Question

8. Explain David Ricardo’s labor theory of value. Why did he think this was an improvement over Adam Smith’s contradictory comments on the theory of value? What were Smith’s ideas on the theory of value? Explain briefly.

Answer 1

The labor theory of value comes under Classical school of economics, which was an early attempt by economists to explain why goods were exchanged for certain prices on the market. This theory was greatly propagated by Adam Smith, David Ricardo and Karl Marx. It suggested the value of a commodity could be measured objectively by the average number of labor hours necessary to produce it.

Adam Smith’s entry point to the theory of value is that labor is “the real measure of value”. The necessary prerequisite for any commodity to have value is to be product of human labor. However, Smith contradicted himself by adding the exchange value of commodity. The exchange value of a commodity “more frequently estimated by the quantity of money, than by the quantity either of labor or of any other commodity which can be had in exchange for it."

But Smith was able to see the labor as the determinant of exchange value/real price only in early precapitalist economies, before “the accumulation of stock” and “the appropriation of land.” Once the capitalist gained control of the means of production and landlords monopolized the land and natural resources, the exchange value became the sum of three component parts: wages, profits, and rents.

David Ricardo's version is : Labor, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its natural and its market price. With a rise in the price of food and necessaries, the natural price of labor will rise; with the fall in their price, the natural price of labor will fall. However, David Ricardo expanded on the theory and given the explanation, by adding the element of supply and demand i.e. with the progress of society the natural price of labor has always a tendency to rise, because one of the principal commodities by which its natural price is regulated, has a tendency to become dearer, from the greater difficulty of producing it. As, however, the improvements in agriculture, the discovery of new markets, whence provisions may be imported, may for a time counteract the tendency to a rise in the price of necessaries, and may even occasion their natural price to fall, so will the same causes produce the correspondent effects on the natural price of labor.

Hence, the essential two premises of the Ricardo's law of labor is that

(1) it applies to the reproducible goods produced in the capitalist sector

and

(2) it is premised upon the existence of free competition between producers.

Quantity of Labor Expended = Quantitative Changes in the Value of the Commodity = Productivity of labor