Ricardo's Value Theory: The Flawed Labor Theory Of Value

Improved Essays
The Flawed Labour Theory of Value
“Value theory is the core of Ricardo’s economics, and consequently the core of classical economics”
(Senga, 2017, p.198).

Having orientated Ricardo’s writing in the context of his predecessors and contemporaries, this essay hopes to have now highlighted the extent to which Ricardian thought developed naturally in line with classical economics. We shall now move to address two divisive elements of Ricardian thought, which are claimed to constitute a detour; namely the labour theory of value and the alleged “dual development” of economics (Hollander, 1979). Ricardo’s acceptance of the labour theory of value left economics “a shattered science” according to Jevons (Jevons, 1879:1), and Schumpeter claims that
…show more content…
Exclusion of these commodities allows Ricardo to be far more consistent than Smith, something strengthened further by Ricardo’s desire to obtain an “invariable measure of value”. In his deliberation, Smith had made land rent a component of natural price, however the theory of rent allowed Ricardo to understand the differences between agricultural and manufacturing production; Smith claimed high land rents drove up the price of wheat, whereas Ricardo showed high wheat prices drove up the price of rent. In effect, rent is viewed by Ricardo as a consequence, not a cause, of high food prices. Connecting all of Ricardo’s work, we know that labour theory states that value is determined by the amount of labour needed for production. For wheat and similar goods, value is determined by the amount of labour needed for production on the poorest quality land, and wages are determined by the value of goods a working class family needs in order to survive and reproduce. In short, profit and rent are incorporated into this value theory, not added on as a cost as …show more content…
SOURCE

As such, Ricardo clearly acknowledged the limitations of the labour as a measure of value - although the weakness of a labour theory of value remain entirely valid, and a very worrisome issue for Ricardian economics.

Classical economics was quite squarely on the side of workers in a normative sense. Ricardo interpreted the profit earned by the capitalist as a “residual” once the cost of replacing capital and wages to labour has been paid. In other words, it is labourers who produce value, and this value-added is the origin of both the labourers’ subsistence wages and the capitalist’s profit (the remainder). Neo-classical economics takes issue with Ricardo’s claim that profit is a residual, stating the role of marginal productivity - of both labour and capital - in determining returns to factors. Building on this, the unionisation of labourers in order to bring about a wage increase will result in increased unemployment. This is, in effect a new theory of wages and profits, and one which Pareto SOURCE used in his dismissal of the theory of Utilitarianism which called for income redistribution. He replaced the redistribution mechanism with his new definition of economic efficiency, in which higher union wages bring about economic

Related Documents

  • Improved Essays

    Further, he does not deny the plausibility of communism if it were administered gradually and on a small scale (Mill275-279). A pivotal point of Mill’s perspective on private property is that personal ownership of land is what stimulates capitalist competition (Mill 253). This competition leads to lower prices of commodities, which actually leaves more surplus to pay wages of workers (Mill 253). This is a divergence from the Marx perspective that competition actually increases worker suffering. Furthermore, Mill is willing to admit that capitalism can at times depress wages, but he qualifies that remark by espousing that all wage declines mirror market fluctuations but competition will eventually revamp workers’ wages (Mill 249, 256).…

    • 928 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    Smith’s theory has a clear argument on capital accumulation such as his explanation for unproductive/productive labor in comparison to Marx. Marx’s explanation of productive labor, critique of abstinence theory, exploitation, and the so-called labor fund is less effective. Adam Smith was considered to be the father of economics. He was a professor at the University of Glasgow. He was the author of a book, The Wealth of Nations, which made him a better-known economist.…

    • 1971 Words
    • 8 Pages
    Improved Essays
  • Great Essays

    1.A. Adam Smith describes how productivity growth in economics can lead to economic growth. Smith being an optimist himself saw that the driving force of capitalism would be self-betterment, a yearn for profit, and the desire to make money. One method to increase productivity was to enhance the division of labor. Organization is one way to enhance the division of labor and thus their productivity of labor.…

    • 1265 Words
    • 6 Pages
    Great Essays
  • Superior Essays

    Since, both Ricardo and Malthus began their investigation into the field of economics through the enquiry into writings of Adam Smith in The Wealth of Nations , both theorize distinct and supplementary works. In the conflict of classes amongst the workers ,capitalist and landowners, Malthus supports the ‘capitalist class’ by opposing the repeal of the Corns Laws. Conversely, Ricardo staunchly believed in free trade and that the Corn Laws burdened the agriculture sector as trade barriers kept food prices artificially high. Ricardo mirrors Adam Smith’s stance that, the market, although imperfect, is best left untouched. A glut, arguably cannot occur if all resources optimally utilized (Say’s Law,“supply creates demand”), however, inherently the law does not account for hoarding, accumulation of money without purpose or intention to save, spend or…

    • 1134 Words
    • 5 Pages
    Superior Essays
  • Great Essays

    Capitalism is about expanding gainfulness and rivalry against partners with comparable business or exchange. Industrialists will always try to have higher increases in order to ensure accomplishment through the level of their productivity. Thus, it would be illogical to assume that capitalists would raise wages for their labourers. Doing as such would give the ordinary citizens the monetary flexibility that could make an open door for a rivalry. This very notion is what Marx considered to be an abuse of monopoly power.…

    • 1717 Words
    • 7 Pages
    Great Essays
  • Improved Essays

    In the excerpt Anti-Duhring called Theoretical, Friedrich Engels takes a historical materialist approach to show that the capitalist mode of production is fundamentally contradictory. From this theory, he follows a trace of social and economic conflicts that occur from this contradiction. The following essay will define historical materialism as described by Engels, as well as explaining the fundamental contradiction and the two contradictions that arise from it, and finally concluding with a brief explanation of Engels ' vision of the ultimate outcome of the historical development of capitalism. Engels discussed historical materialism in Theoretical and was one of the reoccurring themes in the reading. Historical materialism is the principle…

    • 1015 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    Involuntary unemployment is a neat phrase. It is the notion that one, despite having the proper skills, bodily-health and desire to work, can be thrown out of employment. If one were to believe that having a capitalistic system necessitates involuntary unemployment, that would put you firmly in the laissez-faire camp of the classical economists. It was exactly this school of thought which Keynes did intellectual battle with. Keynes saw classical economic thought as an imperfect, to say the least, form of capitalism.…

    • 839 Words
    • 4 Pages
    Improved Essays
  • Great Essays

    The introduction of capitalism, where labour becomes a “source of right in property” was developed and therein creating a whole new “adverse bearing upon freedom of labour, investment and exchange.” Adam Smith, a major proponent of the Laissez-faire economy, argues that everyone has a natural tendency to better himself through “putting effort (labour) to satisfy his natural wants”. He argues that as one works to benefit himself in the Laissez-faire economy, others would inadvertently gain as well. Again, the individualistic nature in the Laissez-faire economy as well as the lack of government intervention is highlighted. The advent of Laissez-faire liberalism led to the degradation of natural laws that Locke had advocated, as capitalism became the norm in society, free from the rigid control imposed by the government which some individuals feel is an infringement upon their rights. Morality has thus been stripped away from these natural laws, and instead, these laws are now “identified with the laws of free industrial production and free commercial exchange”.…

    • 1730 Words
    • 7 Pages
    Great Essays
  • Improved Essays

    Keynes’ theory of money revolves around the fundamentals of how money affects income via the interest rate. For example, an increase in the money supply lowers the interest rate, and the lower interest rate in turn, increases aggregate demand and income. Keynes’ Reformulated Theory on…

    • 2409 Words
    • 10 Pages
    Improved Essays
  • Great Essays

    David Ricardo Case Study

    • 2174 Words
    • 9 Pages

    Given the rate of profit then it is apparent from the (1) that capital grows with economy’s net income and given net income and capital accumulation is an increasing function of the difference between actual profits and minimal compensation of risk. Ricardo theory of profits has been subject to much discussion. His use of terms “profits” and “wages” referred to the relative share of profits and to the relative share of wages at the margin. Since at margin no rent paid. Profits (in Ricardian sense) depend only upon the wages.…

    • 2174 Words
    • 9 Pages
    Great Essays