Question

• Though they used a smilar methodology and based themselves on labour theory of values, Ricardo became a prophet of capitalism of his age, while Marx defended socialism. How?
• Genius can have strange indirect effects… But successors connot continue on the level of the genius. One aspect of the great man, probably that which suits later conditions, is chosen, much of the rest probably rejected.’ Use this quotation to briefly criticize orthodox economics?
• Ricardo states that the principal problem in political economy is to determine the laws which regulate the distribution of the produce of earth among social classes. Why, you believe, he felt a need to constrain the scope of economics after Smith?

Answer 1

The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of "socially necessary labor" required to produce it.

• 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 required to produce it, including the labor required to produce the raw materials and machinery used in the process. 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.
• Contrary to popular belief Marx never used the term "Labor theory of value" in any of his works but used the term Law of value. Marx used the concept of "socially necessary labor time" to introduce a social perspective distinct from his predecessors and neoclassical economics. Whereas most economists start with the individual's perspective, Marx started with the perspective of society as a whole. "Social production" involves a complicated and interconnected division of labor of a wide variety of people who depend on each other for their survival and prosperity. "Abstract" labor refers to a characteristic of commodity-producing labor that is shared by all different kinds of heterogeneous (concrete) types of labor.

Genius can have strange indirect effects… But successors connot continue on the level of the genius. One aspect of the great man, probably that which suits later conditions, is chosen, much of the rest probably rejected.

Criticizing Orthodox Economics

• The main criticism of orthodox economics is the absence of considerations relating to external factors. For example, this type of economic thought assumes complete rationality of actors.
• It assumes that individuals are selfish and will always act in their own best interests. There is no place for moral concerns or altruism in orthodox economics and the invisible hand is expected to move markets without fear or favor.
• Orthodox economics has limited applicability (invisible hand works only if we have no externalities), while moral issues and interaction with nature are not addressed. But real practice may be sometimes even not rational from the viewpoint of orthodox economics.

the principal problem in political economy is to determine the laws which regulate the distribution of the produce of earth among social classes

Ricardo felt a need to constrain the scope of economics by contributing to economic theory :

1. Comparative Advantage: argued that countries can benefit from international trade by specializing in the production of goods for which they have a relatively lower opportunity cost in production even if they do not have an absolute advantage in the production of any particular good.
2. Labor Theory of Value: The labor theory of value states that the value of a good could be measured by the labor that it took to produce it. The theory stated that the cost should not be based on the compensation paid for the labor, but on the total cost of production.
3. Theory of Rents: Ricardo was the first economist to discuss the idea of rents, or benefits that accrue to the owners of assets solely due to their ownership rather than their contribution to any actually productive activity.
4. Ricardian Equivalence: In public finance, Ricardo wrote that whether a government chooses to finance its expenditures through immediate taxation or through borrowing and deficit spending, the results for the economy will be equivalent. If taxpayers are rational, then they will account for any expected increase in future taxation to finance current deficits by saving an amount equivalent to current deficit spending, so the net change to total spending will be zero.