As I begin my exposition and analysis of the Ricardo's central argument and most important theoretical contribution -- his Labor Theory of Value -- I am forced to recapitulate things that I have already discussed in some detail in my Tutorial on the Thought of Karl Marx [see Box.net via a link at the top of this blog] as well as in my book Understanding Marx. I apologize to those faithful readers who have already read one or both of those texts, but there is no way around it, because Ricardo entered a debate that had been under way for four decades, and one can understand the significance of his version of the Labor Theory only if one knows what problems in previous versions it was intended to solve.
Briefly, Adam Smith began his Wealth of Nations by drawing several distinctions, posing a question, and then offering a preliminary answer. The first distinction was between "value in use" and "value in exchange." Many things are useful to us in satisfying our wants or meeting our needs -- food of all sorts, clothing, shelter, medical care, carriages, air, water, arable land, swords, pins, needles, plows, seed corn, feathers, furs, musical instruments, and so on and on. These are useful, or have value in use, insofar as they are instrumental in furthering whatever ends and purposes we may have, in meeting whatever needs we may have. Some, but not all, of these things bring a price in the marketplace when they are offered for sale. Furs and carriages do, air and water by and large do not. Those things that do bring a price in the market are said to have "exchange value" or value in exchange. We will die very quickly without air, and only slightly less quickly without water. Hence their use value to us is beyond calculation. But because they are, under most circumstances, readily available in virtually unlimited quantities, they bring no price at all in the market.
Adam Smith, and after him two and half centuries of economists, including Ricardo and Marx, is not interested in value in use, content to leave that subject to chemists, physiologists, engineers, dieticians, and tailors. His interest is in exchange value, and more specifically in the price that is commanded in the market by such things as indeed have exchange value.
Smith initiates his argument by drawing a second distinction on which all of classical Political economy is erected. He observes that although the market prices for goods fluctuate day by day in response to such factors as weather or variations in supply and demand, those familiar with the market know that there is a customary or price at which each commodity sells for the most part, and he calls this the "natural price" of the commodity. The same is true, he says, for land, labor, and capital. There is a "natural rent," "natural wage," and natural "profit" on which buyers and sellers in the market can depend. Smith likens these natural prices to "centers of gravity" that draw toward them the fluctuating market prices, in much the way that a physical center of gravity will tend to stabilize an unsteady object. This is, on Smith's part, a deliberate attempt to give to the new study of Political Economy something of the majesty and rigor of what was then the gold standard for theoretical investigations, Newtonian Physics.
Smith calls these natural prices "values," and he sets himself to offer an explanation for, or a theory of, the natural prices that rule in the marketplace. Thus, Smith seeks a Theory of Natural Price, or, what is for him the same thing, a Theory of Value. His answer, in a phrase, is that natural prices or values of commodities are regulated by the quantity of labor required to produce them. Thus, he offers, in a very crude and preliminary form, a Labor Theory of Value.
Before getting into the fascinating and perplexing details of the Labor Theory of Value, let us just pause for a moment to reflect on the real significance of what Smith proposes. Economists, by and large, are so eager to get to the fun stuff, the equations, that they do not give as much thought as they ought to the conception of the world that underlies those equations.
Smith is suggesting that it is human labor that confers exchange value of commodities. It is not the admirable capacity of capitalists to defer their personal gratification so that the money not spent on luxuries can be invested productively [a favorite of the apologists for Capitalism -- see my mini-tutorial in Max Weber's The Protestant ethic and the Spirit of Capitalism for the religious origins of that story]; nor is it the entrepreneurial genius of those same capitalists that confers exchange value on the commodities that are produced on their land and in their factories [another favorite.] Nor is it the interplay of consumer demand and producer supply that explains exchange value [the story currently enshrined in college textbooks. It is labor. Who performs that labor? The workers.
The question simply cries out to be asked: If it is the labor of the workers that confers exchange value on commodities, then why do those same workers end up with so little of that exchange value? Why, as their labor creates more and more exchange value, do they remain as poor as ever, while the entrepreneurs grow richer and richer day by day? Before we move on to the details, I should like just to suggest that it was not the elegant mathematical superiority of the marginalist theories of Alfred Jevons, Karl Menger, and Leon Walras, advanced in the 1870's, that persuaded the entire Economics profession to abandon the school of Classical Political Economy. It was the fact that the new economic theories made it very easy to stop asking those troubling questions, questions that thrust themselves unavoidably on us as we read the writings of Adam Smith, David Ricardo, and Karl Marx.
Well, enough of my ranting and raving. On to the theory. To defend the thesis that it is labor that lies at the heart of exchange value, Smith tells a little story about a deer hunter and a beaver hunter who meet in the woods and negotiate the terms on which they will trade deer for beavers. to their mutual advantage. Since according to Smith it takes two days to catch a beaver and one day to catch a deer [I accept Smith's hypothesis without demur, never having hunted day in my life], the deer hunter will not pay more than two deer for one beaver, and the beaver hunter will not accept less than two deer for one beaver. The reason, of course, is that if the deer hunter is asked to pay four deer for one beaver, which four deer it would take him two days to catch, he would be better off [labor being a curse, not a blessing, as the Good Book tells us] spending one day hunting beaver, and a second day hunting deer. He will then have, for his two days of labor, one beaver and two deer, rather than merely one beaver. The beaver hunter makes a parallel calculation, and so, by "the higgling and jiggling of the market," as Smith puts it, they arrive at a price of two deer for one beaver. [We are assuming, among other things, that each hunter has positive marginal utility for both beaver and deer, which may of course not actually be true. There are only so many beaver pelts one can put to good use, and only so much venison one can eat, but never mind.]
Immediately upon advancing this theory, Smith acknowledges that it applies only to the rude state of society 'before the appropriation of land and the accumulation of stock." The problem is this: Once some people have laid claim to ownership of the arable land, and are in a position to defend their claim by the majesty of the law and force of arms, aspiring farmers seeking to get a living by cultivating the soil will be compelled to pay rent to those landowners, and that payment of rent, he thought, would drive up the price at which the farmers would be willing to sell their grain at market. [Hence the appeal of the "New World," where, it was commonly said, there was virgin land owned by no one save disposable savages.] As for the "accumulation of stock," the hunting of deer and beaver requires beaver traps and rifles or bows and arrows. Those tools of the trade cost a certain amount of labor to produce, and they last for some average amount of time before they must be replaced. Now, there is in general no reason at all to suppose, Smith realized, that the same amount of time and effort goes into the making of the tools of the trade in each line of production. Some techniques of production are, as later economists learned to say, "capital intensive" while others are "labor intensive." Even under the most technologically primitive conditions, men and women are not stupid, and they will demand that the labor expended on the making of those means of production, that "stock," be compensated by an appropriate adjustment in the Natural Price, or Value, of the commodities produced with their aid.
And there Adam Smith stopped, unable to figure out how to take into account the appropriation of land and the accumulation of stock in the determination of natural price. Tomorrow, we shall meet David Ricardo's brilliant breakthrough -- embodied labor.