Question

a- Compare two authors/economist’s notion of the source of “Value” and weight out whose more right.

b- Why was Ricardo unable to link the labour theory of value to his theory of price?

c- Which system of thought is more pro-labour, mercantilism vs. physiocrats? defend.

Answer 1

a) Marxian theory of value and Ricardian theory of value

• Ricardo planned to develop a rigorous theory of value. Rather than make his theory fuzzy enough to encompass the value of all goods, he would exclude goods such as "rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil," since their value is wholly independent of the quantity of labour originally necessary to produce them, and varies with the varying wealth and inclinations of those who are desirous to possess them.
• According to Ricardo, labour embodied is the source, as well as the measure of value. Exchange values are governed by labour embodied in commodities. He states the amount of societies labour alotted to the production of a commodity, is the true source of value and the best measure of value.
• Ricardo was aware of factors affecting value
• Distributional changes, differences in quality of labour differences in capital inputs used, different time intervel for different goods, durability of different capital goods.
• The labor theory of value is a major pillar of traditional Marxian economics, which is evident in Marx’s masterpiece, Capital (1867). The theory’s basic claim is simple: the value of a commodity can be objectively measured by the average number of labor hours required to produce that commodity.
• For the most part, Karl Marx worked within the framework of David Ricardo's labor theory of value. The two most important differences were Marx's emphasis on fixed capital and his use of the labor theory of value to identify the source of profit. However, Marx used the labor theory of value to project capitalism's path in a way not anticipated by Ricardo.
• Like Ricardo, Marx started by adding up all of the direct and indirect labor used. The value of something that requires 10 hours of direct labor plus raw materials that took 12 hours of labor to produce plus 1/1,000 of the life of a machine that took 5,000 hours of labor [including raw materials and tools] to make would be 'worth' 10 [labor] + 12 [materials] + 5 [depreciation of capital] hours of labor, a total value of 27 hours.

b) The natural price of labour...depends on the price of the food, necessaries, and conveniences required for the support of the labourer and his family. With a rise in the price of food and necessaries, the natural price of labour will rise; with the fall in their price, the natural price of labour will fall.

It is when the market price of labour exceeds its natural price that the condition of the labourer is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family. When, however, by the encouragement which high wages give to the increase of population, the number of labourers is increased, wages again fall to their natural price, and indeed from a reaction sometimes fall below it.

When the market price of labour is below its natural price, the condition of the labourers is most wretched: then poverty deprives them of those comforts which custom renders absolute necessaries. It is only after their privations have reduced their number, or the demand for labour has increased, that the market price of labour will rise to its natural price, and that the labourer will have the moderate comforts which the natural rate of wages will afford.

c) Mercantilism is economic nationalism for the purpose of building a wealthy and powerful state. Adam Smith coined the term “mercantile system” to describe the system of political economy that sought to enrich the country by restraining imports and encouraging exports. This system dominated Western European economic thought and policies from the sixteenth to the late eighteenth centuries. The goal of these policies was, supposedly, to achieve a “favorable” balance of trade that would bring gold and silver into the country and also to maintain domestic employment. In contrast to the agricultural system of the physiocrats or the laissez-faire of the nineteenth and early twentieth centuries, the mercantile system served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state.

Physiocracy etymologically denoted the “rule of nature,” and the physiocrats envisaged a society in which natural economic and moral laws would have full play and in which positive law would be in harmony with natural law. They also pictured a predominantly agricultural society and therefore attacked mercantilism not only for its mass of economic regulations but also for its emphasis on manufactures and foreign trade.

Whereas mercantilists held that each nation must regulate trade and manufacture to increase its wealth and power, the physiocrats contended that labour and commerce should be freed from all restraint. Again, whereas mercantilists claimed that coin and bullion were the essence of wealth, the physiocrats asserted that wealth consisted solely of the products of the soil.