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The Labour Theory of Value: Economics or Ethics? by Peter C. Dooley
1.0 Introduction.
The labour theory of value dominated the research agenda of economics for over two centuries, from at least the time of Sir William Petty in the 1660's to the 1870's when Léon Walras, Carl Menger and William Stanley Jevons established the marginal utility theory of value. One generation of economists after another struggled to explain the price of commodities by the labour required to produce them. This became the paradigm of political economy, at least among British economists. Nearly everybody criticized the theory, however, because they saw errors in work their predecessors. Adam Smith, David Ricardo and Karl Marx all made significant modifications and introduced important exceptions to the theory. They wanted to keep the old theory and tried to correct the errors in it, because they believed in the philosophical, moral or ethical implications of it.
The philosophical foundation of the labour theory of value rests on a self-evident truth: all commodities are ultimately produced by labour alone. All the material things that exist on the face of the earth were originally free gifts of nature. According to this theory, things only have value when labour makes them useful to mankind, including tools and machines, which can be used to make new things. The labour employed to produce a commodity today requires tools, materials and supplies made yesterday, which in turn required labour to produce them beforehand, and so on retrospectively back to the age of stone axes and flint knives. From this perspective, all commodities originally arose from mixing labour with the things of nature. Petty tried to measure the value of commodities by the land and labour used to produce them. He treated capital goods as the product of “past labour.” John Locke turned this conception into a theory of property rights and established the “political” agenda of classical political economy. Whether classical economics took the form of Liberalism or Marxism, it rests on the moral principle that people are entitled to the fruits of their labour.i
The purpose of this paper is to show how the ideas of Petty and Locke can be seen in the works of Adam Smith, David Ricardo, and Karl Marx. It is not a commentary on modern commentaries. Petty may be taken as the starting point on the authority of Karl Marx, who wrote “the founder of modern political economy is Sir William Petty, one of the most gifted and original economic investigators.”
2.0 Petty’s two measures of value.
Sir William Petty gave his economic speculations an empirical foundation whenever possible. As a medical doctor who served as professor of anatomy at Oxford, he approached economics from the natural science point of view. He called it "Political Arithmetick," because he believed economic policy should be based on social statistics. Petty (1899 [1676]: 244) acknowledged his debt to Sir Francis Bacon and vowed to express himself "in Terms of Number , Weight , or Measure ; to use only arguments of Sense, and to consider only such Causes, as have visible Foundations in Nature." He wanted to base his work on observed reality, but the process of classifying observations requires abstract concepts. Theory comes before the collection of statistics and the analysis of data.
His economic theory commanded the attention of his successors, because he asked questions about fundamental issues. He identified the agents of production as land, labour and capital, which he called stock; he constructed national income and national wealth accounts for England and Wales for 1665;ii^ and he considered the
i 1 Marx (1969: 1, 356) justly maintained that Locke's "philosophy served as the basis for all the ideas of the whole
of subsequent English political economy." The influence of Locke on the philosophical foundations of classical economics is treated by James Bonar (1893: 91-103) and by Werner Stark (1944: 1–30), though they do not always agree with each other. Gunnar Myrdal (1953: 71) wrote that “In its purest form, the theory demands laissez-faire, for it implies the view of the `sacred’ right of man to the fruits of his work.” Schumpeter (1950 [1942]: 298-99) went even further: “The ideology of classical socialism is the offspring of bourgeois ideology. In particular, it fully shares the latter's rationalist and utilitarian background and many of the ideas and ideals that entered the classical doctrine of democracy.”
ii (^) In the 1665 National Wealth Account that Petty (1899 [1667] :105–110) constructed for England and Wales, he
origin, measure and regulation of value to be distinct concepts. His theory consisted of little thought experiments, which often took the form of aphorisms or parables.
For Petty, land and labour were the original source of all commodities: "Labour is the Father and active principle of Wealth, as Lands are the Mother (Petty, 1899 [1662]: 68).” While the emphasis on land and labour was not new, Petty turned it into a fundamental notion of classical economics. Smith (1976 [1776]: 65), for example, began his hypothetical economic history of the world in an “early and rude state of society,” where land and labour were the only agents of production. Petty (1899 [1664]: 110) defined capital, or “what we call the Wealth, Stock, or Provision of the Nation,” as “being the effect of former or past labour.”
J.K. Ingram (1893: 51) and Eric Roll (1956: 106-107), among other authorities, have found places where Petty seems to explain the prices of commodities by the labour embodied in them.iii^ While Petty (1899 [1662]: 50) certainly stressed the role of labour in production, he did not ignore land. In his parable of a man trading silver from Peru for corn in England, for example, he appears to define the natural price of commodities by the labour embodied in them: "If a man can bring to London an ounce of Silver out of the Earth of Peru , in the same time that he can produce a bushel of Corn, then one is the natural price of the other." This statement appeared, however, in the context of trying to measure the value of rent paid in corn by its value in money.
Earlier he had set up a little thought experiment to explain what determines the rent of land in terms of corn:
Suppose a man could with his own hands plant a certain scope of Land with Corn, that is, could Digg, or Plough, Harrow, Weed, Reap, Carry home, Thresh, and Winnow so much as the Husbandry of this Land requires; and had withal Seed wherewith to sowe the same. I say, that when this man hath subducted his seed out of the proceed of his Harvest, and also, what himself hath both eaten and given to others in exchange for Clothes, and other Natural necessaries; that the remainder of Corn is the natural and true Rent of the Land for that year (Petty, 1899 [1662]: 43).
Then he asked, “how much English money this Corn or Rent is worth?”
I answer, so much as the money, which another single man can save, within the same time, over and above his expence, if he imployed himself wholly to produce and make it; viz. Let another man go travel into a Countrey where is Silver, there Dig it, Refine it, bring it to the same place where the other man planted his Corn; Coyne it, &c. the same person, all the while of his working for Silver, gathering also food for his necessary livelihood, and procuring himself covering, &c. I say, the Silver of the one, must be esteemed of equal value with the Corn of the other: the one being perhaps twenty Ounces and the other twenty Bushels. From whence it follows, that the price of a Bushel of this Corn to be an Ounce of Silver (Petty, 1899 [1662]: 43).
Clearly, the production of corn has requires two agents: labour and land. The value of the corn includes both the subsistence of labour and the rent of land. The silver mine also produced a surplus of 20 ounces over the subsistence of the miner. The market prices of silver and corn are regulated by the wages of labour plus a surplus of silver or corn attributable to nature, whereas in a pure labour theory of value labour alone regulates values. The subsistence of the labourer is Petty’s (1899 [1672]: 181) proxy for his labour measure of value.
estimated the value of the capital stock at £106 million (consisting of housing, shipping, livestock, coins and goods), the land at £144 million and the capitalized value of labour at £417 million. In the economy of 1665, housing would include agricultural, commercial and industrial structures. In his corresponding National Income Account, he put wages at £25 million, rent at £8 million and the yield of “Money and other personal estates,”that is, capital, at £ million.
iii (^) Notable commentators on Petty include Karl Marx (1969-72:1, 361), C.H. Hull (1899: lxxiii; 1900:330-331),
E.A.J. Johnson (1937: 102-13), J.A. Schumpeter (1954: 211-15), T. Aspromourgos (1986: 28-45) and T. Hutchison (1988).
Locke, but it clearly extends to Adam Smith and beyond. This is an ethical theory, not an economic theory; and it also has an obvious religious basis. Locke (1967 [1690]: 172) noted how God made Adam a day labourer for life when He cast him out of Paradise: "In the sweat of thy face shalt thou eat thy bread, till thou return unto the ground, for out of it wast thou taken, for dust thou art, and unto dust shalt thou return"
His economic theory improved upon Petty by more clearly distinguishing between the origin, the measure and the regulation of value. (1) His theory of the origin or source of value comes out of his theory of property rights. It explains how labour produces most of the value of useful things, which is the philosophical foundation of classical economics. (2) His measure of value is more practical than theoretical, for it concerns protecting fixed incomes like rent against a decline in the value of money, that is, against inflation. (3) When he turned to the regulation of value, however, he abandon the labour theory of value and presented what is often called a supply and demand theory. These three concepts – the origin, measure and regulation of value -- were discussed by all the important classical and early neoclassical economists.v^ A.C. Whitaker (1968 [1904]) has correctly observed in his History and Criticism of the Labor Theory of Value in English Political Economy that these concepts are the “key” to understanding the labour theory of value.
First, the theories of the origin of value presented by Petty and by Locke were similar, but they served different purposes. Petty wanted to trace the value of things back to the land and labour embodied in them, so that he could measure value by its two natural dimensions. He got rid of capital by supposing that it was merely the past labour embodied in the accumulated stock of things. Locke (1967 [1690]: 298) also traces the value of commodities back to a state of nature.
For 'tis not barely the Plough-man's Pains, the Reaper's and Thresher's Toil, and the Bakers Sweat, is to be counted into the Bread we eat; the Labour of those who broke the Oxen, who digged and wrought the Iron and Stones, who felled and framed the Timber imployed about the Plough, Mill, Oven, or any other Utensils, which are a vast Number, requisite to this Corn from its being seed to be sown to its being made Bread, must all be charged on the account of Labour, and received as an effect of that: Nature and the Earth furnished only the almost worthless Materials, as in themselves. 'Twould be a strange Catalogue of things, that Industry provided and made use of, about every Loaf of Bread, before it came to our use, if we could trace them; Iron, Wood, Leather, Bark, Timber, Stone, Bricks, Coals, Lime, Cloth, Dying-Drugs, PiK´fÒ Tar, Masts, Ropes, and all the Materials made use of in the Ship, that brought any of the Commodities made use of by any of the Workmen, to any part of the Work, all which, 'twould be almost impossible, at least too long, to reckon up.
This notion, which accounts for what Petty called “past labour,” is repeated in one form or another by Adam Smith, David Ricardo, Karl Marx, and most other classical economists. His seemingly innocent comment that all of which “would be almost impossible, at least too long, to reckon up” is the Achilles heel of any empirical labour theory of
v (^) A theory of the origin of value is an explanation of a cause of causes. The classical economists saw labour
as the cause of value, for which they were severely criticized by the early neoclassical economists. The early neoclassical economists, who developed the marginal utility theory, thought they had found the truth when they claimed that utility is the origin of value. In his Principles of Economics , Carl Menger (1950 [1871]) claimed that value originates in the relation between man's needs for various things and the quantities of them that are available. Friedrich von Wieser (1956 [1888]: 3) began Natural Value with a chapter on “The Origin of Value,” in which he asked: “Whence do things get their value?” Where goods are scarce, von Wieser (1956 [1888]: xxxii) said, “utility creates value.” Léon Walras (1954 [1874-77]) included a lesson entitled “Exposition and Refutation of Adam Smith's and J.B. Say's Doctrines of the Origin of Value in Exchange” in his Elements of Pure Economics , in which he traced the origin of value to rareté, the Walrasian term for marginal utility. W.J. Jevons (1957 [1871], 2) also included a section “On the Origin of Value” in his Theory of Political Economy , in which he asserted that “value depends entirely upon utility.” By early in the twentieth century, discussion of the origin of value disappeared from the economic literature, because there is no such thing. In a competitive economy, exchange values depend on the complex of wants, technical knowledge, resources and their distribution among the people. Dooley (1900) compares the classical and neoclassical theories of the origin, measure and regulation of value.
value: The past labour embodied in the production of things today cannot be known.
While Locke (1967 [1690]: 298) attributes value to both land and labour like Petty, he gives a much greater emphasis to labour, because labour “ puts the greatest part of the Value upon Land , without which it would scarcely be worth any thing.”
I think it will be but a very modest Computation to say, that of the Products of the Earth useful to the Life of Man 9/10 are the effects of Labour : nay, if we will rightly estimate things as they come to our use, and cast up the several Expences about them, what in them is purely owing to Nature, and what to labour, we shall find, that in most of them 99/100 are wholly to be put on the account of labour (Locke, 1967 [1690]: 296).
This may be called a 99 percent labour theory of value. How Locke made this very modest calculation is not at all clear, because all labour required to produce anything going back to an original state of nature “would be almost impossible, at least too long, to reckon up.” Second, the practical importance of measuring values forºúTÍke arose from the problem of inflation, which he described as a fall in the value of money. Gold and silver declined in value after the discovery of America, and coins fell further with the debasement of their gold and silver content. Since landlords often rented their land for a tenant's life, sometimes for many lives, the real value of their rental income declined when it was fixed in terms of money. It was, therefore, sensible to find an invariable measure of value.
A measure of value is a commodity or bundle of commodities by which we reckon the value of other things. Any commodity could serve as a measure of value, here and now, in a particular market, because equal values are given in exchange; but things are usually given in exchange for money, so that people customarily think of prices in terms of money. Money, as Locke (1991 [1692]: 248) observed, "is the universal measure by which people reckon, and is used by every body in the valuing of all Things."
Money is not a steady or unalterable measure of value, however, because money and every other commodity change in value over time. No two commodities ever exchange at the same fixed ratio year after year. Locke (1991 [1692]: 264) asked, does a commodity exist that has a fixed absolute value? He answered, money would be such a commodity,
if in any country they use for Money any lasting Material, whereof there is not any more to be got, and so cannot be increas'd; or being of no other use, the rest of the World does not value it, and so it would not like to be diminished; this also would be a steady standing Measure of the Value of other Commodities.
This apparently means that a commodity would be a perfect measure of value if the quantity of it never changed. But, even if neither the supply of it nor the demand for it ever changed, the value of all other commodities may change relative to it, in which case it would be impossible to determine whether its value remained constant. The quest for an invariable measure of value became a common theme of classical economics. Locke (1991 [1692]:
- reached the right practical conclusion: "it is impossible to have any standing, unalterable measure of the value of things."
Third, Locke explains the regulation of commodity prices with his "Laws of Value," which apply to the market period when the commodities brought to market have already been produced. Since the quantity supplied is previously given, the cost of production is a bygone and irrelevant to current prices. Its value depends on supply and demand, as the following sketch makes clear:
For a Farmer that carries a Bushel of Wheat to Market, and a Labourer that carries a Half a Crown, shall find that the Money of the one, as well as the Corn of the other, shall at some times purchase him more or less Leather or Salt, according as they are in greater Plenty and Scarcity one to another (Locke, 1991 [1692]: 249).
Locke's marketable value is Smith's market price, the price at which a commodity actually sells. The whole quantity is evidently offered for sale, perhaps with a reservation price. While Karen Vaughn (1980: 21) has criticized Locke
it is the original foundation of all other property, so it is the most sacred and inviolable.”
4.1 The regulation of value in civil society
When Smith turned to civil society, where capital is accumulated and land is appropriated, his labour theory of value broke down as an explanation of market prices.vi^ The whole produce of labour is then divided between three social classes: labourers, landlords and capitalists. With the accumulation of capital comes the profits of stock, which Smith (1976 [1776]: 67) explained as follows:.
In this state of things, the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him. Neither is the quantity of labour commonly employed in acquiring or producing any commodity, the only circumstance which can regulate the quantity which it ought commonly to purchase, command, or exchange for. An additional quantity, it is evident, must be due for the profits of the stock which advanced the wages and furnished the materials of that labour.
With the appropriation of land, Smith (1976 [1776]: 67) continued, comes the rent of the landlord:
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 in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He 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
In civil society, prices have three component parts: wages, profit and rent. Smith continued to argue, however, that all production was due to labour, that labour was the origin of value. He only abandoned the notion that labour regulates value in civil society, that it determines market prices. He even developed an elaborate theory of labour as a measure of value.
The theory of market prices presented by Smith involves three distinct periods of time: (1) a temporary period, like Locke’s theory, where market prices are determined by supply and demand; (2) a long period, where competition reallocates land, labour and capital among various commodities until the market price equals the cost of production, which is the “natural price” of a commodity; and (3) a secular period, where the accumulation of capital and the growth of population regulate the cost of production and the “natural price.” “The natural price,” Smith (1976 [1776]: 75) explained, “is, as it were, the central price, to which the prices of all commodities are continually gravitating.”
The proportions of land, labour and capital that are employed in a country ultimately determine the natural rates of wages, profit and rent. As a country progresses, capital accumulates and population grows, while land is constant, so that factor proportions of change. Therefore, the natural rates of wages, profit and rent also tend to change, which causes the relative value of commodities that are produced with different proportions of land, labour and capital to vary.
4.2 The measure of value.
Smith’s Inquiry into the Nature and Causes of the Wealth of Nations required him to measure the value of production so that he could compare the wealth of different nations. He considered gold, silver and corn as measures of value, but concluded that they fluctuated in value over time. To get around this problem, Smith (
vi (^) For further discussion of classical price theory, see E. Roll (1956), G.J. Stigler (1965 [1958]), M. Blaug (1978),
D.P. Levine (1977), D. O'Brien (1975), S. Hollander (1973, 1979), M.H. Dobb (1973), R. Meek (1956, 1977), V. Bladen (1938, 1975), and P. Douglas (1966 [1928]), Walsh and Gram (1980), R. O’Donnell (1990) and T. Peach (1993), among many others.
[1776]: 50) asserted that the sacrifice of the labourer is constant.
Equal quantities of labour, at all times and places, may be said to be of equal value to the labourer. In his ordinary state of health, strength and spirits; in the ordinary degree of his skill and dexterity, he must always lay down the same portion of his ease, his liberty, and his happiness. The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it. Of these, indeed, it may sometimes purchase a greater and sometimes a smaller quantity; but it is their value which varies, not that of the labour which purchases them. At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire; and that cheap which is to be had easily, or with very little labour. Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.
He made labour his universal measure of value on the assumption that the sacrifice of labour is an absolute value that does not vary over time or space. He assumed that labourers are homogeneous and make the same sacrifice for any given type of work at all times and places. Thus, labour sacrifice is his measure of the wealth of nations. It is his real price of commodities.vii Smith's real price of commodities is his labour command theory of value. It is based on his theory of the origin of value, for it supposes that labour and labour alone produces all value. An individual who exchanges one commodity for another commodity is, according to Smith (1976 [1776]: 47), exchanging one quantity of labour for another.
The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities.
Similarly, the wealth of bottindividual can be measured by the quantity of labour that he can command, which, Smith (1976 [1776]: 48) wrote, is the same thing as the total output that he can command.
His fortune is greater or less, precisely in proportion to the extent of this power; or to the quantity either of other men's labour, or, what is the same thing, of the produce of other men's labour, which it enables him to purchase or command.
What is the same thing? The quantity of labour and the produce of labour are the same thing because labour is the sole value-creating substance. The real price of commodities, Smith's labour-command measure of value, is output per unit of labour sacrifice.
Smith (1976 [1776]: 51) confused many of his readers, however, because he also used the wages or subsistence of labour as a measure of value, which he called the real price of labour. In this popular sense, therefore, labour, like commodities, may be said to have a real and a nominal price. Its real price may be said to consist in the quantity of the necessaries and conveniencies of life which are
vii (^) What Smith (1976 [1776]: 47, 50) meant by “labour” is not entirely clear. His language vacillates between
something akin to Jevons' “disutility” of labour, which the utilitarians called “pain,” and the more modern concept of leisure forgone: “toil and trouble” suggests disutility, whereas “he must always lay down the same portion of his ease, his liberty, and his happiness” implies the principle of opportunity cost. Since Smith had a theory of occupation choice, where different occupations involved different degrees of hardship or ingenuity, he emphasized the disutility of labour more than leisure forgone. Both disutility and leisure forgone may be considered sacrifices. Smith's theory of occupation choice clearly implies that labour is homogeneous. In contrast to Senior (1965 [1836]: 129--30, 217--20), Smith does not consider the possibility of some individuals receiving a “rent of ability” because they possess extraordinary natural talents or of some occupations, such as nursing, earning permanently low wages because some people strongly prefer these occupations to others; and he treats “acquired and useful abilities ( [1776]: 282)” as a species of capital, which receives the ordinary rate of profit. Where labour is homogeneous, an hour of work is an objective phenomenon.
stock or money in the country, like the quantity of land, being supposed to remain the same after the tax as before it.
This is consistent with his theory of rent, where “high or low wages and profit, are the causes of high or low price; high or low rent is the effect of it;” but not his theory of growth, where capital accumulation stops when profits fall too low.
A general tax on the rent of land does not affect the price of food, because rent is a surplus which costs no effort to produce. It falls wholly on the landlord. A particular tax, such as a tax on barley land, however, would reduce the quantity of land planted in barley and raise the price of barley until that land yielded the same rent it would in any other crop. Smith praised the land-tax of Great Britain, which was assessed according to a fixed standard that did not vary with the rent of land. A landlord who improved his land could keep the revenue derived from the improvements. Such a tax, wrote Smith (1976 [1776]: 828-29) “as it has no tendency to diminish the quantity, it can have none to raise the price of that produce. It does not obstruct the industry of the people. It subjects the landlord to no other inconveniency besides the unavoidable one of paying the tax.”
Smith (1976 [1776]: 847-49) divided profits into three parts: pure interest, a premium for risky employments, and a premium for disagreeable employments of capital (or discount for agreeable employments). A tax that reduced the return to either risky or disagreeable employments would divert capital to other employments. It would reduce the output of such industries and raise the price of their products until investment in them would be as attractive as their alternatives, so that the tax would ultimately be paid by the consumer. A tax on the pure interest of a previously accumulated stock of capital is more like a tax on a fixed quantity of land. It is a tax on a surplus, but Smith recommended against such a tax on practical grounds. As a practical matter, capital is commonly concealed, so that a tax on capital would be difficult to assess. Furthermore, unlike land, capital can be removed from the country, if taxes are too high.
Most classical economists accepted the policy of taxing the rent of land. Ricardo presented so rigorous a restatement of Smith’s theory that even neoclassical economists like Walras and Marshall agreed with much of it, despite all the criticisms of it. Their position reflects the notion that land is a free gift of nature that costs no effort to produce. Rent tends to rise as society progresses without any effort or sacrifice by the landlord. Therefore it could be taxed away without affecting production. A tax on pure profits proved less appealing since it may reduce the rate of saving and retard capital accumulation. Smith’s theory of this incidence of taxation is consistent his principle of justice. If rent and pure profit were taxed away, labour would receive the value of what it creates in civil society just as it would in a Lockean state of nature.
5.0 Ricardo corrects Smith
David Ricardo accepted the general framework presented by Adam Smith. He believed that society was divided into three classes: labourers, capitalists and landlords. The principal problem of political economy for Ricardo was to determine the laws which regulate the distribution of income among these classes in the form of wages, profit and rent. As capital accumulates and as population grows the income allotted to the different classes changes. Before he turned to the question of income distribution, however, he sought to correct and rehabilitate the labour theory of value presented by Adam Smith.
5.1 Labour values
Ricardo quoted and endorsed Smith’s (1976 [1776]: 65) example of the beaver and the deer, where “the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another.” Whereas Smith restricted his labour theory of value to a primitive society which precedes the accumulation of capital and the appropriation of land, Ricardo (1951 [1821]: 24-25) sought to apply it to civil society where income is divided among wages, profit, and rent:
If we look to a state of society in which greater improvements have been made, and in which arts and commerce flourish, we shall still find that commodities vary in value conformably with this principle: in estimating the exchangeable value of stockings, for example, we shall find that their value, comparatively
with other things, depends on the total quantity of labour necessary to manufacture them, and bring them to market.
Even though he alludes to the metaphysical concept of labour as the origin of value, he was not much interested in such philosophical abstractions. His theory focused on the regulation and measurement of market prices. Ricardo (1951 [1821]:13) wanted to explain the empirical phenomenon of value-in-exchange with a logically consistent theory that was based on the doctrine that labour “is really the foundation of the exchangeable value of all things, excepting those which cannot be increased by human industry.”
5.2 Exceptions, qualifications and modifications
This ambitious agenda soon led him into a long series of exceptions, qualifications and modifications to his theory, which take up most of Chapter I “On Value” in the third edition of his Principles of Political Economy and Taxation.
First, he noted where commodities are naturally scarce or artificially monopolized, their values are unrelated to the labour required to produce them, so he treated them as exceptions to his theory and explained their value by scarcity. His labour theory of value only applies to newly produced goods that are sold in competitive markets.
Second, Ricardo (1951 [1821]: 12) qualified both the scarcity and labour theories of value by stating that an article must be useful before it can be valuable: “Possessing utility, commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labour required to obtain them.”
Third, he took account of the fact that labourers are not all identical. Some types of labour are more productive than others and, for that reason, they are paid higher wages than others.
In speaking, however, of labour, as being the foundation of all value, and the relative quantity of labour as almost exclusively determining the relative value of commodities, I must not be supposed to be inattentive to the different qualities of labour, and the difficulty of comparing an hour's or a day's labour, in one employment, with the same duration of labour in another. The estimation in which different qualities of labour are held, comes soon to be adjusted in the market with sufficient precision for all practical purposes, and depends much on the comparative skill of the labourer, and intensity of the labour performed. The scale, when once formed, is liable to little variation. (Ricardo, 1951 [1821]: 20).
Adam Smith reached the same conclusion in his chapter on the inequality of wages, but Ricardo did not follow Smith, who had assumed that labour is homogeneous which means that all labourers have the same innate abilities and preferences for different occupations. Ricardo used the market wages of labour to measure the quantity of labour embodied in any commodity. Labour only contributes to the value of commodities in proportion to the market wages paid to labour. This proposition undercuts the notion that values are determined by labour-time. As Ricardo unraveled the logic of his theory, the rule that relative wages govern relative values did not survived to the end of Chapter I.
Fourth, the quantity of labour employed in production includes not only current labour, but also “past labour,” to repeat Petty’s phrase. In a passage reminiscent of Locke, Ricardo (1951 [1821]: 24) traces the value of stockings back to all the things that were necessary to manufacture them and bring them to market.
First, there is the labour necessary to cultivate the land on which the raw cotton is grown; secondly, the labour of conveying the cotton to the country where the stockings are to be manufactured, which includes a portion of the labour bestowed in building the ship in which it is conveyed, and which is charged in the freight of the goods; thirdly, the labour of the spinner and weaver; fourthly, a portion of the labour of the engineer, smith, and carpenter, who erected the buildings and machinery, by the help of which they are made; fifthly, the labour of the retail dealer, and of many others, whom it is unnecessary further to particularize. The aggregate sum of these various kinds of labour, determines the quantity of other things for which these stockings will exchange, while the same consideration of the various quantities of labour which have been bestowed on those other things, will equally govern the portion of them which will be
commodity which is not itself exposed to the same variations as the things, the value of which is to be ascertained; that is, there is none which is not subject to require more or less labour for its production.” The perfect measure of value for Smith, however, was the sacrifice, toil and trouble, pain, disutility or leisure foregone of labour, not some commodity with a constant quantity of labour embodied in it. Smith rendered the sacrifice of labour constant by assumption. For Ricardo, a perfect measure of value would always require the same quantity of labour to produce it. Even if there were such a commodity, Ricardo argued, it would not be a perfect measure of the value of other commodities that did not have the same capital structure or that could not be brought to market in the same time. If wages rose and profits fell, the value of commodities produced in capital intensive industries would fall relative to other commodities.
For the sake of exposition, Ricardo (1951 [1821]: 45-46) assumed that gold had a constant quantity of labour embodied it and that it was produced under average conditions. It fit “nearly equal distant from the two extremes, the one where little fixed capital is used, the other where little labour is employed.” Thus, if wages rose and profits fell, all commodities produced with more labour intensive methods would rise in value, while those produced under more capital intensive conditions would fall. Gold may, therefore, be considered stationary.x
5.4 Getting rid of rent.
Ricardo accepted the view that in a Lockean state of nature before the appropriation of land, the produce of the earth was a free gift of nature. Land was held in common, and natural products cost only the trouble of gathering it or catching it. There was no rent. As society progresses and population grows, land becomes increasingly scarce. First the best land and then inferior lands come to be private property; and landlords can begin to demand a rent. For Ricardo (1951 [1821]: 67], “rent is that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil.” It is distinct from the popular use of the word, which includes whatever is paid for the use of buildings, fences and other improvement to land. Improvements are capital investments, which earn profits.
As inferior lands come to be cultivated, rent arises on all the superior lands, because they yield larger crops than the inferior lands. If often happens that before inferior lands are brought into production, Ricardo ( [1821]: 71) explained, “capital will be preferably employed on the old land, and will equally create a rent, because rent is always the difference between the produce obtained by the employment of two equal quantities of capital and labour.” As society progresses, therefore, the tendency is for landlords to claim a growing proportion of the national product.
As more capital and labour are employed on old land and more new land is cultivated, the extra output (or marginal product) of each additional dose of labour and capital is smaller, so that more labour and capital are required to produce an extra bushel of corn. This raises the cost of production on both the intensive margin of cultivation on old land and the extensive margin of cultivation on new land. As a consequence, the price of food rises, which Ricardo (1951 [1821]: 74) explains in a passage that echoes Smith.
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; and it has been justly observed, that no reduction would take place in the price of corn, although landlords should forego the whole of their rent. Such a measure would only enable some farmers to live like gentlemen, but would not diminish the quantity of labour necessary to raise raw produce on the least productive land in cultivation.
On the margin of cultivation, the price of food is regulated by the wages of labour and the profit of capital. In this
x (^) Ricardo’s theory of value gave rise to academic industry in the history of economic thought after the publication
of Production of Commodities by Means of Commodities by Piero Sraffa. Sraffa’s influence is evident in many articles in The New Palgrave Dictionary , in which the article on “Sraffian economics” is by Paul A. Samuelson (1987). See also the survey by Schefold (1998).
way, Ricardo got rid of rent. Rent is not a component part of price. It could all be taxed away without affecting production.xi^ During the course of the nineteenth century, the idea of financing government with a tax on land had many advocates, not least John Stuart Mill (1965 [1848]) and Henry George (n.d. [1879), though David Ricardo, as we shall see, was opposed to a disproportionate tax on land.
5.5 Ricardo on the “toil” of the landlord and the fruits of capital John Locke justified private property on the grounds that labour is entitled to fruits of its labour. If the value of commodities is almost exclusively due to labour, the rent of land and the profits of capital appear to be unfair and unjust. This line of reasoning gave rise to the doctrine that Property is Theft, which was made famous by Proudhon (n.d. [1840]). Ricardo accepted the principle that all people were entitled to what they produce, but he extended this principle to the sacrifices of the landlord and the capitalist.
In the case of a tax on rent, he accepted Smith’s argument that such a tax would not affect production, but Ricardo (1951 [1821]: 203) thought it would be unjust to tax land exclusively; and he turned Smith’s maxim that taxes should be assessed according to the ability to pay against him.
It must be admitted that the effects of these taxes would be such as Adam Smith has described; but it would surely be very unjust, to tax exclusively the revenue of any particular class of a community. The burdens of the State should be borne by all in proportion to their means: this is one of the four maxims mentioned by Adam Smith, which should govern all taxation. Rent often belongs to those who, after many years of toil, have realised their gains, and expended their fortunes in the purchase of land or houses; and it certainly would be an infringement of that principle which should ever be held sacred, the security of property, to subject it to unequal taxation.
This adds the “toil” of the landlord to the “toil” of the labourer discussed by Locke and Smith. Ricardo’s ( [1820]: V, 68-69) real concern, however, was “the sacredness of property, which constituted the great security of society.” He thought a disproportionate tax on property would be a disincentive to industry.
He explained this principle more thoroughly in a posthumous article in the Scotsman , in which he advocated extending the suffrage to more people. He stopped short of endorsing Universal Suffrage, however, because he thought the franchise should only be extended to people who believed that the rights to property should be sacred. To do otherwise, Ricardo (1952 [1823]: V, 501) wrote, would sacrifice good government and economic prosperity.
The man of a small income must be aware how little his share would be if all the large fortunes in the kingdom were equally divided among the people. He must know that the little he would obtain by such a division could be no adequate compensation for the overturning of a principle which renders the produce of his industry secure. Whatever might be his gains after such a principle had been admitted would be held by a very insecure tenure, and the chance of his making any future gains would be greatly diminished; for the quantity of employment in the country must depend, not only on the quantity of capital, but upon its advantageous distribution, and, above all on the conviction of each capitalist that he will be allowed to enjoy unmolested the fruits of his capital, his skill, and his enterprise. To take from him this conviction is at once to annihilate half the productive industry of the country, and would be more fatal to the poor labourer than to the rich capitalist himself. Ricardo does not even suggest that the whole produce of society should belong to the labourer. Good government required that the capitalist, the landlord and the labourer should all be entitled to the fruits of their occupations. He
xi (^) The Ricardian theory of rent is based on severe and unrealistic assumptions. If all land remains in production
whether it is taxed or not, the services of all land must be put on the market at whatever rent they may fetch. While the quantity of land may be considered practically fixed, the supply of it depends on the preferences of landlords. They may prefer to plant rose gardens or keep deer parks rather than rent their lands to farmers. If the supply of land coincides with the quantity of it, the supply curve would be perfectly inelastic. Dooley (1991) gives an analysis and criticism of Marshall’s treatment of Ricardian rent. E.J. Mishan (1981) has shown it implies that the income and substic. Ion effects of all landlords must be zero.
measured and regulated by the quantity of labour embodied in it.
A use-value, or useful article, therefore, has value only because human labour in the abstract has been embodied or materialised in it. How, then, is the magnitude of this value to be measured? Plainly, by the quantity of the value-creating substance, the labour, contained in the article. The quantity, however, is measured by its duration, and labour-time in its turn finds its standard in weeks, days, and hours.
Labour is the origin of value, because labour is the sole value creating substance. The regulation of value is due to labour, because the exchangeable value of commodities rises or falls as more or less labour is embodied in them. Labour is also the measure of value, though, for the sake of exposition, Marx (1961 [1867]: I, 85) took gold to be his measure of value, because “it is the socially recognised incarnation of human labour.”
Labour will only bestow value on an article if it is employed efficiently. If labour takes more time or uses more materials than necessary, the extra cost does not add value to the article. Only the socially necessary labour time required for production creates value, which Marx (1961 [1867]: I, 39) defined as “that required to produce an article under the normal conditions of production and with the average degree of skill and intensity prevalent at the time.”
The labour power of all the individual labourers in society counts as a homogeneous mass of labour power. The heterogeneous collection of individual labourers in society is converted by Marx (1961 [1867]: I, 170-71) into a homogeneous mass of unskilled labourers using the labour theory of value itself. Labour is simply a commodity like any other commodity, and its value is determined in the same manner as all other commodities.
The value of labour-power is determined, as in the case of every other commodity, by the labour-time necessary for the production, and consequently also the reproduction, of this special article. So far as it has value, it represents no more than a definite quantity of the average labour of society incorporated in it.
The labour-time embodied in the production of labour power can in turn be reduced to the value of the subsistence necessary to raise and maintain the labourer. If it take more time to raise and bring a philosopher to market than it does a common street porter, one philosopher counts as so many street porters. By this rule, which corrects Ricardo, who weighted different labourers by their wages, all labour-time can be reduced to unskilled labour-time. Unlike the labour embodied in the production of other commodities, however, the subsistence of the labourer varies from country to country and from age to age. As Ricardo and Malthus had earlier explained, subsistence depends on the habits and customs of a people. Similarly, Marx (1961 [1867]: I, 171) wrote that “there enters into the determination of the value of labour-power a historical and moral element.”
Finally, in addition to being useful and having labour embodied in it, an article must be exchanged in the market to be a commodity. His theory of value does not explain the value of the free gifts of nature, like the air and natural meadows; and it does not explain the value of the quit-rent corn or the tithe-corn that the medieval peasant produced for his feudal lord or his parson. It applies to the value of commodities produced in a society where capitalists employ free labourers to produce commodities for sale in the market, where a free labourer is
free in the double sense, that as a free man he can dispose of his labour-power as his own commodity, and that on the other hand he has no other commodity for sale, is short of everything necessary for the realisation of his labour-power (Marx, 1961 [1867]: I, 169).
His theory does not concern the labour of someone whose hobby is his gardening, because his labour is not employed to produce a commodity for sale in the market; and it does not pertain to the family farm, which has its own land, buildings, and machinery. They enjoy the fruits of their own labour. The free labourer, in contrast, must sell his labour power to the capitalist in order to buy his subsistence. He produces a commodity that does not belong to him; and, therefore, he is alienated from the product of his labour.
6.3 Surplus value.
Exchange occurs when the use-value of a commodity to a buyer exceeds its exchange- value in the market, and the exchange-value to the seller exceeds its use-value. What they buy is worth more to them than what they sell.
This takes two forms: selling in order to buy, which Marx (1961 [1867]: I, 149) denoted C–M–C; and buying in order to sell, M–C–M.
The circuit starts C–M–C with one commodity, and finishes with another, which falls out of circulation and into consumption. Consumption, the satisfaction of wants, in one word, use-value, is its end and aim. The circuit M–C–M, on the contrary, commences with money and ends with money. Its leading motive, and the goal that attracts it, is therefore mere exchange-value.
Surplus value emerges even though equal values are given in exchange. The capitalist starts out with one sum of money and ends up with a larger sum of money. This process can be written M–C–M, where M = M + M. The increment over the original sum of money is called surplus value.
Surplus value does not come from selling a thing for more than it is worth. All things exchange at full value, which is simply the value of the labour power embodied in them. Surplus value flows from the consumption of a commodity. Its source is its value-in-use rather than its value-in-exchange, which Marx (1961 [1867]: I, 167) put rather vividly.
In order to be able to extract value from the consumption of a commodity, our friend, Moneybags, must he so lucky as to find, within the sphere of circulation, in the market, a commodity, whose use-value possesses the peculiar property of being a source of value, whose actual consumption, therefore, is itself an embodiment of labour, and, consequently, a creation of value. The possessor of money does find on the market such a special commodity in capacity for labour or labour-power.
The exchange-value of labour is the subsistence of the labourer. However, the capitalist hires the labourer for the whole working day, which is the use-value of labour. If subsistence takes half a day’s labour to produce, the capitalist earns surplus value equal to the other half of the day’s labour. The whole working day is, in this way, divided into two parts: one to produce the necessary subsistence for the labourer, the other to produce the surplus value for the capitalist.
Marx called the means of subsistence the variable part of capital or, simply, variable capital. It is variable because labour is the value creating substance. Labour not only reproduces its own means of subsistence but it also produces surplus value for the capitalist. He called the means of production, that is, materials, supplies, equipment and structures used in production, the constant part of capital, or constant capital. It is constant because it merely transfers its value to the commodity as it is used up in production.
The means of production are equal in value to the labour embodied in them. They are the product of “past labour,” to repeat Petty’s phrase again. The value of tools or machines today includes the value of the labour embodied in the tools and machines used up in their production yesterday, and so on, back in time. Marx ( [1867]: I, 187) illustrated this principle with the example of cotton yarn.
Hence, in determining the value of the yarn, or the labour-time required for its production, all the special processes carried on at various times and in different places, which were necessary, first to produce the cotton and the wasted portion of the spindle, and then with the cotton and spindle to spin the yarn, may together be looked on as different and successive phases of one and the same process. The whole of the labour in the yarn is past labour; and it is a matter of no importance that the operations necessary for the production of its constituent elements were carried on at times which, referred to the present, are more remote than the final operation of spinning.
The notion that labour, past and present, produced all commodities is the logical and empirical foundation on which the labour theory of value rests. Marx (1961 [1867]: I, 713) traced the accumulation of labour-power back to “a primitive accumulation (previous accumulation of Adam Smith) preceding capitalist accumulation; an accumulation not the result of the capitalist mode of production, but its starting point.”
6.4 Marxian values.
The exchange value of a commodity for Marx consists of three parts: the constant capital (c) used up in
obsolete as capital accumulates, as Marx (1962 [1894]: III, 112) explained. With the introduction of improved machinery, old capital “continually becomes antiquated before it has time to reproduce its own value.” Old antiquated capital goods are technologically obsolete. Old capital goods that are still in use may not and, sometimes, cannot be reproduced. They sells for less than the value of the labour embodied them.
6.5 The so-called transformation problem.
In Volume III of Capital , Marx addressed the same issue which had confronted Ricardo. Competition tends to produce a uniform rate of profit in all industries as capital moves from low to high profit industries. If the capital structure is the same in every industry, that is, if the organic composition of capital is the everywhere the same, then market prices of commodities are proportional to the labour embodied in production. They are proportional to the variable capital plus constant capital used up in production. But, if the capital structure is not the same in every industry, market prices tend to exceed labour values in those industries which are relatively intensive in the use of constant capital. This theoretical possibility required Marx to introduce his own considerable modification to his labour theory of value in Volume III of Capital when he discussed how competition transforms labour values into the prices of production. This is the so-called transformation problem.
Surplus value arises from the exploitation of labour and is proportional to the variable capital employed in production, whereas the rate of profit is proportional to the whole capital employed. Thus, the rates of surplus value and profit are explained by different principles and are not in general the same. Marx argued that competition tends to allocate the total surplus value created in society among the different branches of production in proportion to the total capital they employ. Marx (1962: III, 156) wrote
the rates of profit prevailing in the various branches of production are originally very different. These different rates of profit are equalized by competition to a single general rate of profit to any capital of a given magnitude, whatever its organic composition, called the average profit.
“Hence,” Marx (1962: III, 156) concluded, “the price of production is equal to the cost-price plus the profit.” Even though Marx sought to explain the prices of production by the labour embodied in production, he ended up with a cost-plus-profit theory of value like Adam Smith and David Ricardo. Marx’s transformation turns profits into a necessary cost of production, because any industry that did not receive the “average profit” would see its capital diverted to other industries. Adam Smith simply abandoned the labour theory of value when he moved beyond the beaver and deer of primitive society. For Smith, the natural prices in civil society are regulated by wages, profits and rents, all of which must be paid at their natural rates for production to be forthcoming. Ricardo insisted that even the beaver and the deer required capital to hunt and to kill, so that profits were a component part of price for him even in primitive society.
Many authors tried to solve the so-called transformation problem even before Volume III of Capital appeared, but Engels thought they all failed (Marx, 1961: III, 8-21). Marx's own solution is seriously flawed, because he transformed output prices without transforming input values, which were labour values, not market prices. He needed to know the market prices of the capital used in production to show how competition tends to equalized the rate of profits on capital. Ladislaus von Bortkiewicz (1949 [1907]) offered an early solution to this problem, but he did not follow Marx's method. His method is correct as far as it goes, but it does not go far enough. He restricted his analysis to the special case of simple reproduction, in which past labour and current labour are the same. He does not consider how the labour-power embodied in today’s constant capital has accumulated over historical time. The past labour embodied in things that are no longer being produced, but which are still being used up and embodied in the production of new commodities, cannot be transformed into market prices using today’s prices. Technologically obsolete constant capital may have no current cost of reproduction, though it may continue to earn what Marshall called a quasi-rent. The value of old capital goods is simply the present value of their quasi- rents, which is unrelated to the labour embodied in them. The debate continues to this day.xiii
xiii (^) See, for example, F. Seton (1957), R. Meek (1977), P.A. Samuelson (1971), L. Pasinetti (1977), J. Robinson
(1977), I. Steedman (1977), A. Freeman (1984), F. Moseley (1993) and C. Carchedi (1993), among a great many
others.
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