Ricardo’s Labor Theory of Value

Ricardo’s Theory of Value was based primarily upon labor as the primary actual product cost and therefore was the most important component of a labor theory of value. Ricardo argued that every unit of labor applied toward the production of the product should be reflected in the value of the commodity, as should any reduction. According to Ekelund and Hébert (1997), this position led to many economists judging the Ricardian theory of value to be a pure labor theory of value. There were exceptions to this interpretation. Scarce or nonreproducible goods possessed value without concomitant labor. Other exceptions to the rule were the treatment of capital as essentially embodied labor. Moreover, note that Ricardo excluded rents from product costs, which carries the assumption that lands have no alternative economic use.

Through the concept of embodied labor, Ricardo further argued that capital used by production constitutes addition to the value of the product. Ricardo understood that there was no time value of money factored in for this capital. Clearly, he thought that the opportunity cost for use of this capital should be considered. Ricardian theory of value falls short of sufficiency by assuming that adjustments in wages for qualitative differences will be minor and that economic rent is excluded from costs of goods. Moreover, Ricardian theory of value confines the role of demand in determining prices to cases involving non-commodity goods where goods are produced with constant average costs of production. Ricardo erroneously argued that because of increasing population (i.e., Mathus’ Population Principle), economic growth was doomed to slow to a stationary state. His assumption did not make allowances for technological progress and its effect on production that would fuel the value equation.

Reference

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