University of Dhaka

Land and Labor

In Partial Fulfillment of the Requirement for Obtaining the

Degree of Master of Social Science (MSS)

Submitted by
Name: Sadia Afrin
Class Roll: 08
Exam Roll: 5231
Registration No: 2010- 715- 121
Session: 2014- 2015
MSS(1st semester)
DS- 4th Batch
Date of Submission: 4th June, 2015

University of Dhaka
Economics Theories of Land and labor & its Relevant to Developing
Countries
In Partial Fulfillment of the Requirement for Obtaining the
Degree of Master of Social Science (MSS)
Submitted by:
Name: Sadia Afrin
Class Roll: 08
Exam Roll: 5231
Registration No: 2010- 715- 121
Session: 2014- 2015
MSS (1st semester)
DS- 4th Batch
Submitted to:
Dr. Rashed Al Mahmud Titumir
Associate Professor
Department of Development Studies
University of Dhaka
Date of Submission: 4th June, 2015

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

Supervisors Declaration
I 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.

Faculty
Department of Development Studies
University of Dhaka

Dedications:
This paper will be dedicated to my parents and honorable teachers

Tables of contents
List of Tables.vi
List of Graphs...vii
Acknowledgement.viii
Abstract:..ix
Abbreviations...x
Introduction.............................................................................................................
1.1 Introduction..1
1.2 Objective of the study:..3
1.3 Research question.....3
1.4 Limitations of the study...............3
1.5 Conclusion...3
Different school of thoughts.....................................................................
2.1Introduction:..5
2.2 Different Theoritical perspectives about Land and Labor:.................5
2.2.1Classical theories5
2.2.2 Neoclassical Theroies:.17
2.2.3 Other theories.......18
2.3
Conclusion......27
Criticism
3.1Introduction.28
3.2 Criticism of Marxist labor theory of value:29
3.3 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...........42
4.1 State of land in developing countries:the case of Bangladesh .42
4.2Agricultural sector and labor in developing countries..............................................43
4.3 Conclusion:44
Conclusion
5.1 Concluding Remarks....46
References.......................................................................................................................48

List of Tables
Table 2.1: Average Firm size and Gross Output
Table 2.2: Average Firm Size and Income Acre 5
Table 4.1: Distribution of Firm Holding According to Size

List of Figures
Figure 2.1: Ricardian Rent Theory
Figure 2.2: The Tenant Model 3
Figure 2.3: The Landower Model

Acknowledgement
At 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.

Abstract
Factors of production, resources or inputs are 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 the production function.
There are three basic resources or factors of production: land, labor and capital. The
number and definition of factors varies, depending on theoretical purpose, empirical
emphasis, or school of economics. The classical economics of Adam Smith, David Ricardo
and their followers focuses on physical resources in 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's labor theory of value.
In neoclassical economics, the supply and demand of 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 Product

LDCs

Least Developed Countries

10

Chapter 1
Statement of the study
1.1 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 laboreven 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
1

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
2

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 more as

heap

of

grain.

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 Objective of

the

study:

To find out the main ideas of different school of thought about factors of production and
its relevant

to

developing

countries.

1.3 Research Question:

What are the basic theoretical understandings about factors of production?
1.4

Limitation

of

the

Study:

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,
3

such as forests, or nonrenewable such as oil or natural gas. The income that resource owners earn
in return for land resource is called rent. 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 2
Different School of Thoughts
2.1Introduction:
In economics, factors of production, resources or inputs are 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 the production function. There
are three basic resources or factors of production: land, labor and capital. Factors of production
may also refer specifically to the primary factors which are land, labor and capital goods applied
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 but natural resources above or below the
soil. Recent usage has distinguished human capital from labor. Entrepreneurship is also
sometimes considered a factor of production. Sometimes the overall state of technology is
described as a factor of production. The number and definition of factors varies, depending on
theoretical

purpose,

empirical

emphasis,

or school

of

economics. The classical

economics of Adam Smith, David Ricardo and their followers focuses on physical resources in
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's labor 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. In neoclassical economics, the supply and demand of each
factor of production interact in factor markets to determine equilibrium output, income, and the
income distribution. Factor demand in turn incorporates the productivity 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 labor
2.2.1 Classical theories:
2.2.1.1 Labor theory of value by Adam Smith

According to Adam Smith value 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
a

measure

of

changes.

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.
Relative

Prices:

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's

realmeaning.

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
6

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 and

supply.

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
obvious
The

problems

Meaning

of

arise.
Value

Smith 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.
7

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 value and and exchange value.
Smith on

Relative

Prices

Because 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.
Labor cost

theory in

primitive

society.

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
8

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
taken intoaccount.
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,
profits and

rents

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 + Rd- 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
9

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

the

determination 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 theory
of Smith. But, according to Ricardo, Smith was not consequent on this point and
halfway introduced another measure of value incompatible with the aforementioned
principle of the determination of value. It is there that he begins his criticism. 'Adam
Smith, who so accurately defined the original source of exchangeable value and who
was bound in consistency to maintain that all things became more or less valuable in
proportion as more or less labor was bestowed on their production has himself erected
another standard measure of value and speaks of things being more or less valuable in
proportion as they will exchange for more or less of this standard measure. Sometimes
he speaks of corn, at other times of labor, as a standard measure; not the quantity of
labor bestowed on the production of any object, but the quantity which it can command
in the market: as if these were two equivalent expressions'
Classical economist David Ricardo's labor theory of value holds that the value of a good (how
much of another good or service it exchanges for in the market) is proportional to how
much labor was 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.
10

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 the subjective 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
a normative theory, as are some later forms of the labor theory, such as claims that it
is immoral for 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 Ricardo theorized that prices are determined by the
amount of labor but found exceptions for which the labor theory could not account
Adam Smith theorized 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 and neoclassical economics. The simplest definition
of socially necessary labor time is 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 of socially necessary labor
time. Each hour worked by the unskilled worker will only produce a quarter of the social value
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
the direct labor 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,
11

and so on. The sum of all the amounts of labor that were direct inputs into this backwardsstretching series of capital goods produced in the past is called the indirect labor 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 total embodied labor in 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 is currently required 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 between productive and unproductive labor. Only wage
workers of productive sectors of the economy produce value.
2.2.1.4 The Ricardian theory of rent
The 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.
12

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.
13

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
14

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

15

MC
p1
AC

Price
F

p0
L

M0

M1

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 OP0 if land is to be cultivated at all.
Note that price OP0 is equal to the minimum average cost per unit of corn output on labor and
capital. At price OP0 there 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:
16

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 profitmaximizing 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
17

is equal to the partial derivative of the production function, or Q/ 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. Sharecropping is 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
18

own their own mules and equipment, and "sharecroppers" do not, and thus sharecroppers are
poorer and of lower status.
Sharecropping agreements
Typically, 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. The market timing decision 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
19

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

20

TC

Total
Output

(1s)TVP

L1

L2

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
21

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

22

MVP(Farm)

Margina
l
Value
Product

(1-S) MVP(tenant)
G
W

L1

L2

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 FGA
2.2.3.2 Farm Size and Productivity:
23

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
below
Table 2.1

Size group
0-9.9
10-49.9
50-99.9
100-199.9
200-499.9
500+

Average farm size

3.7
25.5
71.9
138.9
313.2
1178.0

Gross output per hectare

85.92
30.73
16.19
8.80
5.00
2.20

Table 2.2

Size Group
0-5
5-15
15-25
25+

Average farm size

2.95
9.30
19.50
42.60

Income per acre

737
607
482
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
24

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.
25

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. Both David Ricardo and Karl Marx attempted 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 by Adam 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
26

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 the labor 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 3
Criticisms
3.1 Introduction
Major 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
27

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

instance mutualism anarchist theorist Kevin

found

in

Carson's Studies

non-Marxist
in

traditions. For

Mutualist

Political

Economy opens with an attempt to integrate margin list critiques 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".
28

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 economist Eugen von Bhm-Bawerk argued 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 the roundabout nature 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 of iron ore, the smelting of steel, 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 postulate exploitation to understand the return on capital.
In contrast, Marx argued that Capital it is not demand that creates but labor that preserves the
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

29

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 the entrepreneur for 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 wageearner. 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 employerentrepreneur 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 employerentrepreneur.
Nikolai Bukharin argued that Bhm-Bawerk's concept of round aboutness was untenable in the
context of the continuous, simultaneous production of a modern economy.
30

3.4 Post Keynesian criticisms:

The Post-Keynesian economist Joan 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 of Thorstein Veblen and James
Duesenberry.
Ignoring differences in skill
One 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. Heinlein gives
an example in his book Starship 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
31

same items, which have value, and produce an inedible mass of ruined dough having zero value.
The inexperienced cook's labor subtracts value 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-made
The 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.
32

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 superiorityinferiority 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
33

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 theory
Returns to scale
Neoclassical 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
34

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 problems
Another 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
35

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 production
The 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.
Rent
The 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.
Wages
In 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
36

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 profit

The 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.
37

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, especially wages, lag behind
rising prices. Such is not always the case in modern inflations.
Dynamic influences on distribution
Prices
Neoclassical theory throws light upon the long-run changes in distribution of income. It fails to
take account of the short-run impact of business fluctuations, of inflation and deflation, of
rapidly rising prices. This failure is an omission, though it is true that distributive shares do not
fluctuate as much as employment, prices, and the state of business generally. This lagging in the
behavior of shares can be understood by remembering that they are determined by the quotient of
38

the real remuneration of the factor and its productivity; both variables move, according to
marginal productivity theory, in the same direction. Yet inflation and deflation do have a certain
impact upon distribution: if purchasing power shrinks, profits are the first income category to
suffer; next come wages, particularly through the effects of unemployment. In a depression, the
recipients of fixed money incomes (such as interest and pensions) gain from lower prices. In
inflation the opposite happens.
The traditional inflationary sequence was that as prices rose, profits would increase, with wages
lagging behind; this would tend to diminish the share of labor in the national income. Experience
since World War II, however, has been different; in many countries wage levels tended to run
ahead in the inflationary spiral and profits lagged behind, although most entrepreneurs eventually
succeeded in shifting the burden of wage inflation onto the consumers. The result of the postwar
inflation was a slight acceleration of the increase in the share of labor, while the shares of capital
and land decreased faster than they would have in the absence of inflation. Profits as a whole
held their own. The struggle among the various participants in the economic process no doubt
added fuel to the inflationary fires.
Technology
Another dynamic influence is technological progress. The concept of the production function
assumes a constant technology. But in reality the growth of production is much less the
consequence of increased quantities of labor and capital than of improvements in their quality.
This element in increased production is distributed in a way not fully explained by neoclassical
theory. Part of the change in distribution that is caused by technological progress can be analyzed
as

resulting

from

changes

in

the

elasticity

of

production.If

goes up, technological change is said to be "capital-using," and the share of capital will increase.
This is what, in fact, may have happened; the change in technology has offset, though it has not
neutralized, the decline in the share of capital caused by the employment of a higher amount of
capital per worker. But another part of the fruits of technological progress is garnered by profit
receivers, probably quite a substantial part. Businessmen who are quick innovators make high
profits; in a rapidly changing society, profits tend to be high, a circumstance that is fortunate
39

because profits are the mainspring of economic change. The high rate of growth experienced by
the post-World War I Western world stemmed from this profit-innovation-profit nexus.
Personal income and neoclassical theory
The neoclassical theory endeavors to explain the prices of productive factors and the distributive
shares received by them. It does not come to grips with a third category of distribution, that of
personal income, which is much more affected by institutional arrangements and by
characteristics of the social structure. Profits in particular may be shared in various ways: they
may accrue to stockholders, to workers, to management, or to the government; or they may be
retained in the corporation. What happens depends on dividend policy, tax policy, and the
existence of profit-sharing arrangements with workers. Neoclassical theory has little to say on
these matters or on the fact that in present-day capitalist society the managers of big business are
virtually in a position to fix their own personal incomes. Managers have so much power vis--vis
the stockholders and their total share of profits is so relatively little that their ability to pay
themselves high salaries is limited only by the conventions of the business world. These high
incomes cannot be explained by the categories of the neoclassical theory, and they do not
constitute an argument against the theory. They may well argue for changes in society's
institutions, but that is a matter on which the neoclassical theory of distribution does not
pontificate. A great deal of change could occur in the legal and social order without any
disturbance to the theory.

3.8 Conclusion:
Most of the theories related to land and labor or factors of production are strongly criticized due
to inapplicability of those theories to the empirical world. Most of the theories seemed to be a
system of exploitation and have a little bit contribution to overcome the hurdles.

40

Chapter 4
Relevant to Developing Countries
4.1 Introduction:

Most of the developing countries are relied on labor intensive industries. Besides, landlord
system exists in many developing countries. The major characteristics of agricultural system in
developing countries are sharecropping system, tenant farming; large-scale farming where there
is a clear distinction between employers and employees. In developing countries especially in
Bangladesh, labor is exploited by industrialist. It is a common phenomenon in Bangladesh.

41

Surplus is extorted by the owners of the industries through paying subsistence amount of wages
and forcing them to work in overtime.
4.2 State of Land in Developing Countries: The Case of Bangladesh
A substantial proportion of land in Bangladesh is owned by absentee landlords, most of who
reside in urban areas. They let their land under sharecropping arrangements. In Bangladesh,
virtually all arable land is generally used for agricultural production. Growing population has
increased demand for food creating pressure on the land. Every year about 1% of arable land is
being lost for giving accommodation to growing population. Besides, intensive cultivation is
causing loss of soil productivity. Pressure on land will not subsist, so alternatives including
sustainable techniques are crucial. Land reform is essential for ensuring access to land for
farmers and for those who depend on land for their livelihood. The present land tenure system in
Bangladesh has emerged from the Land Reform Act of 1950. It abolished the Zamindar or
Landlord system, introduced by the British colonial rulers, and ensured property rights for the
farmers and dwellers. However, land reform in 1950 had not been able to ensure equitable land
distribution to people of all tiers of the society. 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.

Table 4.1: Distribution of Farm Holdings according to Size, 19883/84-2005 (as percentage)
Size classification
holdings
Marginal (owning
between 0.05 to 0.49
areas)
Small (owning
between 0.50 to 2.49

1983-84

1996

2005

24.06

28.45

38.63

46.28

51.42

49.86

42

areas)
Medium (owning
between 2.50 to 7.49
areas)
Large (owning 7.50+
areas)
Landless

24.72

17.61

10.34

4.94

2.52

1.17

8.67

10.18

14.03

4.3 Agricultural Sector and labor in Developing countries

In developing countries but particularly in low-income countries that characterize large parts of
the African and Asian continent, many economically active persons are located in rural areas.
The Rural Labor Market is characterized by agricultural employment and migration. Agricultural
work has many guises, which include: (i) subsistence farming, (ii) co-operative farms, (iii)
sharecropping (iv) tenant farming (v) large-scale farming where there is a clear distinction
between employers and employees. Theoretically the literature on rural labor markets is weak
based on household models (e.g. Barnum-Squire, 1979). This model predicts households are
either net importers or exporters of labor, with initial factor endowments important in who
demands labor and who supplies labor. These models also assume that households maximize
profits by deciding (i) on what and how to produce and then (ii) what consumption bundle is
chosen assume production and consumption can be completely separated (these markets are
complete). Empirically in rural developing countries this is not the case due to (i) risk (ii)
asymmetric information and (iii) incentive problems this means rural labor markets are
characterized by numerous types of labor market models in the agricultural sector.
(i) Subsistence Farming: small-scale so no likelihood of any economies of scale. Productivity is
low. Such subsistence farming provides the household with the primary source of food. Any
excess food is likely to be sold in local market places. However many chronically poor
households (low nutritional intake, under-weight, calcium deficient etc) are in a vicious circle
that begins with low calorie intake and under-nutrition, which directly affects productivity in
what is highly physical work (Strauss and Thomas, 1999). Even when laborers can earn more
from hiring out their labor to others they may well remain farming their plot of land because of
the importance of producing/providing food for the household given agricultural production is
uncertain - food security. This decision can appear uneconomic (irrational) but because of no
insurance markets, lack of credit markets, asymmetric information and incentive problems is in
fact not irrational at all. The risk of not having food security for the household will in itself lead
43

to (now well-known) diversification of income sources importance of non-farm income and

issue

of

migration/remittances.

(ii) Sharecropping: A way of providing incentives to workers by employers so monitoring costs

and screening costs are redundant. Theoretically this model is a way of overcoming market
failures of asymmetric information and incentives problems. It provides landless workers with
access to land and tools so the landlord is providing, land, tools, possibly some credit and loans
in harsh times. The employer gains by having non-seasonal workers all year round. Often
landlords will offer sharecropping to individuals/households he knows social networks and
issue of trust (new institutional economics) that reduces transactions costs. Kinship networks are
particularly important here so will offer sharecropping to a family member (prior to inheritance
of land). The only problem with sharecropping comes about when the lack of economic power of
the landless workers is exploited by the powerful land-owner

has to be a degree of good-

will.
(iii) Tenant Farming: Pay rent to the land owner, but is little or no security in tenure on the land.
Hence, there is poor incentive to invest in capital and technology and no improvement in
productivity.
iv) Co-operative farming: Small land-owners form larger areas to cultivate so can exploit
economies of scale in inputs and outputs. An issue of access to markets if any surplus is
produced: transport infrastructure needs to be improved within rural areas and between rural and
urban

areas,

where

the

surplus

will

be

sold

for

more.

(v) Commercial Farming: Can lead to significant change in how rural labor markets work. E.G.
Contract farming (employer contracts small landowner to produce crops providing them with
new technology (inputs)) is good if the small landowner still retains some land for his/her own
use

and

has

other

sources

of

income.

(vi) Non-Farming Activities Found by a number of researchers in developing countries those

non-farm income/earnings are one of the most important components in rural household income
basis for hiring (cheap) farm labor. The overriding argument for households wanting to
participate in non-farming activities in both rural and urban locations is that it diversifies sources
of income like spread betting or hedging your bets except this is done in order to decrease the
likelihood

of

food

insecurity.

(vii)The Urban Labor Market: Characterized by (i) greater wage labor, (ii) greater formal
44

sector employment, (iii) public and private sector (iv) Urban self-employment (survivalist for the
majority). Labor market characterized by market forces. However these markets are not
unfettered: still issues of institutional structures of the labor markets, trade union organizations,
employer organizations, and collective bargaining coverage, labor market legislation (e.g.
minimum wages, significant hiring and firing costs).
4.4 Conclusion:
Though Marxist theory of value has criticized by many economists, it is quite applicable in
developing countries in the era of industrial sectors. Sharecropping is a system of exploitation
which can be easily understood through analyzing agricultural system in developing countries.
The characteristics of labor market in developing countries are greater wage labor greater, greater
formal employment, public and private, urban self employment. In tenant farming, there is poor
incentive to invest in capital and technology and no improvement in productivity

Chapter 5
Conclusion
5.1 Concluding Remarks:
Land and labor is the most critical and important elements of factor of production. Land is the
key asset determining access to agricultural livelihood opportunities. In developing countries, the
45

majority of the households hold no agricultural land beyond their immediate homesteads and a
large segment of households do not even own this homestead land. Ownership of land is
concentrated amongst the richest. However the structure of the ownership of agriculture land is
changing over time. The affluent households are diversifying into other activities by selling their
lands, while the poorest households sell their piece of land with a view to meet the income and
expenditure divide in times of emergency. On the other hand, Labor is the source of all wealth,
the political economists assert. And it really is the source next to nature, which supplies it with
the material that it converts into wealth. But, it is even infinitely more than this. It is the prime
basic condition for all human existence, and this to such an extent that, in a sense, we have to say
that labor created man himself.
Classical economics think about cost that it consists of land, labor and capital stock.
Land or natural resource naturally-occurring goods like water, air, soil, minerals, flora and fauna
that are used in the creation of products. The payment for use and the received income of a land
owner is rent. In the case of labor, human effort used in production which also includes technical
and marketing expertise. The payment for someone else's labor and all income received from
ones own labor is wages. Labor can also be classified as the physical and mental contribution of
an employee to the production of the goods. In the case of capital stock, human-made goods
which are used in the production of other goods. These include machinery, tools, and buildings.
According to Marx, The "subject of labor" refers to natural resources and raw materials,
including land. The "instruments of labor" are tools, in the broadest sense. They include factory
buildings, infrastructure, and other human-made objects that facilitate labor's production of
goods and services. On the other hand, neoclassical economics, one of the branches
of mainstream economics, started with the classical factors of production of land, labor, and
capital. However, it developed an alternative theory of value and distribution. Many of its
practitioners have added various further factors of production.
Most of the theories can be criticized from different perspectives. According to Marx, labor
intensive industries are more profitable than capital intensive industries. This statement
contradicts the empirical studies. Capital intensive industries can earn more profit than labor
intensive industries. The idea of socially necessary labor theory of value depends on entirely on
whether or not there is demand for the finished product such as the knotted cord. In this way,
introducing the "socially necessary" qualifier into the labor theory of value simply converts the
theory into a roundabout and imprecise description of supply and demand. One reason argued for
46

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. An unskilled labor is unable to produce sufficient
amount of output.
Sometimes that theoretical phenomenon contradicts the empirical studies. In Bangladesh, Land
reform is essential for ensuring access to land for farmers and for those who depend on land for
their livelihood. The present land tenure system in Bangladesh has emerged from the Land
Reform Act of 1950. It abolished the Zamindar or Landlord system, introduced by the British
colonial rulers, and ensured property rights for the farmers and dwellers. However, land reform
in 1950 had not been able to ensure equitable land distribution to people of all tiers of the
society. 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.

References:
Bangladesh Bureau of Statistics, (2007), Yearbook of Agricultural Statistics of
Bangladesh 2005, Dhaka
Schneider, Friedrich and Dominik Enste (2000): Informal Economies: Size, Causes, and
Consequences, The Journal of Economic Literature
Arthur Lewis (1954), Lewis, W.A. (1954) 'Development with unlimited supplies of
labor',
Manchester School of Economics and Social Studies
47

 Porter and Phillips-Howard (1997), Comparing contracts: an evaluation of contract

farming
schemes in Africa , World Developm
Fafchamps, M., (1997), Introduction: Markets in Sub-Saharan Africa, World
Development
Keijiro Otsuka and Yujiro Hayami, (1988), Theories of Share Tenancy: A Critical
Survey,Economic Development and Cultural Change.
Joan Robinson and Joan Eatwell, (1974),An
EconomicsMcGraw-Hill.

48

Introduction

to

Modern