Ricardo's Value Theory: The Flawed Labor 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…
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