Chapter 68 APPENDIX XII Ricardo's Theory of Agricultural Taxes and Land Improvement

Part of his theory was based on potentially impossible assumptions.While logically sound, it doesn't apply to practical situations. We have said a great deal about the depth of Ricardo's thought and the imperfection of its expression, and in particular the reasons which led him to formulate the law of diminishing returns without limitation.The same opinion of ours holds true in his discussion of the effects of land improvements and of the consequences of agricultural taxes. His criticism of Adam Smith is most indiscreet; as Malthus justly points out (concluding remarks of Section X of his Political Economy), "Mr. Ricardo is generally concerned with permanent final always adopts the opposite policy. And it is only by heeding temporal consequences that he can refute Adam Smith's contention that the cultivation of rice or potatoes affords a higher rent than the cultivation of wheat".If Malthus goes on to say: "In fact, there is reason to believe that rent will not even temporarily fall, since the conversion of wheat to rice must be gradual," he may not be very wrong.

But it was of great practical importance in Ricardo's time to think that in a country where much wheat could not be imported, it would be easy to adjust land taxes and hinder land improvement in such a way that the landlord class would become rich in a short time and the masses of the people impoverished. Significance, even now to realize this is of great scientific interest.There is no doubt that when the people are poor and sick, the pocketbooks of the landlord class are bound to be damaged.But this fact does not weaken Ricardo's contention that the sharp rise in agricultural prices and land rents during his lifetime showed that the damage to the state was incomparably greater than the benefit to the landlord class.But let us examine some of Ricardo's arguments, which he liked to start from well-defined assumptions in order to arrive at interestingly precise results; which the reader can synthesize for himself, so that they can be applied to real life.

We begin by assuming that the "wheat" grown in a given country is absolutely necessary; that is, the demand for wheat is inelastic, and any change in its marginal cost of production affects only the price people pay for it, not the price paid for it. will affect its consumption.Next assume that wheat is not imported.The effect of a tax of one-tenth on wheat would then be to raise its real value until the same nine-tenths as before sufficed to repay the marginal quantity of investment, and hence the quantity of each investment.The total surplus of wheat in each plot is therefore the same as before; but since one-tenth of the wheat is expropriated as a tax, only nine-tenths of the former surplus of wheat remains.Since the real value of its parts rises in the ratio of nine to ten, the real surplus remains the same.

But the assumption that the demand for agricultural products is absolutely inelastic is a perverse one.A rise in price must, in fact, necessarily reduce the demand for some produce, if not the principal crop, so that the value of wheat (that is, the value of the total produce) can never rise in proportion to the tax, while the amount employed in all cultivation of the land Labor and capital will be reduced.The surplus of wheat, therefore, must decrease in all lands, but in varying proportions from country to country.Since a tenth of the wheat surplus is expropriated as a tax, while the real value of its parts rises by a ratio of less than nine to ten, there is a double fall in the real surplus (fig. translate these reasonings simultaneously into geometric terms).

Under modern conditions, the free importation of wheat prevents taxes from raising its real value very much, and this real surplus would fall very rapidly; The same standard of living and efficiency will gradually be produced.Both effects, lowering the standard of living and efficiency, have similar effects on producer surplus; both make labor expensive to employers, and the latter make real hourly wages for workers low. Ricardo's reasoning on all these matters is difficult to comprehend: for he often goes without explanation, and when he no longer discusses the "immediate" and "short-term" results compared with the growth of population, he turns to those The "ultimate" sums belong to the "long period" of results, and in the long period the labor value of agricultural products has time to greatly affect the size of the population, and thus the demand for agricultural products.If this explanation is supplemented, his reasoning is seldom flimsy.

We may now examine his arguments concerning the effects of agricultural improvements, which he divides into two classes.Of particular scientific interest is his discussion of the first category.The so-called improvements of the first kind are those in which "I can obtain the same output with less capital without destroying the differences between the productive forces of successive parts of capital"; Fact: That any one improvement contributes more to one field than to another (see Book IV, Chapter III, Section IV), Ricardo, as before, assumes an inelastic demand for wheat, and he Prove that capital will be withdrawn from less fertile land (or from more intensive cultivation of more fertile land), and therefore the surplus in terms of wheat (i.e., the wheat surplus as we refer to it) from the investment under the most favorable conditions There will be a surplus compared with land which is not, as before, marginal to cultivation; since the difference in productivity of the secondary investment is assumed to be constant, the surplus of wheat must be reduced, and the real and labor value of this surplus must, of course, be reduced. drop even more.

This may be illustrated by the right-hand diagram; in which curve AC represents the return afforded by the land of the whole country, taken as a farm, to the various investments of capital and labour.Individuals of labor and capital are not in the order in which they are invested, but in the order of their productivity.