Ricardo’s labor theory of value varies from the ideas put forth by ancient economists, such as Adam Smith. The labor theory of value affirms that the value of goods and services is affected by the level of socially needed labor necessary for production. Labor theory of value has emerged from the Marxian economics despite the fact that it has been widely applied by classical economists including David Ricardo and Adam Smith. Based on this definition, value can mean the total amount of labor applied for the creation of a marketable product. It may also mean the amount of labor input needed for the development of real capital required in the process of production. Thus, value can refer to the usefulness of a product as well as its exchange value in relation to other commodities. Therefore, the objective of the following analysis is to examine how Ricardo criticizes economic doctrines proposed by other economists, such as Adam Smith, in relation to the labor theory of value. The paper will also address points of consensus between the arguments of Adam Smith and David Ricardo. The conclusions will be drawn from the underlying principles put forward by these theorists.
Adam Smith’s view of the value to labor differs from Ricardo’s ideas in significant ways. Smith argues that equal amounts of labor at similar places and time can be equal to the value of the product itself. The price paid by the laborer is always equal to the quantity of products which the laborer receives in return. According to Smith, the challenges faced during the usage and extraction of labor remains constant over time, similar to the labor disutility. Thus, labor has an unchanging standard of value in varying circumstances. Indeed, Ricardo drifts away from this proposition by terming Smith’s assertions as subjective and compromising the theory of labor maximization. His criticism emanates from several concepts of the theory, which include the assertion that labor has an inflexible measure of value. Indeed, Smith fails to acknowledge that the value of a commodity is measured by the labor that will be commanded by this commodity. Thus, the labor quantity that the product will purchase in a given market situation will vary. Ricardo argues that labor is a social rather than an individualized concept, and, thus, the subjective attribution of labor is of less significance. According to Ricardo, the significance of labor can be equated with the real prices of products needed for its upkeep.
Another point of conflict between Adam Smith’s view of labor and Ricardo’s theory is the concept of corn as a standard measurement of value. Since corn cannot purchase the same volume of labor as it embeds, this commodity by itself cannot be regarded as having a standard degree of value. Smith acknowledges that and individual in the possession of similar quantities of corn at defined periods of similar value can purchase the same quantities of labor. However, similar equivalent amounts of corn at the same time cannot purchase the same quantities of labor. Based on this contradiction, Ricardo notes that Smith’s arguments are wrong, and, thus, labor cannot have a standard measure. As a result, Smith underestimated the deviation of corn from a standard value, which could not be attained at different time periods. Ricardo stressed the fact that corn was exposed to similar forces that caused changes in values of other commodities. Ricardo criticized Smith’s arguments, as those were built upon illogical thoughts, putting corn under a different category despite the fact that it had always had attributes similar to the real commodity.
The value of labor, according to Smith, can be inferred from several connotations. Arguing from the laborer’ point of view, the value attributed to a product equals the amount of labor employed into it. Consequently, the value of a product from the proprietor’s point of view is based on three factors. These elements are the volume of labor used in its interchange, necessities required for its interchange, and the price incurred during the exchange. However, Ricardo noted that Smith’s usage of value was considerably inconsistent. At times, he meant real value, while in other instances he meant nominal value, while referring to similar concepts. Ricardo treats labor relative to value in regard to its real and exchange values, which are influenced by the amount of direct or indirect labor embedded in it. Additionally, he notes that the exchange value is affected by monopoly and is determined by the incurred costs of production.
Ricardo’s labor theory of value led him to accept different definitions of increases and decreases in the remuneration of labor as compared to Adam Smith. For Smith, a rise and fall in the real wages implied less value of the necessities and commodities obtained during exchange. For Ricardo, a rise and fall in the remuneration implied an increase or decrease in the value of life at different times. According to Ricardo’s argument, a positive alteration in wages causes enhanced life for the laborer. Thus, Ricardo’s arguments are more consistent with ideals of labor extraction and remuneration used during the classical economic period.
Additionally, Ricardo observes that the prices of commodities rise and fall for a reason. The major factor contributing to this change is the value of single specific commodity in relation to dynamic quantities of direct and indirect labor at different rimes. Simply put, the value of a commodity can be permanently altered as a result of change in exchange value in relation to other commodity. As a result, it follows that, holding other factors constant, if the nominal costs of labor increase, then the prices of products remain unchanged, since no extra input of labor is required during the production process. Fundamentally, in Ricardo’s theory, changes in the rate of wages do not influence price. In regard to Smith’s argument, the price of a commodity is a component of wages and profits rate. Consequently, if the amount of remuneration for labor increases, then the prices also increases proportionately.
Another major point of Ricardo’s criticism of the economic views of Adam Smith in labor utilization was based on profit and interest. Ricardo pointed that although Adam Smith’s model recognized various elements that comprised profits, it failed to examine various forces that affected those elements. According to Adam Smith, the rate used to calculate profits in a labor market affects these profits, which directly relates to the effects of capital accumulation. However, Smith’s rate of interest relates to the legal rate rather than the market rate. On the contrary, Ricardo’s idea differs from this proposition by pointing that the legal interest rate does not offer a guide to the profit rates, as put forward by Smith. He refutes by stating that the legal rate comes after the market rate. According to him, the legal rate of interest has little significance in influencing profits and is rarely used in any economic model. It then follows that the real value of labor is insignificantly affected by the legal rate of interest. Thus, in an ideal economic set the market interest rate is determined by the profit rates up. Ricardo affirms that the market interest rate varies temporarily due to other factors which affect the rate of profits.
Ricardo advances the arguments put forward by Adan Smith by observing that the interest rate is just an element of the general profits, and, therefore, the former is influenced by forces which are independent of the latter. For example, during periods of abundant supply, the price falls and causes the interest rate to increase due to the growth in credit operations. Certainly, Ricardo’s argument is related to the ceteris paribus conditions associated with the long-run model theory of money. Since all conditions that affect the demand and supply of money play a role in an economy, then foreign actors play a great role in influencing prices and consequently the value of labor. As a result, Ricardian factors in the exposures and risks are posed by exchange rate fluctuations in the parametric prices of commodities in international markets. This can be used to explain the Napoleon’s Continental Systems in the United Kingdom during the period of 1808 and 1809 by influencing the demand for British exports during the period.
Indeed, Ricardian ideas differ sharply from Smith’s argument about the effect of taxes on wages and other necessities. Ricardo’s teaching is that the general rate of taxes on wage remuneration increases wages and lowers incomes via the profits earned. Similarly, the rate of tax on necessities tends to raise wages. However, he notes that whereas taxes imposed on necessities raise prices paid by the receivers of such profits, the former charged taxes fall indefinitely and are borne by the profit receivers. This argument contradicts Smith’s observation that the price of manufactured goods increases due to the increase in wages and tax on the consumers. Essentially, the additional costs of labor incurred by the manufacturers lead to a rise in prices charged for manufactured products. According to Smith, the tax imposed on necessities is similar to the tax charged on wages, and, thus, they both have the same incidence. In his view, taxes on necessities and wages should be deemed undesirable, since they worsen the position of laborers.
Despite the significant differences between Ricardo’s and Smith’s arguments regarding the labor theory of value, both theorists arrive at certain similar concepts that are built on classical labor theories. Both scholars contend that the nominal labor wage is in tandem with the amount of remuneration of the laborers. Marginally, Ricardo used abstract economic aspects and associated challenges of labor distribution to the rates of real wages. Smith, on the other hand, attributed these variations to the conditions of mankind and viewed real wages as solely the amount of conveniences and necessities needed to produce labor. Actually, Ricardo builds his arguments on the inferences of Adam Smith. Based on his invaluable industrial experiences, he corrects some of the Smith’s works’ shortcomings.
To conclude, the paper has highlighted the main propositions put forward by Ricardo in regard to the labor theory of value. The paper has examined the criticisms he posits upon assertions raised by Adam Smith. According to Ricardo, labor cannot be assumed to have a standard measure of value, as proposed by Adam Smith. In his view, labor is a component of several factors and its remuneration changes in different conditions. Ricardo’s argument applies the ceteris paribus model of economics. On the other hand, Smith’s ideas are more controversial and include more general arguments. For example, he assumes that the profit rate is affected by the legal rate, which sharply differs from Ricardo’s view. However, Ricardo’s assertions are deeply rooted in the discussion of Adam Smith and his work, as he heavily borrows ideas from Smith.