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In: Economics

What is Ricardo’s alleged labour theory of value and what are its limitations?

What is Ricardo’s alleged labour theory of value and what are its limitations?

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Expert Solution

David Ricardo's Labour Theory of Value states that the value of a product is positively related to the amount of labour required to produce that product. That is to say that a more labour extensive product (say, a bullock cart ) will be higher in value (when exchanged for money, or other goods) than a less labour extensive product (say, a pencil). A product which needed a higher number of labour hours, or more labour in general, would have a higher market value.

If it took 40 hours to build a bullock cart and 10 hours to build a pencil, 4 pencils will be exchanged for 1 bullock cart, as its market value is derived purely from the number of labour hours that were put into the production of that commodity.

Limitations:

1. It doesn't consider the real value of a commodity, it just considers the amount of labour that was used while production. So something with little or no value in real terms (a product that is useful for no one and they wouldn't exchange it for money or other goods) may have a lot of value according to this theory if a lot of labour hours were put in to create that product.

2. Some goods may require the same amount of labour hours as input but have a wide difference in its actual market value. e.g. A gold chain may require as much labour hours as required in the production of a table. But to believe that a table would cost as much as a table, would be silly, to say the least. Gold obviously hold more value than wood and the value of a commodity cannot be only dependent on the amount of labour required as input but also on things like raw material used, technological inputs etc.

3. Fluctuation of prices - inflation/deflation- are not taken into account and it is assumed that the value of labour remains constant and thus the prices (or exchange value) of goods will also remain the same.


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