Classical Value Theory (Part 4 of 5)

Thomas Malthus debated with Ricardo over the course of two decades on the subject of the Corn Law and Ricardo’s approach to general economic method (Ekelund & Hébert, 1997). Malthus obviously saw the importance of Ricardo’s real cost theory of value in the long run applications but sought to apply supply and demand analysis to explain the practicalities of short term market behavior. Malthus applied some of Smith’s ideas about supply side market determinants to Ricardo’s system and brought it into sharper clarity. Mathus saw several shortcomings to the Ricardian system but often supported his own position weakly. Mathus’ contribution in this area did not have a lasting impression on economic theory in the wake of Ricardo’s extensive skills as a debater and logician.

Unlike the Physiocrats before him, Smith actually sought to analyze how value arises in the context of exchange and used this as a means to better understand how macroeconomic growth takes place. In this respect, Smith’s attempt to build an economic system far exceeded what the Physiocrats achieved. Ricardo’s theory of value hinged upon the real costs of factors of production, specifically labor, in constructing an argument to explain why artificially keeping the price of grain high in England would actually hinder capital accumulation and economic growth. Although essentially correct in the Corn Law instance, Ricardo modified Smith’s theory of value to treat what was essentially a special short run case of grain subsidies. Malthus attacked Ricardo’s emphasis on real costs alone and sought a better, more generally applicable model using the principles of supply and demand analysis. Perhaps Malthus’ intent was to refine Ricardo’s thoughts (as Smith would have done if he were alive) to explain what would be short term adjustments to exchange value instead of the long term effects on exchange value of putting an increased amount of labor into the production of a good.

Smith considered profits in his value theory but not price from a demand schedule perspective. Ricardo sought to remove rents and profits from the analysis. Perhaps value is best considered as a supply-side discussion while price is a demand-side discussion. Smith’s discussions of value more clearly have application in understanding prices. Ricardo sought to uncouple the consideration of value with discussions of price while Smith considered the final price to be comprised of rent, wages, and profits. Smith felt that labor was the primary factor in the supply-side determinants of value but certainly not the only factor.

In discussing the demand-side determinants of value, Mathus and Ricardo argued about demand and quantity demanded as if they were the same. Malthus and Ricardo seemed to confuse a shift of demand with a change in quantity demanded. If only they had been privy to the revelation of demand schedules, they could have discussed whether they were talking about price shifting the quantity demanded or whether some other demand factor had actually shifted demand.

Malthus sought to relate Ricardo’s analysis more realistically into the workings of a complex economy. Malthus recognized that buyers could want goods at varying levels of desire, while Ricardo just assumed that the buyer would pay what the good was worth in terms of labor. Malthus extended Ricardo’s analysis to include the rigors of supply and demand. Malthus’ view of exchange value evolved and he often wavered in his later writings, and this left him open to be “dashed against the rocks” of Ricardo’s system. The strength of Ricardo’s arguments was not always in that they best explained the economic phenomenon, but that they were part of a tightly evolved system.

Ricardo’s view of market forces in relation to Smith’s and Malthus’ seems quaint in our own time of relatively efficient markets. Ricardo focused on the theoretical side and that is why the short-term effects of market equilibrium were not interesting to him. To Ricardo, a specific and direct relationship existed between the addition of labor and an increase in value. Moreover, vice versa, a subtraction of labor led to a decrease in value. Ricardo assumed that the market would automatically shift prices, in general, to reflect these changes.
Smith included rents in his discussion of the increases in value, while Ricardo did not. Unlike Smith, who sought to treat all variables that affect value determination, Ricardo built a system out of focusing on a single dominant idea. Ricardo unrealistically assumed that land only had one use in the long run and rent paid for its use was a minor variable in the analysis.

Reference

Ekelund, R. B., Jr., & Hébert, R. F. (1997). A history of economic theory and method (4th ed.). New York: McGraw Hill.