Question

(History of Economic Thought) Question.

1) (i) There are three concepts in Adam Smith’s value theory that are very similar to each other: ‘labor theory of value’, ‘labor commanded theory of value’ and the ‘adding up theory of value’. Making sure that you show the differences between the three concepts, and giving examples to show these differences, explain how the price of a commodity will be determined in these three approaches. (ii) Smith believes that one of these measures is inappropriate for a capitalist economy, an idea that Ricardo has objected to. Which measure does Smith consider to be inappropriate for a capitalist economy, and how does Ricardo criticize this argument of Smith?

Answer 1

According to the Smith,labour theory of value says that value of a commodity is determined by the amount of labour which went into the production of that good.Hence price of a cmmodity is determined by the amount of labour used.

He gave exchange value and use value.The exchange value which anyway will be dependant upon amount of labour used.

Adding up theory of value (cost of production theory)or exchange value theory.Here price of a commodity is determined by the adding the costs of production and at that time when there was no owndership of land and poor working class was exploited ,hence labour was the only means of production.Hence the cost of production is the cost of labor according to the Smith.Smith called this price as natural price for which labour was only respomsible.

So in the approach of smith there were two problems:

• First one is that why there are different prices of a commodity when it reaches to the market ,if according to smith its price is determined by the amount of labor went into its production.
• Second problem was that there are others factors which are involved in its production like land and all,so where is the accountability of those factors?

Hence Ricardo answered these questions.Ricards was focusing on the distribution of income .He said the main problem is with distribution of income.Capital which was also used in the production of commodity,that amount of capital which is generated by the labour only but going to the capitalists and is not taken by the labour. Ricardo was focusing on the technology or various others factors which can change the value of labour.If an advanced techonology can make the production process faster,then the goods can be produced with less labour and value of labour will fall and in that case price of commodity will also change if we go by the smith's concept of labour theory of value.

Marx took his idea of surplus value from this and exploited labour and generated surplus value which was again re-invested into the production of the commodity.