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Ricardo`s Theory Of Value Essay, Research Paper

One of the enduring questions

of economics is "Where do profits come from?" One of the ways in which

economic philosophers have tried to answer it is by first answering the question

of value. At the center of most economic paradigms is a Theory of Value. The

classical political economists found value to be determined in production; since

most of the cost of production could be reduced to labour, this approach was

refined into The Labour Theory of Value. Neoclassical economists looked for

value in the market act of exchange and developed the Marginal Theory of Value.

Both of these theories are currently under challenge by the post-Keynesians with

their Sraffian Theory of Value, which, like the labour theory of value, is based

on production rather than exchange. Any theory of value in economics is an

extremely abstract formulation: in fact, value theory is the major intersection

between economics and philosophy. For millennia, literally, scholars and

theorists have tried to deduce how items attained their ‘value’. From

pre-Christian to pre-Keynesian times, various strands of thought have proposed

(often divergent) explanations for this phenomenon. For instance, economists

sometimes use the term "theory of value" to mean quite different

things. Here, the term is used to denote a theory that attempts to explain

long-run prices in a capitalist economy. But there are also theories of value

which attempt to explain what prices should be. Medieval scholars used the

concept of just price, which was the price that would allow the producer to earn

a living appropriate to his social position. Some Institutionalists have

introduced similar concepts – such as normative value or reasonable value.

Whatever their explanations, theories of value are at the heart of two of the

major themes: i-) the distribution of wealth and income; and ii-)the maintenance

of microeconomic order. A Brief History of Value Theory The debate on the theory

of value, which was initiated in Ancient Greece and which became inactive during

the Middle Ages, later re-emerged at the close of the seventeenth century to

dominate economic thought for the next 200 years. Even today its primary

importance is such that Schumpeter claimed that "the problem of value must

always hold the pivotal position, as the chief tool of analysis in any pure

theory that works with a rational schema." Similar hypothetical solutions

varied from time to time. Considering that this piece is hyperbolic in scope,

shall, I would narrow down the analysis to the following structure. Firstly, I

would try to overview sketching Aristotelian, Scholastic and Mercantilistic

views on value. Secondly, I will follow an analysis of the contribution of

pre-classicalist writers like Petty, Cantillon, Galiani and Law to the debate.

Thirdly, the supply oriented theory of value put forward by classical economists

like Smith, Ricardo, Marx and Mill shall be examined. Fourthly, Jevons and

Mengers’ neo-classical attempt to replace the classicalists with their

demand-oriented theory of value will be considered. Finally, both Walras’ and

Marshall’s respective resolution to the conflict shall be investigated by

individually accommodating the interactions of both supply and demand as

determinants of value within their overall economic framework. Early Economic

Thought The first great landmark in the long and tortuous intellectual struggle

with the riddle of value, was laid by the philosophers of the Athenian Academy

in the 4th century BC. It was Aristotle (384-322) who held that the source of

value was based on need, without which exchange would not take place.

Originally, it was he who distinguished between value in use and value in

exchange- "Of everything which we possess, there are two uses; For example

a shoe is used for wear and it is used for exchange". While the Scholastics

later adopted and accommodated these views to Christian thought, like the

Aristotelian philosophers before them, economics was not regarded as an

independent discipline but merely as an integral part of ethical and moral

philosophy. As a result, the debate on value was centred and henceforth retarded

by a normative approach – what value should ‘justly’ be, instead of what

actually is. During this period, utility was widely held as the determinant of

value with only a minority of theorists such as St. Thomas Aquinas (1225-1274)

and John Duns Scotus (1265-1308) taking note of the cost of the production side.

The search concerning value was continued in the direction of utility by early

mercantilists during the 16th and the first half of the 17th century. The

supremacy of this argument was highlighted in 1588 when Bernardo Davanzati

unsuccessfully attempted to construct a utility theory of value in Lecture On

Money. It is not surprising that they concentrated on the determinants of the

demand for goods (utility), since the merchants’ profits depended on the

exploiting of the difference between the market buying and the selling prices

rather than controlling the production process. For medieval theorists, value

depended not on any intrinsic value but on utility and scarcity. Shakespeare’s

Richard III battle plea "A horse, a horse, my kingdom for a horse"

epitomises the subjective approach to value of this era. Yet despite the

failings and limitation of this one-sided method, this period is viewed as

embryonic with regard to value theories, and one which would issue subsequent

economic developments. Pre-Classical Thought It was only at the end of the

seventeenth century when economists following a Cartesian philosophy of

deduction, broke away from the dominant mercantilistic utility view and looked

for a solution in the cost of production. William Petty (1623-1687) who was

influenced by the scientific advances of his era abandoned the subjective theory

of value and instead objectively searched for the natural and intrinsic laws of

reality – of which ‘natural value’ was one of them. According to Petty, the

market price (’actual price’) of any commodity would fluctuate perpetually

around its natural value (’natural price’). The determinants of this natural

value were deduced as the factors of production – land and labour. In keeping

with his mathematical nature, Petty attempted to reduce his theory of value to a

labour one only, by looking for a ‘par’ value for land in terms of labour

forces. In the political Anatomy of Ireland (1691), he states that the unit of

measure consisted of "The easiest-gotten food of the respective countries

of the world"- average daily diet necessary to sustain a worker. Although

he successfully anticipated the classical-Marxian theory of subsistence wages

and surplus, he also inherited the endless difficulties associated with a labour

cost theory of value. Richard Cantillon (168?-1734) who was another practitioner

of the Cartesian approach also began with the labour-and-land theory of value.

Although, similar to Petty in that he reduces the determinants of intrinsic

value in terms of one factor, unlike him, Cantillon, who was influenced by

French agrarian protectionists, chose land. Cantillon finds his ‘par’ value by

equating the value of a labourer with that of twice the produce of the land he

consumes, while allowing for variations in the labourers’ skills and status.

Once this ‘par’ value is calculated, the intrinsic values of any good can be

reduced to land only. With his assumptions of constant returns to scale,

Cantillon provides us with his land theory of value. He also originally shows us

how resources were allocated between different markets when the market price

diverge from his intrinsic ‘land’ value. Unfortunately, Cantillon’s land theory,

like Petty’s labour theory, was only a true description of value in highly

specific cases. Meanwhile the medieval subjective approach to value was

continued by another branch of pre-classical economists, which included people

like Nicholas Barbon (1640-1698) who thought that the natural value of goods was

simply represented by their market price. For him "the value of all wares

arise from their use; things of no use, have no value, as the English phrase is,

they are good for nothing". Furthermore, on the continent, the Italian

Ferdinando Galiani (1728-1787) borrowed the early mercantilistic writings of

Davanzati and Montanari on the subjective nature of value. He devoted his time

to developing a theory of utility value and even implicitly described the notion

of diminishing marginal utility. His deductions just "lacked the concept of

marginal utility" of the neo-classical economists, Jevons and Menger.

Although Galiani vaguely accounted for the cost of production in his utility

value theory, he failed to develop it into a fully-fledged supply and demand

analysis. The Scotsman John Law (1671-1729) took up this monumental project. In

his Essay on a Land Bank, Law outlined the old water / diamond paradox of value,

in which comparatively ‘useless’ diamonds are more highly valued than the more

‘useful’ water and reconciled the mystery by using a supply and demand analysis.

Unlike his predecessors and his immediate successors (until Walras and

Marshall), Law used both demand and supply factors in determining the value of a

good which has a use in society. Henceforth any changes in the value of goods

were due to a change in the quantity supplied or demanded. Although John Locke

(1632-1704) in, Some Considerations on the Consequences of Lowering of Interest

and the Raising the Value of Money, had developed a theory of price

determination earlier, it lacked the clarity, precision and understanding of

Law. In Money and Trade Considered, Law corrects Locke’s unpolished value by

stating that "The prices of goods are not according to the quantity in

proportion to the vent, but in proportion to the demand" . Surprisingly,

Law’s early solution to value theory gained little following owing probably to

his failed financial operations in France. Even more surprisingly has been the

reduction of Law’s contributions in this area to mere footnotes in the

mainstream economic history books. Unfortunately, for the development of value

theory, this dualistic analysis was suppressed for almost 200 years, until its

resurrection at the close of the 19th century. Classical Thought The publication

of Adam Smith’s (1723-1790) Wealth of Nations in 1776 heralded the rise of the

classical school and swung the value debate back towards Petty’s objective

labour theory of value. According to J. Niehans, the classical emphasis on the

labour cost was "a step backward" compared to the pre-classical

analysis. The classical political economists shared three major points in their

approach to developing a theory of value. First, all the classical economists

thought it necessary to start their investigations of capitalism with the

question of value. Second, all the classical economists searched for value in

the conditions of production. It was in the workshop or the factory, not the

marketplace, that goods acquired their particular values. Third, although they

had somewhat different reasons, all the classical economists subscribed to one

form or another of a subsistence theory of wages. That meant that the cost of

labour was itself equal to the value of the goods and services that a

working-class family needed in order to get by. Smith: Adding-Up of Costs Adam

Smith found value – which he called "natural price"- by adding the

costs of production. In a society without private ownership of land and which

used only the simplest of tools, labour would make up the entire cost of

production: If among a nation of hunters, for example, it usually costs twice

the labour to kill a beaver which it does to kill a deer, one beaver should

naturally exchange for, or be worth two deer. It is natural that what is usually

the produce of two days’ or two hours’ labour, should be worth double of what is

usually the produce of one day’s or one hour’s labour. The Wealth of Nations,

Book 1, Chapter 6 But this simple measure of value is not sufficient for the

more complex production processes and property ownership patterns of capitalism.

When the worker is hired by a capitalist, use equipment owned by the capitalist,

and works with raw materials purchased by the capitalist, there will normally be

profit: In the price of commodities, therefore, the profits of stock [capital]

constitute a component part altogether different from the wages of labour, and

regulated by quite different principles. The Wealth of Nations, Book 1, Chapter

6 By "quite different principles," Smith means that the worker is paid

by the hour of labour while the capitalist is "paid" by the amount of

capital and the length of time that the capital is engaged in that production

process. Whenever a product involves the use of land, there will be a third

component included in its price: As soon as the land of any country has all

become private property, the landlords, like all other men, love to reap where

they never sowed, and demand a rent even for its natural produce. The wood of

the forest, the grass of the field, and all the natural fruits of the earth,

which, when land was common, cost the labourer only the trouble of gathering

them, come, even to him, to have an additional price fixed upon them. He must

then pay for the licence to gather them; and must give up to the landlord a

portion of what his labour either collects or produces. This portion, or, what

comes to the same thing, the price of this portion, constitutes the rent of

land, and in the price of the greater part of commodities makes a third

component part. The Wealth of Nations, Book 1, Chapter 6 The real value, then,

of any commodity, will be the sum of the labour cost and the profit plus any

rent. Even though the capitalist purchase raw materials as well as labour, the

raw materials – and anything else the capitalist purchases from other

capitalists – can in turn be broken down into labour, profit and rent. Adding Up

of Costs We can fabricate a simple example along the lines suggested by Smith. A

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