity as farm increases results from the underutilization of the total land area available. Output composition:The output composition of larger farms may be oriented more towards land extensive enterprises or lower value crops than smaller farms Multiple cropping:Smaller farms have been found to do more multiple cropping than larger farms, for the same crop in the same locations. The effect of multiple cropping is of cause to raise the total output value for a given area of land. Soil fertility: Large farms may have on average less fertile soils than small farm and various explanations have been given for this. One is that high population density and fragmentation of holding tend to occur in locations of high natural soil fertility. Another is that large farms only improve the best land within their total farm area and ignore the productive potential of less favorable land. The relationship of fertility and farm size is unproven as a general hypothesis even though it may occur in some locations. Irrigation:Some studies reveal an inverse relationship between farm size and proportion of the total farm area under irrigation. Where this occurs it evidently gives one technical reason for the inverse yield relationship Labor intensity:Allied to the inverse yield relationship is an inverse relationship between farm size and the quantity of labor used it per unit area. Smaller farms use more labor per unit area than farms. Higher labor intensity helps to explain other factors like the higher amount of multiple cropping on small farms.The pattern of ideas which emerge from these points may now be drawn out. First, the proposed superior efficiency of smaller farms rests largely on the intensity of utilization of land as a resource. Second, lower intensity of land use as farm size increases means lower use of other inputs per unit area of land. The existence of lower labor use with increasing farm size is well documented and like the use of land its explanation is sought in peculiarities of the way labor markets work for small and large farms respectively. Lower use of other inputs is not so well documented. There are evident problems of comparability where labor is substituted by machines and farms of different sizes operate with different technologies. Third, the scale of farm enterprise has not so far entered the argument. Declining yields with larger farm size could be consistent with decreasing returns to scale.Fourth, two categories of what may be called quality factors are sometimes invoked in support of farm size propositions. There are some quality of land has already been mentioned. The quality of labor refers to attributes of motivation and supervision which involve low cost on small farms and which deteriorate as farm size increases.

2.3 Conclusion:Labor theory of value is a key concept for understanding intrinsic value of labor. According to Adam Smith,refers to the amount of labor necessary to the production of a marketable commodity, including the labor necessary to the development of any real capital employed in the production. BothDavid Ricardoand Karl Marxattempted to quantify and embody all labor components in order to develop a theory of the real price, or natural price of a commodity.The labor theory of value, as presented byAdam Smith, however, did not require the quantification of all past labor, nor did it deal with the labor needed to create the tools (capital) that might be employed in the production of a commodity. The Smith theory of value was very similar to the later utility theories in that Smith proclaimed that a commodity was worth whatever labor it would command in others (value in trade) or whatever labor it would "save" the self (value in use), or both. But this "value" is subject to supply and demand at a particular time. David Ricardo maintained that the economy generally moves towards a standstill. His analysis is rooted in a modified version of thelabor theory of value. He held out the belief that the rate of profit for society as a whole depends on the amount of labor necessary to support the workers who farm "the most barren land that can still maintain agriculture" This model breaks land down into categories based on average fertility rates. The most fertile land naturally produces more food than land of poorer quality. As a result it commands a higher rent. The poorest land utilized for agriculture receives no rent, with all of its earnings going to cover labor and capital costs. The difference between the output from the least fertile land which can still be farmed and that of a higher quality constitutes the source of rent on the better land. The share cropping system refers that a landowner allows a tenant to use the land in return for a share of the crops produced on the land. Sharecropping has a long history and there are a wide range of different situations and types of agreements that have used a form of the system. Some are governed by tradition and others by law. From land owner model, the effects of this model turn to be a capitalist farmer. According to tenant model, sharecropping is considered an exploitation system. A lion share of profit is extracted by the landowner.

Chapter 3Criticisms3.1 IntroductionMajor theories about land and labor or factors of production can be criticized from several perspectives. In the first general argument for the labor-command standard, Adam Smith seems to regard labor solely in the aspect of productive power; but, as the reader will recall, we do not advance far in his many-sided discussion before we encounter labor as disutility. Labor is later said to be an invariable measure, because it stands for a constant amount of hardship. Disutility is associated with value in some very intimate relation. This is, at bottom, the explanation of the remarkable vitality of the labor theory, even in forms that are absurdly incorrect. Marxist theory is being severely criticized for giving more importance on labor intensive industries and argued that capital intensive industries are source of exploitation. On the other hand, Ricadian rent theory is widely criticized from different perspectives. Rent paid to any factor whose supply is fixed in relation to demand. Any factor of production earns rent if its supply is less elastic in relation to its demand. So rent is not a monopoly of land. Modern economists defined it as transfer earning. Rent accrues to all the factors of production. On the other hand, sharecropping is a exploitation system to extort profit from tenant. 3.2 Criticisms of Marxist theory of value:The Marxist labor theory of value has been criticized on several counts. It predicts that profits will be higher in labor-intensive industries than in capital-intensive industries, and empirical data contradicts this. This is sometimes referred to as the Great Contradiction. Marx attempts to explain why profits are not distributed according to which industries are the most labor-intensive and why this is consistent with his theory. Whether or not this is consistent with the labor theory of value as presented in volume 1 has been a topic of debate.According to Marx, surplus value is extracted by the capitalist class as a whole and then distributed according to the amount of total capital, not the just variable component. In the example given earlier, of making a cup of coffee, the constant capital involved in production is the coffee beans themselves, and the variable capital is the value added by the coffee maker. The value added by the coffee maker is dependent on its technological capabilities, and the coffee maker can only add so much total value to cups of coffee over its lifespan. The amount of value added to the product is thus the amortization of the value of the coffee maker. We can also note that not all products have equal proportions of value added by amortized capital. Capital intensive industries such as finance may have a large contribution by capital, while labor-intensive industries like traditional agriculture would have a relatively small one.The theory can also be sometimes found in non-Marxist traditions.For instancemutualismanarchisttheoristKevin Carson'sStudies in Mutualist Political Economyopens with an attempt to integratemargin listcritiques into the labor theory of value.Some Post-Keynesian economists have been highly critical of the labor theory of value.Joan Robinson, who herself was considered an expert on the writings of Karl Marx, wrote that the labor theory of value was largely a tautology and "a typical example of the way metaphysical ideas operate".Others have argued that the labor theory of value, especially as it arises in the work of Karl Marx, is due to a failure to recognize the fundamentally dialectical nature of how human beings attribute value to objects. Pilkington writes that value is attributed to objects based on our desire for them and that this desire is always inter-subjective and socially determined. He writes that:Value is attributed to objects due to our desire for them. This desire, in turn, is inter-subjective. We desire to gain medal or to capture enemy flag [in battle] because it will win recognition in the eyes of our peers. A medal flag are not valued for their objective properties, nor are they valued for the amount of labor embodied in them, rather they are desired for the symbolic positions they occupy in the inter-subjective network of desires.Pilkington insists that this is an entirely different conception of value than the one we find in the marginalist theory found in many economics textbooks. He writes that "actors in marginalist analysis have self-contained preferences; they do not have inter-subjective desires"3.3 Criticisms of Ricardian labor theory of value:The Austrian economistEugen von Bhm-Bawerkargued against both the Ricardian labor theory of price and Marx's theory of exploitation. On the former, he contended that return on capital arises from theroundaboutnature of production, which necessarily involves the passage of time. A steel ladder, for example, is produced and brought to market only if the demand supports the digging ofiron ore, the smelting ofsteel, the machines that press that steel into ladder shape, the machines that make and help maintain those machines, etc.Roundabout processes, Bhm-Bawerk maintained, lead to a price that pays for more than labor value and this makes it unnecessary to postulateexploitationto understand the return on capital.In contrast, Marx argued thatCapital it is notdemandthatcreates butlaborthatpreservesthe value of the commodities obtained prior to the actual process of production - in this case, the iron, steel and machines necessary to make the ladder:Thus, proponents of the LTV argue, without the necessary addition of human labor-power, the ore, steel and machines would not create any new value on their own, but would in fact gradually depreciate what value they originally possessed through the ravages of time and neglect. Once these materials are activated in the labor process, their values are simply transferred from one commodity to another with no increase. They claim that it is not the materials, but the labor-time present in a commodity that represents its mark-up in value over the course of its production.Bhm-Bawerk's positive theory of interest also argued that workers trade in their share of the end price for the more certain wages paid by the entrepreneur. Entrepreneurs, he claimed, have given up a safer wage-earning job to take on the role of entrepreneur. In other words, he claimed that profits compensated theentrepreneurfor the willingness to bear risk and to wait to receive income.Bhm-Bawerk's essential argument that employers are compensated for shouldering some risk in paying their employees ahead of time, however, appears unable to explain how profit can be accumulated in cases where workers are reliant on commissions, tips, etc. for their income, which are received only after they sell their services. However, Bhm-Bawerk's does provide such an explanation. In the context of a waiter earning tips, the waiter himself is not a wage-earner. The restaurant owner does not make of profit from the tips earned by the waiter. The waiter is essentially an entrepreneur, taking the risk that customers will sufficiently compensate him for the labor he provides, while the customers are under no legal obligation to do so. The waiter is making an investment of services in anticipation of future return from the customers. The waiter is compensated by an aggregate amount of earnings from tips that exceeds that labor value provided to the customers, thereby including a return on the waiter's investment. If the tips were not sufficient to provide this return on investment, then the waiter would rationally seek other employment, such as a wage-earning job with similar compensation that does not include the risk element or an entrepreneurial job with similar risk that provides a better return.Regarding other situations where the employer-entrepreneur does receive a profit from after the labor has been rendered (e.g., a salesperson who works on commission), the employer-entrepreneur may take risks other than paying a wage to the salesman, including: providing a salesperson with an office, cell phone and/or computer; paying for product training and marketing materials; paying for travel and lodging expenses; producing inventory in reliance upon future sales that may or may not be made by the salesperson. All of this comprises a potential for loss that accounts for the return on investment realized by the employer-entrepreneur.Nikolai Bukharinargued that Bhm-Bawerk's concept of round aboutness was untenable in the context of the continuous, simultaneous production of a modern economy. 3.4 Post Keynesian criticisms: The Post-Keynesian economistJoan Robinson, who was otherwise sympathetic to Marx's writings, was strongly critical of the labor theory of value. She wrote that it was essentially a "metaphysical doctrine" and "logically a mere rigmarole of words. She writes that in the labor theory of value:Value is something different from price, which accounts for prices, and which in turn has to be accounted for. And to account for it by labor-time is mere assertion. This theory of prices is not a myth. Nor was it intended to be an original contribution to science. It was simply an orthodox dogma.Others have pointed out that the labor theory of value is based on a failure to recognize the properly dialectical component of human desire. Pilkington writes that:Value is attributed to objects due to our desire for them. This desire is inter-subjective. We desire to gain medal or to capture enemy flag because it will win recognition in the eyes of our peers. medal flag are not valued for their objective properties, nor are they valued for the amount of labor embodied in them, rather they are desired for the symbolic positions they occupy in the inter-subjective network of desires.Pilkington says that this is a different theory of value than the one we find in many economics textbooks. He writes that in mainstream margin list theory consumers are viewed in an atomistic manner, unaffected by the desires of their peers. He writes that "actors in marginalist analysis have self-contained preferences; they do not have inter-subjective desires". He says that dialectical analyses of value can be found in the work ofThorstein VeblenandJames Duesenberry.Ignoring differences in skillOne reason argued for the labor theory of value to be invalid is it presumes all labor is valuable, and in some cases some labor may be of no value or of negative value.Robert A. Heinleingives an example in his bookStarship Troopers, where Mr Radchak explains to a high school class that, given flour, eggs, milk, sugar, and green apples, an ordinary baker of reasonable skill can produce a pastry. An expert pastry chef can use his or her skill to produce an extraordinary torte with no more effort than the ordinary baker. But an unskilled or incompetent cook can take these same items, which have value, and produce an inedible mass of ruined dough having zero value. The inexperienced cook's laborsubtractsvalue and leaves nothing in such a case. The character points out that these simple kitchen examples demolish Marx' theory of labor value.3.5 Criticisms of Share Cropping System:The sharecropping ensures the persistent exploitation of tenant farm households. The social welfare is experience entirely and cumulatively over time, by the landowning class while the welfare of the tenant class is continously forced back to the bare survival level. There is a cumulatively unequal participation in the benefits. Sharecropping is a non market form of surplus extraction by one class, the landowners from another class, the landless tenants. This surplus extraction is direct, it is the physical crop share obtained by the non producing landowner from the producing sharecropper. It is not mediated by prices and it is closer to a feudal relation of production than a capitalist one. Sharecropping has been reffered to as semi feudalism in this context.We have discussed as increasing the efficiency of sharecropping are ways of improving the effectiveness of surplus extraction. They succeed in stimulating the relationship between capitalist and worker which typifies capitalist production, the merely serves to reinforce the idea that surplus transfer from the direct producer to the owner of means of production is the central of sharecropping.3.6 Criticisms of Ricardian rent theory:The Ricardian theory of rent has been widely criticized as under: (i) It has been pointed out that there are no "original and indestructible powers of the soil." Good lands, after being constantly cultivated, lose their fertility to a large extent and get exhausted. To this may be replied that if after exhaustion, good lands are matured equally with the bad, the former regain their productive power much more readily than the latter. It is also pointed out that in an old country, where land has been constantly mannered, the upper layer, which grows crops, is all man-madeThe Ricardian theory of rent has been widely criticized as under: It has been pointed out that there are no "original and indestructible powers of the soil." Good lands, after being constantly cultivated, lose their fertility to a large extent and get exhausted. To this may be replied that if after exhaustion, good lands are manured equally with the bad, the former regain their productive power much more readily than the latter. It is also pointed out that in an old country, where land has been constantly manured, the upper layer, which grows crops, is all man-made. There is nothing 'original about it. But this is not correct. The climate, sunshine, air, situation, etc., of a particular piece of land are all fixed by nature. They are all 'original and indestructible'. It is objected that Ricardo uses the term fertility of land in a vague manner. Apart from the factor of situation, fertility depends upon the ability of the farmers and the methods of cultivation used. Moreover, fertility is relative to the crops grown. Ricardo's theory assumes that there exists a no-rent land which only repays the cost of cultivation. In most cases, it is true; there are lands which pay only a nominal rent. Such lands yield no true economic rent. The concept of rent can also explain this situation. For the substance of the theory, it is not necessary that there should exist a no-rent land. The concept of no-rent land is merely imaginary and theoretical and is not realistic. According to the Ricardian theory, rent arises on account of natural differential advantages of superior lands over the marginal one. But even if all the land is of A-grade, rent will still arise. It will arise owing to the operation of the law of diminishing returns when land is intensively cultivated. The marginal unit of labor and capital applied must be compensated by the yield obtained. The earlier units will give surplus over their costs, which will constitute the rent. The fact is that rent arises not on account of superiority-inferiority of land but because land is scarce. If lands, good or bad, were in a state of abundance, there would have been no question of paying or receiving rent. Even if the land were homogeneous, rent will still arise owing to its scarcity. Ricardian theory explains that superior things have superior prices, but it does not explain why prices emerge? As Carey and Roscher point out, it is historically wrong to assume that, in a new country, the best lands are cultivated first. In fact, lands that are first cultivated are not usually the best; they are only the most easily accessible. To this Walker replied that by the best land Ricardo meant not the most fertile land but that which was the best from the point of view of both fertility and situation. Criticism is leveled against Ricardo's corollary that since the marginal land pays no rent, and price is determined by the cost of the marginal land, rent does not form a part of the price of the produce.The modern economists think that it is only from the point of view of economy as a whole that land has perfectly inelastic supply and earns a surplus or rent. This surplus is not included in cost and hence it does not enter into price. But from the point of view of an individual farmer or industry, a payment has to be made to prevent land from being transferred to some other use. The payment, called transfer earnings, is an element of cost and hence enters (vii) the most important criticism of Ricardo, however, comes from those who deny "the necessity of explaining rent by a special theory not applicable to the rewards of other factors of production." They explain rent in the same way as wages, interest and profits. They deny its peculiar nature as contended by Ricardo. No specific and separate theory of rent is called for. The demand and supply theory, which determines all values, also determines the rent of land.3.7 Criticisms of Distribution theoryReturns to scaleNeoclassical theory assumes that the total product Q is exactly exhausted when the factors of production have received their marginal products; this is written symbolically as Q = (Q/L) L + (Q/K) K. This relationship is only true if the production function satisfies the condition that when L and K are multiplied by a given constant then Q will increase correspondingly. In economics this is known as constant returns to scale. If an increase in the scale of production were to increase overall productivity, there would be too little product to remunerate all factors according to their marginal productivities; likewise, under diminishing returns to scale, the product would be more than enough to remunerate all factors according to their marginal productivities.Research has indicated that for countries as a whole the assumption of constant returns to scale is not unrealistic. For particular industries, however, it does not hold; in some cases increasing returns can be expected, and in others decreasing returns. This situation means that the neoclassical theory furnishes at best only a rough explanation of reality.One difficulty in assessing the realism of the neoclassical theory lies in the definition and measurement of labor, capital, and land, more specifically in the problem of assessing differences in quality. In macroeconomic reasoning one usually deals with the labor force as a whole, irrespective of the skills of the workers, and to do so leaves enormous statistical discrepancies. The ideal solution is to take every kind and quality of labor as a separate productive factor, and likewise with capital. When the historical development of production is analyzed it must be concluded that by far the greater part of the growth in output is attributable not to the growth of labor and capital as such but to improvements in their quality. The stock of capital goods is now often seen as consisting, like wine, of vintages, each with its own productivity. The fact that a good deal of production growth stems from improvements in the quality of the productive inputs leads to considerable flexibility in the distribution of the national income. It also helps to explain the existence of profits.Substitution problemsAnother difficulty arises from the fact that marginal productivity assumes that the factors of production can be added to each other in small quantities. If one must choose between adding one big machine or none at all to production, the concept of the marginal product becomes unworkable. This "lumpiness" creates indeterminacy in the distribution of income. From the viewpoint of the individual firm, this objection to neoclassical theory is more serious than from the macroeconomic viewpoint since in terms of the national economy almost all additions to labor and capital are very small. A related problem is that of substitution among factors. The production function implies that land, labor, and capital can be combined in varying proportions, that every conceivable input mix is possible. But in some cases the input mix is fixed (e.g.,one operator at one machine), and in that situation the neoclassical theory breaks down completely because the marginal product for every factor is zero. These cases of fixed proportions are scarce, however, and from a macroeconomic viewpoint it is safe to say that a flexible input mix is the rule.This is not to say that substitution between labor and capital is so flexible in the national economy that it can be assumed that a 1 percent increase in the wage rate will reduce employment by a corresponding 1 percent. That would follow from the neoclassical theory described above. It is not impossible, but it requires a very special form of the production function known as the Cobb-Douglas function. The pioneering research of Paul H. Douglas and Charles W. Cobb in the 1930s seemed to confirm the rough equality between production elasticitys and distributive shares, but that conclusion was later questioned; in particular the assumption of easy substitution of labor and capital seems unrealistic in the light of research by Robert M. Solow and others. These investigators employ a production function in which labor and capital can replace each other but not as readily as in the Cobb-Douglas function, a change that has two very important consequences. First, the effect of a wage increase on the share of labor is not completely offset by changes in the input mix, so that an increase in wage rates does not lead to a proportionate reduction in total employment; and second, the factor of production that grows fastest will see its share in the national income diminished. The latter discovery, made byJ.R. Hicks (1932), is extremely significant. It explains why the remuneration of capital (interest, not profits) has shrunk from 20 percent or more a century ago to less than 10 percent of the national income in modern times. In a society where more and more capital is employed in production, a continually smaller proportion of the income goes to the owners of capital. The share of labor has gone up; the share of land has gone down dramatically; the share of capital has gradually declined; and the share of profits has remained about the same. This picture of the historical development of income distribution fits roughly into the frame of neoclassical theory, although one must also make allowance for the short-run effects of inflation and the long-run effects of technological progress.Returns to the factors of productionThe demand side of the markets for productive factors is explained in large degree by the theory of marginal productivity, but the supply side requires a separate explanation, which differs for land, labor, and capital.RentThe supply of land is unique in being rather inelastic; that is, an increase in rent does not necessarily increase the amount of available land. Landowners as a group receive what is left over after the other factors of production are paid. In this sense, rent is a residual, and a good deal of the history of the theory of distribution is concerned with the issue whether rent should be regarded as part of the cost of production or not (as in Ricardo's famous dictum that the price of corn is not high because of the rent of land but that land has a rent because the price of corn is high). But inelasticity of supply is not characteristic only of land; special kinds of labor and the size of the total labor force also tend to be unresponsive to variations in wages. The Ricardian issue, moreover, was important in the context of an agrarian society; it lacks significance now, when land has so many different uses.WagesIn analyzing the earnings of labor, it is necessary to take account of the imperfections of the labor market and the actions of trade unions. Imperfections in the market make for a certain amount of indeterminacy in which considerations of fairness, equity, and tradition play a part. These affect the structure of wages--i.e.,the relationships between wages for various kinds of labor and various skills. Therefore one cannot say that the income difference between a carpenter and a physician, or between a bank clerk and a truck driver, is completely determined by marginal productivity, although it is true that in the long run the wage structure is influenced by supply and demand.The role of the trade unions has been a subject of much debate. The naive view that unions can raise wages by their efforts irrespective of market forces is, of course, incorrect. In any particular industry, exaggerated wage claims may lead to a loss of employment; this is generally recognized by union leaders. The opposite view, that trade unions cannot influence wages at all is held by a number of economists with respect to the real wage level of the economy as a whole. They agree that unions may push up the money wage level, especially in a tight labor market, but argue that this will lead to higher prices and so the real wage rate for the economy as a whole will not be increased accordingly. These economists also point out that high wages tend to encourage substitution of capital for labor (the cornerstone of neoclassical theory). These factors do indeed operate to check the power of trade unions, although the extreme position that the unions have no power at all against the iron laws of the market system is untenable. It is safe to say that basic economic forces do far more to determine labors share than do the policies of the unions. The main function of the unions lies rather in modifying the wage structure; they are able to raise the bargaining power of weak groups of workers and prevent them from lagging behind the others.

Interest and profitThe earnings of capital are determined by various factors. Capital stems from two sources: from saving (by households, financial institutions, and businesses) and from the creation of money by the banks. The creation of money depresses the rate of interest below what may be called its natural rate. At this lower rate, businessmen will invest more, the capital stock will increase, and the marginal productivity of capital will decline. Although this chain of reactions has drawn the attention of monetary theorists, its impact on income distribution is probably not very important, at least not in the long run. There are also other factors, such as government borrowing, that may affect the distribution of income; it is difficult to say in what direction. The basic and predominant determinant is marginal productivity: the continuous accumulation of capital depresses the rate of interest.One type of earning that is not explained by the neoclassical theory of distribution is profit, a circumstance that is especially awkward because profits form a substantial part of national income (20-25 percent); they are an important incentive to production and risk taking as well as being an important source of funds for investment. The reason for the failure to explain profit lies in the essentially static character of the neoclassical theory and in its preoccupation with perfect competition. Under such assumptions, profit tends to disappear. In the real world, which is not static and where competition does not conform to the theoretical assumptions, profit may be explained by five causes. One is uncertainty. An essential characteristic of business enterprise is that not all future developments can be foreseen or insured against. Frank H. Knight (1921) introduced the distinction between risk, which can be insured for and thus treated as a regular cost of production, and uncertainty, which cannot. In a free enterprise economy, the willingness to cope with the uninsurable has to be remunerated, and thus it is a factor of production. A second way of accounting for profits is to explain them as a premium for introducing new technology or for producing more efficiently than one's competitors. This dynamic element in profits was stressed by Joseph Schumpeter (1911). In this view, prices are determined by the level of costs in the least progressive firms; the firm that introduces a new product or a new method will benefit from lower costs than its competitors. A third source of profits is monopoly and related forms of market power, whether deliberate as with cartels and other restrictive practices or arising from the industrial structure itself. Some economists have developed theories in which the main influence determining distributive shares is the relative "degree of monopoly" exerted by various factors of production, but this seems a bit one-sided. A fourth source of profits is sudden shifts in demand for a given product--so-called windfall profits, which may be accompanied by losses elsewhere. Finally, there are profits arising from general increases in total demand caused by a certain kind of inflationary process when costs, es