Value Analysis

 David Ricardo is widely recognised for his contribution towards the labour theory of value. In his effort to contribute to the development of an economic theory, David Ricardo undertook a number of studies that focused on improving the ‘major errors’ made by Adam Smith in his proposition on the theory of value. 

Smith’s bases his arguments about value on a situation where capital is non-existent. However, Ricardo affirms that capital has always been in existence. He further refutes Smith’s assertion that the value in exchange is equivalent to the price. Additionally, he bases his arguments about value on the ‘value in use’ component by considering it as the utility in a commodity. In his opinion, utility is a basic, but inadequate condition in exchange relations. Ricardo further asserts that the “present or past relative value of a commodity is determined by the relative amount of commodities produced and the amount of labor consumed”. Thus, Ricardo is interested in the relative value of products as opposed to their real value. Ricardo argues that exchange value is not related to wage levels. Subsequently, “changes in the wage levels would not have any impact on the exchange value or the price of commodities”.

 Ricardo suggests that changes in the level of wages could only affect prices/exchange value if the relative values of products are determined based on the ‘embodied labour’. On the contrary, adjustments in wages levels only influence the level of profitability due to the inverse relationship between wages and profit. Thus, an increase in the “level of wages leads to a decline in the level of profitability”. Consequently, Ricardo’s work highlights the absence of positive variation between the value of a commodity and wages.

Ricardo argues that rent does not determine the price of a commodity. Subsequently, it should not be considered in determining the price or value of a product. However, Ricardo ignores the existence of differential rent and absolute rent, which implies that rent is non-existent in price determination.

In his argument, Ricardo asserts that the Smith’s  theory of labor does not consider scarce products, which makes his labor-command theory of value ineffective. In his opinion, the value of commodities that can easily be reproduced such as foodstuffs can only be determined by assessing their embodied labor. Therefore, if producing one bed and one toy requires 30 hours and 1 hour of labor respectively, then the cost of labor incurred in producing one bed is 30 times the cost of producing a toy.

Based on Smith’s labor theory of value, if the cost of making a bed is approximately $60, then the cost of producing a toy will gravitate around $2. This assertion illustrates an absolute approach in the determination of value of a commodity’s price or value. However, Ricardo asserts that the cost of labor is subject to the workers’ level of skills and expertise.

Ricardo also argues that Smith did not take into account the non-reproducible commodities in his assessment of value. He affirms that the value of scarce products is determined by their demand. Additionally, the value of such commodities is inherent in their scarcity. Moreover, Ricardo is of the opinion that labor is not the only dimension that can be used in determining the relative value of commodities.

In his assessment, Ricardo argues that the “influence of profits on the price of a commodity varies depending on the amount of circulating and fixed capital required”. Additionally, Ricardo maintains that profits “become a greater percentage of prices as fixed capital increases relative to circulating capital”. Ricardo emphasizes that capital-intensive products are sold at a higher price as compared to less-capital intensive products irrespective of the quantity of labor employed.

Additionally, Ricardo emphasized that the amount of duration taken to bring a commodity to the market is also a fundamental determinant of a commodity’s price irrespective of the amount of labor embodied. Therefore, a commodity’s price is determined by the compound profit and wage level. This assertion implies that the value of a commodity increases as time passes. For example, the value of a well-aged wine is higher as compared to newly manufactured wine despite the amount of labor required in the production process being equal.


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