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Sunday, March 29, 2015

The Foundation of Marx’s Labour Theory of Value in Ricardo

It can be seen in David Ricardo’s On the Principles of Political Economy and Taxation (3rd edn.; 1821):
“In making labour the foundation of the value of commodities, and the comparative quantity of labour which is necessary to their production, the rule which determines the respective quantities of goods which shall be given in exchange for each other, we must not be supposed to deny the accidental and temporary deviations of the actual or market price of commodities from this, their primary and natural price.

In the ordinary course of events, there is no commodity which continues for any length of time to be supplied precisely in that degree of abundance, which the wants and wishes of mankind require, and therefore there is none which is not subject to accidental and temporary variations of price.

It is only in consequence of such variations, that capital is apportioned precisely, in the requisite abundance and no more, to the production of the different commodities which happen to be in demand. With the rise or fall of price, profits are elevated above, or depressed below their general level, and capital is either encouraged to enter into, or is warned to depart from the particular employment in which the variation has taken place.

Whilst every man is free to employ his capital where he pleases, he will naturally seek for it that employment which is most advantageous; he will naturally be dissatisfied with a profit of 10 per cent., if by removing his capital he can obtain a profit of 15 per cent. This restless desire on the part of all the employers of stock, to quit a less profitable for a more advantageous business, has a strong tendency to equalize the rate of profits of all, or to fix them in such proportions, as may in the estimation of the parties, compensate for any advantage which one may have, or may appear to have over the other.” (Ricardo 1821: 80–81).
Ricardo refers to the “comparative quantity of labour” necessary for production as a foundation of the value of commodities. There is a “primary and natural price” at which exchange value or price somehow equals the “comparative quantity of labour.” But how this happens and how the quantity of labour maps onto, or corresponds to, natural price is left unexplained.

How, for example, do equal labour quantities determine equal prices when there are, and have always been, such radical differences in wage rates by sector, profession, skill, experience, privilege or competence? For if, at the natural price, equal labour quantities do not cause equal prices, how can anyone take the labour theory seriously? I don’t think Marx ever adequately explained this either.

Ricardo is also clear that market prices are driven away from “natural prices” because of supply and demand discrepancies in production. As those individual market supply or demand disequilibria are eliminated, prices move back towards “natural prices” in a type of equilibrium process.

But, as in Marx, the Ricardian labour theory of value is ill-defined and under-determined. How do you properly define the “comparative quantity of labour which is necessary” for production as a homogeneous unit that can function as a universal measure of the labour value of all commodities?

BIBLIOGRAPHY
Ricardo, David. 1821. On the Principles of Political Economy and Taxation (3rd edn.). John Murray, London.

5 comments:

  1. In Ricardo, LVT is an approximation for the correct theory, where rate of profits are equalized as in the Straffian model (Sraffa model is probably the correct interpretation of Ricardo).

    For Marx instead the LVT approximation takes a religious status, and this is why Marxism is a step backward from Ricardo/Sraffa w.r.t price theory.

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    1. Claims of the "religious" status of Marxian value theory are themselves religious, based on hearsay and fervent desire rather than an actual understanding of his arguments.

      I invite newcomers to refer to the sources linked at the bottom of this comment if they wish to actually understand the issue.

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    2. Religious or not the core problem is that there are no good reasons for values (= equilibrium prices) to be proportional to labor used in production. There is a similar problem for Ricardian/Sraffian idea of profit rate equalization. Why should we use price theories that simply come from imagination of philosophers or economists and have zero empirical support?

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    3. Except that

      a) Value theory != price theory

      b) Values != equilibrium prices

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  2. "How do you properly define the “comparative quantity of labour which is necessary” for production as a homogeneous unit that can function as a universal measure of the labour value of all commodities?"

    <- Very simple. You just say that for simplifying analysis you assume labor is homogenous. That's it. I agree it's an assumption that can lead to extremely misleading conclusions such as legislating the same hourly pay for everyone.

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