The Labour Theory Of Value Economics Essay

David Ricardo and Karl Marx were both well renown economists, who will always be recognized for their significant contributions to the field of economics. Both Marx and Ricardo tried to set a value for the labour components, in order to set the true price of a commodity. This theory of value was first created by Ricardo and than a “refined” and “better” version was introduced by Marx. The uses of the labour theory of value were significantly different between the two economists. Ultimately, these different uses affect our current view and understanding of economic theory and analytical methods, as we will see below.

Is Ricardo’s labour theory of value used in the same way as Marx’s? This is a question that still continues to have uncertainty till this very day. Even though both theories have some similar uses, simply put, the answer is no. Karl Marx used the background knowledge of David Ricardo’s labour theory of value, but there were two significant differences between the two theories proposed. Marx placed emphasis on fixed capital in his use of the particular accounting definitions (his theory to identify a source of profit). Moreover, he used his theory to project capitalism’s path in a much different way than Ricardo. Also, once Marx took over Ricardo’s value theory, he solved some of the issues that Ricardo raised, making a new and “improved” theory.

Before we move on to analyze the two different uses of the labour theory of value, it is important to understand the basic definition and meaning of this theory, as it is understood and used in today’s economic world. In a simple way of looking at it, the theory refers to the amount of labour necessary for the production of a profitable good. Within this, the amount of labour necessary to create any real capital employed in the production is included. As we will explain below, both Marx and Ricardo attempted to quantify all of the elements associated with labour to be able to adjust the true price of a commodity and this is why they came up with the theories.

Now, let’s go on to talk about Karl Marx’s labour theory of value and his use for it. In the proposed theory, there exists a similar quantitative element in all the commodities. What this suggests is that the quantity of labour, or the number of labour hours involved in producing the commodities, can be referred to as the main element of commodity value. Also, the use-value of a commodity is not comparable with other use-values, so it cannot be called the exchange value. The amount of labour on the other hand, is the common component throughout all of the commodities, can be considered a component exchange value, this was the important point that Marx wanted to get across in his theory. The price of the commodity is the quantity of labour and is measured by the necessary average labour hours, where all commodities are regarded as products of labour.

Moving on, we have to take the “labour part” of the theory into consideration. If the value of a good is the sum of the workload it took to make the good, we need to take into consideration what the value of labour here is. The value of labour is itself the amount of labour it takes to produce the food and other necessities consumed by the worker and the their family. Also, since humans created agriculture, labour has produced a social surplus, more than is needed to simply sustain the worker at the level that was considered by society to be ‘acceptable’ for workers.

Why doesn’t a worker just produce everything for themselves and keep their entire value of the output, as opposed to letting the capitalist extract a large portion of it? This is due to the value of any commodity based on what Marx called the socially necessary amount of labour used to produce it. If the worker is working without the advanced machinery owned by the capitalist, then he could produce the same product, but in more labour hours. However, they could still only sell it for the equivalent of the original number of labour hours put in. This also depends on how much labour it takes to produce that specific good, using modern machinery and any other production methods applied. In other words, the capitalist is able to convert the social surplus, because the capitalist owns the machinery that allows the social surplus to be the size that it is.

David Ricardo, on the other hand, rather than make his theory contain the value of all goods, he decided to exclude goods altogether. His labour theory of value would be only be concerned with the commodities and such, that were the products of competitive capitalism. However, he was searching for an inalterable measure of value. This was difficult to do because, when the production advancement of a product or service is changed, its net worth also changes. David originally thought that he could find a way to measure the amount of value that wouldn’t change as the distribution of income did, unless the case was a change in technology, than in that case it would obviously change.

Ricardo’s main purpose was to discover how the distribution of income was effected subject to different economic factors. The best choice for this measure was, labour. If wages fell and profits went up, or if profits went down and rents upward, it would still require the same amount of labour to say, build a house. Therefore, when the demand increases, it will take more than the average amount of labour to produce and potentially transport the additional products or goods. These increasing costs, reflect the increasing amount of labour required to gain a given amount of product from a successively less productive input.

David Ricardo wanted to show that the amount of value in agricultural economic goods, had the same value as that of manufactured ones. They also relied on the number of labour hours it took to make them. The main difference with agricultural goods was that the value was controlled by the amount of labour required under the most unfavorable circumstances that is, by the labour hours needed on the land where the level of demand will determine how much production goes on. It is important to note that Ricardo argued that rent is not a component part of the price of commodities. In his theory he explained that high wheat prices, which themselves were caused by a growing population, drove up rent. Therefore we can say that it is the rent is a consequence of high food prices.

All the above information combines properly into a complete and well defined theory of value. The amount of labour needed for production, including the labour used in production of the raw materials including the “used” component of capital equipment determines Economic value. Using the wheat example (also for other similar products), we determine value by the amount of labour needed for production, on the cheapest piece of land. Therefore the values of the goods and services that working class families need to survive and reproduce determine wages. The capitalist pays his suppliers, replaces his used (broken) equipment, pays wages to workers and sells his product for a price determined by the amount of labour it took to produce the goods, the remainder is his profit. For example, if the price of bread is high, wages will also be high and there will be little profit, but agricultural landowners will collect high rents. If the price of bread is low, wages will be low with high profits and little rent. Keep in mind that Ricardo incorporates rent and profit into the labour theory of value theory.

However, even though the theory has most of the angles covered, there was still a huge problem with it. The theory would only work as a theory of natural prices, if the ratio of labour costs to capital costs was the same throughout all industries. Some of the industries used lots of labour and little capital while others used lots of capital and little labour and therefore labour couldn’t be a standard of value. This was because a change in the distribution of income between wages and profits would change costs in different industries by varying amounts. Unfortunately, Ricardo died before he could figure out this dilemma, this is where Marx took over his theory and improved it.

David Ricardo was concerned with the contemporary issues in economics, but for what he will be remembered is his development of a more complete labour theory of value. This was accomplished, because some people believe that Karl’s economic writing a small expansion of David’s thinking. Ricardo’s analysis didn’t use value of a economic components, however was connected with the value of exchange. The amount and value of these economic components in exchange value was the sum of labour, as Ricardo had believed. This was the contemporary amount of labour needed to produce them and included the past labour incorporated in tools, implements, and building equipment (the amount of capital needed to create the given goods). For David, additional earnings arose given the amount of capital employed. Ricardo defined this more precisely, and attempted to take away any problems concerning the origin of profits came from (in the process of production, by hiring labour along with capital). Furthermore, David did not have a positive outlook for the time to come, keeping in mind the supply of land and its scarcity. Ricardo stated that there was a limited outlook for technical improvements to greater increase employment. He observed a drop in the amount of additional earnings and mentioned that in the future there will be an additional drop in these earnings. Many have coined economics as the “negative” science, because of this bad future outlook.

There are some significant distinctions between David’s and Karl’s views of the labour theory of value. We will compare some points from Marx and compare it to Ricardo’s view. As you recall from the above paragraphs, Ricardo stated that prices = wages + profit (rent is nothing in this case), since wages and profits decide who pays what, while rent is determined by price. Rent was moved to zero for the least piece of land. For Ricardo, labour contained in economic goods was the initial price setter and these prices were set to labour embodied (value) only when capital to labour ratios were the same across the industries. In situations where the capital to labour ratios were different, the differences were of less significance and prices equaled value anyways. If someone was to use an standard amount of capital and labour ratios with a standard of measurement, than Ricardo referred to this “modifying principle” to explain actual deviations between price and labour time (value).

Marx mentioned the amount of production were equal fixed capital with the “living” labour or variable capital plus surplus value. The significant part of Marx’s Labour Theory of Value is that he used only the simplest, Labour Theory of Value to give reasoning behind the origin of profits, unlike Ricardo. He did not spend the time in differentiating between the various qualities or types of labour. Marx made use of abstract labour or socially average necessary labour and reduced all the other labour down to a simple concept of homogenous labour. Marx also mentioned that production amounts would even out with the true market equilibrium price, due to the competition and would therefore even out all of the given profits. For example it would redistribute all of the surplus values.

David’s profit theory was formed on his concept model where the money earned was even to the net product or total profit, in which he had both wages and profit, however excluded rent. Therefore, this would create a fall in the amount of total profit because, profits would be depleted by the rise in rent. Remember, rents are cause the all the real wages to rise. He showed that trade or imported goods associated within the real wage component would adequate and create a drop in the rate of profits in the short term. On the other hand, he also held that the improvements in technology or increases in the production function could as well maintain the rate of profit in the long run.

Finally, we can compare this to Marx’s view. He stated that profit rate could be expressed, as the expansion of capitalism and gains in capital happened. By putting more machinery into operation the composition would increase. This would decrease the rate of profit. However, given a rise in surplus value, that was caused by either change of labour, or decrease in wages from trade, or from a decrease in capital. For Karl, the amount of profit depleted over some time as the composition increased at a rate, much quicker than the rate of surplus value.

Why do we care about the fact that this theory has two different uses anyway? This has been the backbone for what we base all other economic thoughts and theories on. Both Karl and David’s views of the labour theory of value provide a general idea of the link of labour to value and how the two interact. In conclusion we can see that there is a basis for what we have been thought and how these famous renown economists thought. Both Marx and Ricardo attempted to quantify all of the elements of labour to be able to adjust the natural price of a commodity. The labour theory of value was created, first by Ricardo, then a “refined” and “better” version was adopted by Marx. The uses of the labour theory of value were significantly different between Marx and Ricardo. Ultimately, these different uses affect our current view and understanding of economic theory and analysis methods.