Prices And Values: The Labour Theory Of Value

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There are many goods and services available in the modern era with prices and value being very distinct, but the question arises, what determines the value of a good and why does the value of a good fluctuate as time passes? Thus came about the labour theory of value. “The labour theory of value can be stated simply as the principle that the source of the value added of the mass of commodities produced is the labour expended in producing them”(Foley,1986,P.14). Many economists made the attempt to explain their theories of value. Some thinkers provided an objective measurement of value whereas some provided a more subjective measurement. In this essay I will analyse the different theories of value and also compare both subjective and objective …show more content…
“To those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command” (Smith,1776,P.33). This suggests that if an individual has a good and wishes to exchange it for another; they can only exchange it for another good that requires an equal amount of labour. However, he mentioned that in an advanced society, capital and land is no longer free therefore a buyer must offer more units of labour for a good than that goes into producing it because the capitalist and landlord must get a share of the overall price. Therefore, Smith abandoned the labour cost and command theories as they can only be applied to primitive societies and not in advanced societies like the one he was living in which led him to develop and adopt his third theory. Karl Marx had a similar theory to Smiths labour cost and command theory where Marx’s theory follows a pre capitalist way of life where “producers own their own means of production, the exchange value of a commodity depends quite simply on the quantity of labour required for its production and raw materials used up by the process of production” (Dean,1993, …show more content…
Ricardo disagreed with aspects of Smiths value theory and also found solutions to the problems that Smith faced. Ricardo said that “commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labour required to obtain them” (Ricardo,1821,P.12). In the first case where some commodities have a price that is determined by scarcity alone; the value is dependent on how perfectly inelastic the supply curve is for that good. For example, rare art pieces like the Mona Lisa is a priceless work of art and is highly valued as there is none like it or another one in existence. However, Ricardo’s labour theory is primarily applied to goods that are produced in perfectly competitive markets and that are not scarce. “According to Ricardo, the primary problem for a value theory is to explain the economic forces that cause changes in relative prices over time” (Landreth and Colander,1994,P.133).The same example of the deer hunting can be used. “If the relative price increases where 3D=1B, has the price of beaver increased, or that the price of deer decreased?” (Venkatachalam,2018,S.28). It is difficult to depict of what good the relative price changed therefore Ricardo stated that there must be an invariant measure of value. For Ricardo, the changes in the number of labour necessary to produce a good were the best way to explain changes in relative

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