Ricardo's Labor Theory of Value and Its Implications

 

David Ricardo, a prominent economist of the 19th century, developed his theory of value as a response to the Corn Law controversy in England. In this blog post, we will explore Ricardo's labor theory of value and its implications for understanding the factors that influence relative prices over time.

The Corn Law Controversy

The Corn Law controversy pitted Ricardo against other economists, like Malthus, who advocated for higher tariffs on grain imports. Ricardo, however, championed the idea of free international trade and opposed tariffs. He argued that high tariffs would reduce profits, leading to slower capital accumulation and economic growth. Ricardo was dissatisfied with Adam Smith's economic theory in dealing with this issue, particularly the cost of production theory of value, which protectionists used to justify tariffs.

Ricardo's Alternative Theory of Value

To counter the prevailing cost of production theory, Ricardo sought to establish an alternative theory of value. Unlike most theories of value that explain relative prices at a given point in time, Ricardo's focus was on understanding the economic forces causing changes in relative prices over time.

Ricardo's Labor Cost Theory of Value

Ricardo's theory of value can be summarized as follows:

•  Measurement of Labor: Ricardo emphasized that the value of a commodity depends on the quantity of labor required for its production, not the wages paid to labor. He used clock hours as a measure of labor, addressing the skill and hardship aspects that Adam Smith had struggled with.
•  Use Value and Exchange Value: Ricardo stressed the importance of use value for the existence of exchange value. While Adam Smith saw little connection between the two, Ricardo argued that demand (use value) was essential for a commodity to have a positive price in the market.
•   Capital Goods: Ricardo treated capital as stored-up labor, adding the labor immediately applied to the labor embodied in capital goods. This approach allowed him to account for the influence of capital on prices.
•  Land Rent: Ricardo's theory of land rent played a crucial role. He argued that the price of a commodity depended on the marginal cost of production, and rent was a result of price, not a determinant of it. Thus, differences in land fertility didn't affect changes in relative prices over time.
•  Profits: Ricardo acknowledged that profits could vary among industries due to factors like capital intensity and turnover. However, he maintained that these variations in profits did not quantitatively impact changes in relative prices.

Did Ricardo hold a Labor Theory of Value?

Ricardo did not hold a strict labor theory of value that excluded all other factors. He acknowledged that other forces could influence relative prices but believed that changes in the quantity of labor required for production were the most significant. Historians have labeled his theory as a "93 percent labor theory of value" due to the dominant role of labor in explaining price variations.

In conclusion, Ricardo's labor theory of value aimed to explain changes in relative prices over time. He emphasized the importance of labor as a measure of value, the role of use value in determining exchange value, and the influence of capital, land rent, and profits on prices. While his theory had its challenges, Ricardo believed that changes in labor requirements were the primary driver of changes in relative prices, making his labor cost theory of value a significant contribution to economic thought.

 

Written by: A.K.A.D.R.Chamindi and U.D.K.Malshani.

References:

Ricardo, David, 1772-1823. (1911). The principles of political economy & taxation. London : New York :J.M. Dent; E.P. Dutton,

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