The Labor Theory of Value
The economists Adam Smith and David Ricardo established and analyzed the Labor Theory of Value in the seventeenth and eighteenth centuries, demonstrating that the value of a thing is determined by the amount of work used.
Value of a Product
Many people have wondered for centuries what governs the value of an item. The questions are more along the lines of what gives a product value. As a result, the Labor Theories of Value were developed in response to the attempt to determine what determines the price of a product.
As a result, classical labor and value theorists such as Ricardo and Smith argue that the value of a product is generated by the labor put in during its whole production period. Thus, the Labor Theory of Value explains that the amount of work required to yield a given commodity was regarded as the common denominator.
Besides, by extension of the theory work too can be considered as a product. This is because just like other products labor is bought or sold in the form of the wages paid and it has a market and original price.
Market Price vs. Natural Price of Labor
The market price of labor is the one known by everyone, while the natural price of labor is that one that makes the laborers able to continue their contest without either increase or depreciation. The value theory was important in traditional principle.
From the Labor Theory of Value, it can be illustrated that the real price of a commodity is influenced or determined by labor and the difficulty of acquiring depends on how scarce it is. I consider starting with the Labor Theory of Value generated by Smith, then later followed by the Labor Theory developed by Ricardo, simply because it served as the basis of Ricardo’s theory. Ricardo’s theory was aligned with his evaluation of Smith’s Labor Theory of Value. This paper is a comparative study of Adam Smith’s and David Ricardo’s Labor Theories of Value.
Adam Smith’s Theory
The Labor Theory of Value was a spin-off of Adams Smith trial to explain and theorize the reason why human accumulate wealth. He began his study of political economy by examining simple concepts, such as labor supply and demand. In his evaluation of the community, Smith noticed that in an industrialized society each works for and is reliant on the labor of other, in simple words division of labor enhances socioeconomic relationships.
Therefore, from this analysis marked the beginning of Smith’s discussion of value. He believed that a commodity acquires exchange value due to the prevalent division of labor.
The Free Market and Economic Development
In an analysis of the nature and causes of the wealth of nations in 1776, Smith elucidates that the free market, no matter how chaotic and uncontrolled it seems, is essentially directed to produce the right amount of goods with an invisible hand. Therefore, Self-interested competition in the free market benefits the society because it helps to keep the price low and also builds up ground for a selection of goods and services.
Thus, economic development is based on a location of free competition. From his Labor Theory of Value, Smith stated that the actual value of any product is the labor and the difficulty of obtaining it is as an influence of its scarcity.
Variations in Salaries and Wages
Smith went on and used the intuition on the impartiality of returns to describe why earnings rates varied. For labors that are harder to learn, the wages could be very high because fewer people will be more willing to learn. Hence, the availability of this kind of labor will be scarce and more valuable. Similarly, for hazardous or dirty occupation the wages will be relatively high. Hence, the difference in work would be compensated by a variation of salaries.
Terry Peach’s Interpretation of Smith’s Theory
Smith’s theory is acknowledged by many economists mainly because he had restrained the Labor Theory to an early and rude nation, the passage from Smith’s book The Wealth of Nations (1776) was treated as proposition relating exclusively to changes in exchangeable values proving no commitment of the labor theory of equivalent value.
Consequently, I agree with Terry Peach, when she consents with O’Donnell interpretation of Smiths theory on the true measure of equivalent value. They believed that Smiths theory was designed to identify the changes in value resulting from the changes in conditions of production. However, on Terry Peach’s interpretation of the theory, she believes that Smith attempts to relate changes in real value and actual price as shown by the original amounts not only for the variations in the circumstances of production but also in variations in amounts of labor used in production. Smith conclude that real value and price are related directly to the amount of labor used, despite the fact that the true measures were poorly crafted to the primary purpose.
Reasonable Assumptions for a Stronger Relationship
To obtain a more robust relationship between actual price or value and used labor, it becomes necessary to make more reasonable assumptions like those that Smith made. However, his change to the original theory was that the value of a commodity is commanded by labor to “product controlled” as the real measure while assuming that the product is produced with almost equal amounts of labor.
Challenges to the Theory
Nevertheless, for the theory to succeed, three conditions were to be met: Smith’s reasoning of equity, where the amount of labor used is supposed to be maintained constant, the proportionality of the regular supply of product to the average demand, and relatively reduced fluctuations in real income. However, these conditions faced some challenges.
The problem emerged when some products, in this case, corn, had variable prices in different locations. Smith explains that in small cities corn is always more expensive than in the countryside. He clarifies that this is not the effect of the real cheapness of the price in this case “silver” but the demand for the corn. Hence, the value of silver is constant in both the city and upcountry, but the value of corn is variable. Here he relates the value or real price with the amount of labor used.
David Ricardo’s Theory
On the other hand, David Ricardo formulated this theory in an attempt to rectify the significant errors in Adam Smith’s theory. As seen early, Smith based his argument on a relation of real value, price, and labor.
His explanation of the Labor Theory of Value was based on the fact that the relative price of two goods can be obtained by the ratio of the quantities of labor required for their respective production. Ricardo had a belief that the variations that occur as a result of relative values of commodities by changes in payments and profits were minimal as compared to those that occurred due to the variations of labor. He tries to prove that the price is not related to the values of the goods. Therefore, he retains the Labor Theory of Value as an approximation.
Assumptions Made by Ricardo
On Ricardo’s theory of labor, there are various assumptions made. The assumptions are that both sectors have the similar price rate and profit rates, the investment used in production consists mainly of earnings only, and finally, the period of production was assumed to have the same length for both products. Nonetheless, Ricardo adopted two exceptions to his Labor Theory of Value, which disputed the second and third assumptions. The exceptions were the production period may differ, and the two different production methods may use instruments and equipment as the principal investment and not just the salaries.
Role of Land in Ricardo's Theory
Ricardo used the concept of land to prove his theory. There he explains that because of the scarcity of land it has led to some land having a higher dominant value than others. He takes rent to be an individual benefit that increases due to a shortage of resources, such as land and houses. Thus, he stipulates that if the land was centrally located, one could be able to see that all market exchange of the produced was free and equivalent and that the real value of the trade is limited concurrently to both parties and the society.
Ricardo's Theory as an Empirical Principle
Ricardo’s theory can be termed as an empirical principle since the relative quantities of labor that are to be used in production are the main factors that determine the relative value. Besides, the theory excludes rent from cost, and even if the land supply were fixed, the rent that a piece accrues would be a cost on other uses. Furthermore, the theory was mistaken for reducing all capital to labor together with interest. From this empirical view, Ricardo made his conclusion that labor was the primary determinant.
Conclusion
While comparing the Labor Theories of Value from both Adam Smith and David Ricardo, it can be seen that Ricardo, in an attempt to rectify the errors of the others methods, led to the development of his Labor Theory of Value. However, the theory of Smith can be accepted to be extremely basic and traditional. At least for the economic interest, the focus was exclusively on variations and fluctuations in the exchangeable value, seemingly with no recognition of the theories implication of distribution.
Although the development of Ricardo’s theory shows that Smith’s argument was not fully developed. The Labor Theory of Value can hence be concluded as the theory of absolute value. From the analysis, we can see that none of the three values of the theory corresponded with the theory of relative price. However, Ricardo used the theory as developed by Smith as an approximation. However, there is confusion from the recent economist from failing to recognize the difference between relative value and absolute value. Finally, the Labor Theory of Value has been a critical factor in economic thinking for very long, since Ricardo’s time; however, it has proved even harder to use it since even Ricardo himself believed the theory is an approximation to reality.
Bibliography
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Lopes, Francisco L. “The Ricardo Puzzle.” History of Political Economy 40, no. 4 (2008): 595-611.
Peach, Terry. “Adam Smith and the Labor theory of (real) value: a reconsideration.” History of Political Economy 41, no. 2 (2009): 383-406.
Stigler, George J. “Ricardo and the 93% labor theory of value.” The American Economic Review 48, no. 3 (1958): 357-367.
