Classical Value Theory (Part 2 of 5)

In the classical period of economics, from the 1770’s to the 1870’s, Smith, Ricardo and Malthus all made important contributions to value theory (Ekelund & Hébert, 1997). Smith laid the groundwork for the classical school and focused his discussions of value theory relative to value that arises from exchange, albeit the supply side of the discussion. Moreover, in so doing, Smith noted problems with reconciling the market price with value that could be attributed to labor alone (i.e., natural price). This signpost left the door open for others to follow. Smith, Ricardo, and Malthus all contributed to the refinement of value theory, at times expounding on the work of the predecessor, but all approached the analysis of value differently.

Smith developed the basic concept of the wages-fund for capital investment that influenced other economists including Ricardo and Malthus. The connection between Ricardo and Smith essentially is the wages-fund doctrine. This is evidenced by Ricardo’s discussion of how changes occur in land, labor, capital, and the effect those changes have on capital accumulation and economic growth. Ricardo, inspired by Smith in this way, sought to explain value in terms of the measure of labor involved being the primary actual cost, with exceptions to this rule for scarce and non-reproducible goods. Malthus contributed by applying the forces of supply and demand in his analysis of Ricardo’s labor (i.e., real cost) theory of value to explain how value that arises from factors of production (i.e., labor) leads to exchange value. In that sense, Malthus injected a fair bit of reality into the internally rigorous theory of Ricardian economics.

Smith’s discussion of value centered on the surplus value that is created when the division of labor is allowed to run its course. The division of labor gives surplus to each member of the work force who can then trade it for the goods and services they need above minimal subsistence. Smith supported the idea of using labor as a measure of value but proposed that labor was the primary cause of value only in primitive economies. Smith explains that in all but the simplest economies, labor alone cannot explain market price. In the analysis, Smith noted that value can be influenced by utility or effectual demand, but he did not really develop the demand side of the analysis. Smith acknowledged that utility or intensity of desire can effect market price, but centered his analysis around the supply-side determinants. Regardless, Smith clearly recognized that the market must determine the final price for a good (i.e., market price).
Smith made many important contributions while describing exchange value and natural price. Smith recognized that the value of a good could arise from the ways in which it can be used. Smith noted that the value of the good is subject to the scrutiny of the exchange process. The amount of labor used in production of a good is another measure of value, according to Smith. Smith also discussed capital, rent, and profits extensively. Profit is also a necessary component of exchange value, which in the case of the merchant may be completely separate from the labor employed—unlike Ricardo, Smith considered the importance of profits in respect to suppliers.

Reference

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