The classics versus the labor theory of value - Part II - David Ricardo
A cost-price theory is not the same than a labor theory of value
David Ricardo is probably, along with Marx, the author most identified with a labor theory of value. However, Ricardo’s theory is quite similar to that of Adam Smith; that is, he also has a price theory based on a
cost → price framework.
Ricardo opens his Principles of Political Economy and Taxation by (1) distinguishing between value of use and value of exchange (citing Smith), (2) presenting the paradox of value, and (3) concluding that items without value of use cannot have value of exchange (PPET, p. 11, bold is added):
It has been observed by Adam Smith, that “the word Value has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called value in use; the other value in exchange. The things,” he continues, “which have the greatest value in use, have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange, have little or no value in use.” Water and air are abundantly useful; they are indeed indispensable to existence, yet, under ordinary circumstances, nothing can be obtained in exchange for them. Gold, on the contrary, though of little use compared with air or water, will exchange for a great quantity of other goods.
Utility then is not the measure of exchangeable value [price], although it is absolutely essential to it. If a commodity were in no way useful,—in other words, if it could in no way contribute to our gratification,—it would be destitute of exchangeable value, however scarce it might be, or whatever quantity of labour might be necessary to procure it.
Consider also the paragraph that follows, where Ricardo is talking about price, not utility (PPET, p. 12, bold is added):
Possessing utility, commodities derive their exchangeable value [price] from two sources: from their scarcity, and from the quantity of labour required to obtain them.
Similar to Smith, Ricardo also states that in a primitive society, labor plays a major, if not the only, role in determining relative prices; (PPET, p. 13, bolds added):
In the early stages of society, the exchangeable value [price] of these commodities, or the rule which determines how much of one shall be given in exchange for another, depends almost exclusively on the comparative quantity of labour expended on each.
There is a marginal difference with Smith. For Ricardo, there is a limited amount of capital
(K → 0), while for Smith there is none
(K = 0). Ricardo is confusing because, in this discussion, he assumes that the amount of capital needed to produce different goods is the same. In such cases, only a difference in labor can explain a difference in prices. This is Ricardo a few pages later (PPET, pp. 22-23, bold is added):
Even in that early state to which Adam Smith refers, some capital, though possibly made and accumulated by the hunter himself, would be necessary to enable him to kill his game. Without some weapon, neither the beaver nor the deer could be destroyed, and therefore the value of these animals would be regulated, not solely by the time and labour necessary to their destruction, but also by the time and labour necessary for providing the hunter’s capital, the weapon, by the aid of which their destruction was effected.
At first sight, Ricardo’s words seem to imply that his theory rests only on labor. Yet, according to him, that is not the case. Consider first the following passage from PPET (p. 30, bolds added):
In the former section we have supposed the implements and weapons necessary to kill the deer and salmon, to be equally durable, and to be the result of the same quantity of labour, and we have seen that the variations in the relative value of deer and salmon depended solely on the varying quantities of labour necessary to obtain them,—but in every state of society, the tools, implements, buildings, and machinery employed in different trades may be of various degrees of durability, and may require different portions of labour to produce them. The proportions, too, in which the capital that is to support labour, and the capital that is invested in tools, machinery and buildings, may be variously combined. This difference in the degree of durability of fixed capital, and this variety in the proportions in which the two sorts of capital may be combined, introduce another cause, besides the greater or less quantity of labour necessary to produce commodities, for the variations in their relative value [price]—this cause is the rise or fall in the value of labour.
Capital profit is the “another cause” of relative price variation. For Ricardo, labor (wages) and capital (profits) are two causes of prices. This is Ricardo in a letter to J. R. McCulloch (1890) (p. 194, bolds added):
I sometimes think that if I were to write the chapter on [exchange] value again which is in my book, I should acknowledge that the relative value [price] of commodities was regulated by two causes instead of by one, namely, by the relative quantity of labour necessary to produce the commodities in question, and by the rate of profit for the time that the capital remained dormant, and until the commodities were brought to market.
Ricardo is confusing, but his price theory is similar to Smith's. For Ricardo, the causes of price (exchangeable value) are two: (1) labor and (2) capital. And also, like Smith, Ricardo’s price theory falls into a vicious circle of explaining prices with costs and costs with prices. In the long run, the natural price converges to these two costs of production:
(cost of labor + cost of capital) → equilibrium price
Ricardo, however, has a difference from Smith’s price theory. For Smith, three factors of production explain final prices: labor, capital, and land. For Ricardo, two factors of production explain final prices: labor and capital. The reason why land receives income is because of different marginal productivities. The marginal land receives an economic profit of zero, while the more productive lands receive positive economic profits. This is Ricardo on land (PPET, p. 74, bolds added):
Notwithstanding, then, that the advantages of fertile over inferior lands are in no case lost, but only transferred from the cultivator, or consumer, to the landlord […]
The reason then, why raw produce rises in comparative value, is because more labour is employed in the production of the last portion obtained, and not because a rent is paid to the landlord. The value of corn is regulated by the quantity of labour bestowed on its production on that quality of land, or with that portion of capital, which pays no rent. Corn is not high because a rent is paid, but a rent is paid because corn is high […]
Landowners do not “add” anything to the production process; they receive rent from their ownership of productive land.
Reading beyond Ricardo's ambiguities and confusing wording reveals that, like Smith, he is also talking about a price theory, not a theory of utility. The main difference between Ricardo and Smith is that the former only looks at two factors of production as causes of price. To explain the income of land, Ricardo relies on different productivities.
According to this reading, talking about a Ricardian theory of value is misleading in two ways. The first one is that Ricardo is talking about price, not utility. The second one is that Ricardo does not speak only about labor but also about capital.
Next: John Stuart Mill