Credit and Value Theory – Why Ricardo Didnt Get it

Bentham is a series of unpublished pamphlets at the turn of the 19C broke with  Adan Smith in setting out the view that creation of money was necessary to expand production and that credit could be over issued leading to depression.   He also set out a ‘first use’ theory of money were growth was only sustained if it flowed into productive uses (not what we today would call assets or is hoarded).  Of course the background to this was the impact of the Bank of England coming off the convertable gold standard in the Napoleonic war and issuing paper money.

Most important of these unpublished works by Bentham was ‘True Alarm’, a chaotic draft of which was given to his friend Dumont translated to French – called it ‘Sur le Prix’  and sent to James Mill seeking views on publication.  Mill sent it to Ricardo who advised against it.  Quotes from Ricardo in his marginal note are withering.  These are often missourced to other published Ricardo works (for example in t,he Online Library of Liberty), no they were only published in Sraffas collected works vol 8.  Similarly quotes from True Alarm are often missourced when they are from other Bentham published or unpublished pamphlets.

Some of those notable Quotes from Ricardo

-Why should the mere increase of money have any other effect than to lower its value? How would it cause any increase in the production of commodities?…

-Money cannot call forth goods, —but goods can call forth money…

– it is supposed that the augmentation of money precedes the augmentation of goods. I am of opinion however that it would seldom cause any augmentation of goods, and if it did it would be before prices had found their new level. It would be effected by turning a part of that fund destined for the wages of labour for a short time into capital…

-An increase in money will not add to the annual amount of land and labour in the country.


Clearly (as with Malthus) Ricardo made mincemeat with his opponents by his force of logic despite major problems with his own theory.  Ricardo’s point was  that an increase in money will not lead to an increase in value.  Value resulted from land and labour.  The value of money results from the cost of production of money.  Only recently have I realised that the problems that the classical’s had with value theory are the flip side of the problems of treatment of time in their monetary theory and their solution requires an amendment to ricardian value theory.

The key classical insight was that the value of goods produced was equal to the value of the circulating medium used to exchange those goods.  This means that if the production increases and the amount/velocity of the circulating medium stays the same that the value expression of money will decrease – the purchasing power of money will decrease.  That means that money left idle/hoarded will lose value.  Hence time has a real cost to wealth.

A creditary arrangement is to divert some future profit to the credit issuer in return for money creation today. That money then brings used resources  on the intensive or extensive margin of production into use. This money is not creating immediate value at the point of credit issuance; rather in ensuring that a future stream of production takes place the value of money does not depreciate, and this stream of future production has a net present value.  The rate of value depreciation (taking account of risk) is the rate of interest.

This is the mistake I think Ricardo made in failing to see value theory in proper temporal terms.  Indeed attempts to rescue his value theory by James Mill (his annuity theory of fixed capital) and Nassau Senior (waiting theory of cost), require the same approach of discounting dated value inputs over time.  Indeed Luaderdale and even Torrens admitted that they are mathematically equivalent.  It is little known that Torrens withdrew all objections (in a letter to JS Mill in 1840) to the labour theory of value once he had read Lauderdale’s treatment of fixed capital.  Marx sadly never understood this theory and made fatal mistakes in his treatment of depreciation as a result.  If he had understood it there would have been no ‘transformation’ problem.  In a future post ill present Lauderdales result mathematically and show what extent it rescues the criticisms of Torrens and other writers comtemporary with Ricardo of teh Labour Theory of value.

After Rubbishing ‘Use ot or Lose it’ Boles Adopts it


House-builders will no longer be able to easily “roll over” planning permission on plots of landwithout starting building projects, the planning minister announced.

It is designed to stop “land banking” developers hoarding plots for years and waiting for house prices to rise before starting to build homes.

The policy will be interpreted as a panicked response to Ed Miliband’s September party conference speech, in which he said that developers would have their land seized if they fail to use it.

Mr Miliband’s pledge was at the time described by critics as a “Stalinist land grab”.

Mr Boles said that the Coalition has scrapped a temporary measure introduced by the last Labour government “which allowed developers to roll forward their planning permissions”.

It will give developers a limit of three years to start building on land before they lose planning permission.

The value of land plummets if a plot does not have planning permission, so ministers hope that the new measures will give developers an incentive to immediately start building properties.

Roberta Blackman-Woods, the shadow planning minister, said that the measures would simply “return the position on time limits for planning permission to where it was when Labour was in government”.

The plans were also condemned by the Institute of Directors (IoD) as an attempt to “undermine the ability of developers to complete projects”.

Simon Walker, Director General of the IoD, warned that the plans could backfire and simply mean fewer homes are built.

“Obtaining permission, particularly for large projects, is a very expensive and time-consuming process,” he said.

“If builders do not have certainty that they will be able to use the land when they are ready to do so, it seems likely that it will deter some from applying in the first place.”

According to figures released by the Department for Communities and Local Government, there are currently 507,000 plots of land in the country with planning permission.

Building work has yet to start on more than 257,000 of those sites.

Mr Boles said that just 59,000 of those projects are “on hold or shelved”, with the rest “progressing towards a start”.

However, campaigners dismissed Mr Boles’ claims and said that developers can simply claim they have started building projects by “digging a few trenches”.

Mr Miliband wants to hand local authorities strengthened compulsory purchase powers so that they can buy and grant planning permission on land held back by developers.

Under Labour’s plans, councils could also be given the power to charge developers if they acquire land with planning permission but do not build on it immediately.

Mr Boles described Mr Miliband’s pledge as “heavy handed” and said that it would slow down the planning system.

“This Government is cleaning up Labour’s mess by making sure that developers don’t hold on to land unless they are going to build on it,” Mr Boles said.

“This measure to extend planning permission was always intended to be temporary, and while it made sense in the aftermath of Labour’s financial crash when there was no money to build, as the economy improves, the focus must be on accelerating the number of homes being built to meet demand.”

However, Mrs Blackman-Woods said: “With even the Government’s own statistics showing that there are hundreds of thousands of units with permission but not being built, they should support Labour’s comprehensive measures to stop land banking of sites where the local community has given permission for homes to be built but developers are not building them.”

Countryside campaigners welcomed the Government’s attempt to address Britain’s growing housing crisis.

However, they warned against measures that could result in inappropriate development in rural areas.

Neil Sinden, from the Campaign to Protect Rural England, said: “We support the need for more housing and any sensible measures that result in an increase in housing provision, providing it is the right housing in the right places.

“Evidence that we’ve gathered suggests that we are getting more and more housing allocated in Greenfield areas, so in the coming years we’re likely to see more housing in the wrong places.”