Value in Ricardo

In his Principles, Ricardo distinguishes between "market prices" and "natural prices", a distinction he takes from Adam Smith and Smith's predecessors. Market prices are the prices that prevail at any given time on the market. According to classical economists, they include transient and random variations. Natural prices act as centers of gravitational attraction for market prices. At any time, market prices are tending towards natural prices, in some sense. But does the mature Ricardo distinguish, as Karl Marx later does, between natural prices and value, where value is the quantity of labor embodied in a commodity when outputs are at levels consistent with natural prices? (Smith refers to this level as the level of "effectual demand".)

This is an area where Ricardo is notoriously difficult to understand. Consider, however, this passage from towards the end of the first chapter of the third edition of Ricardo's Principles, that is, after Ricardo has explained that natural prices will generally not be proportional to labor values:

"It is not by the absolute quantity of produce obtained by either class, that we can correctly judge of the rate of profit, rent, and wages, but by the quantity of labour required to obtain that produce. By improvements in machinery and agriculture, the whole produce may be doubled; but if wages, rent, and profit be also doubled, these three will bear the same proportions to one another as before, and neither could be said to have relatively varied. But if wages partook not of the whole of this increase; if they, instead of being doubled, were only increased one-half; if rent, instead of being doubled, were only increased three-fourths, and the remaining increase went to profit, it would, I apprehend, be correct for me to say, that rent and wages had fallen while profits had risen; for if we had an invariable standard by which to measure the value of this produce, we should find that a less value had fallen to the class of labourers and landlords, and a greater to the class of capitalists, than had been given before. We might find, for example, that though the absolute quantity of commodities had been doubled, they were the produce of precisely the former quantity of labour. Of every hundred hats, coats, and quarters of corn produced, if

The labourers had before . . . . 25

The landlords . . . . . . . . 25

And the capitalists . . . . . . 50

...And if, after these commodities were double the quantity, of
every 100

The labourers had only . . . . . 22

The landlords . . . . . . . . 22

And the capitalists . . . . . . 56

In that case I should say, that wages and rent had fallen and profits risen; though, in consequence of the abundance of commodities, the quantity paid to the labourer and landlord would have increased in the proportion of 25 to 44. Wages are to be estimated by their real value, viz. by the quantity of labour and capital employed in producing them, and not by their nominal value either in coats, hats, money, or corn. Under the circumstances I have just supposed, commodities would have fallen to half their former value, and if money had not varied, to half their former price also. If then in this medium, which had not varied in value, the wages of the labourer should be found to have fallen, it will not the less be a real fall, because they might furnish him with a greater quantity of cheap commodities than his former wages." (Ricardo 1821)

Furthermore, Sraffa had the good fortune to discover a paper that Ricardo had been working on in the last month of his life, the manuscript "Absolute Value and Exchangable Value". Sraffa has this to say about that manuscript:

"Yet this paper has importance since it develops an idea which existed previously in Ricardo's writings only in occasional hints and allusions: namely, the notion of a real or absolute value underlying and contrasted with exchangeable or relative value." (Sraffa 1951)

Thus, there is textual evidence that, in some places, Ricardo distinguished between price, whether market or natural, and value.

Others have noticed:

"The Marxian reading of Ricardo has fared somewhat better. Marx claimed that Ricardo's treatment of value in the third edition of the Principles was marred by serious confusion: in some places Ricardo used 'value', 'absolute value' or 'real value' to denote 'necessary labour time'; but in others 'value' signified (relative) cost of production. Furthermore, it was Marx's judgement that Ricardo occasionally and falsely identified his 'value' concepts. However, in the opinion of later authorities, including Marshall, Stigler and Steedman, this reading is wholly untenable: Ricardo's 'value' concept was unambiguously one of cost of production.

It is certainly true, and acknowledged by all, that Ricardo had a 'value' concept in the sense of (relative) cost of production. But to claim that this was his only 'value' concept has been to perpetuate a one-sided distortion. Even before his embrace of the labour theory, Ricardo had used 'value' in a manner suggesting an 'absolute' entity associated with the facility or difficulty of producing an individual commodity. Once he made the labour theory his own, that association was with the quantity of labour expended in production, at various times denoted by such terms as 'natural value', 'real value', 'positive value' and even, at the expense of great confusion, 'value' itself. This 'labour quantity' species of 'value' both existed in Ricardo's schema and came to be invested with unique significance, especially in the later writings. Perhaps it is appropriate to remind ourselves that soon after the publication of the third edition of the Principles, on which Marx was commenting, Ricard had written to Trower: 'In speaking of exchange value you have not any idea of real value in your mind, I invariably have.' Much needlessly spilled ink might have been saved if Ricardo had made a similar announcement in his Principles.

To an extent, therefore, Marx's interpretation is superior to his critics: Ricardo sometimes did use 'value' in a manner associated with quantity of labour expenditure (as previous commentors, including Trower, the author of the Observations, Samuel Bailey and, in his Unsettled Questions, John Stuart Mill, had observed.)" (Terry Peach, Interpreting Ricardo, Cambridge University Press, 1993.)

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A. Smith Explains Source Of Profits In Exploitation Of The Worker

Karl Marx described the source of profits, interest, and rent as value added by workers not paid out in wages. That is, Marx said the value of a commodity produced under capitalism is the sum of the value of the goods worked up by the workers into that commodity and the value added by workers. Insofar as this value-added is not fully paid out to the workers, they are exploited. But, according to Marx, capitalism is sustainable only when a source exists for returns to capital, that is, only when workers are exploited. Adam Smith said much the same:

"As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials... The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced." -- Adam Smith (1976, Book I, Chapter VI)

Smith provided the same explanation of profit a few chapters later, albeit mixed with an account of the source of rent:

"The produce of labour constitutes the natural recompence or wages of labour.

In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belong to the labourer. He has neither landlord nor master to share with him...

...As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise, or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon land.

It seldom happens that the person who tills the ground has wherewithal to maintain himself till he reaps the harvest. His maintenance is generally advanced to him from the stock of a master, the farmer who employs him, and who would have no interest to employ him, unless he was to share in the produce of his labour, or unless his stock was to be replaced to him with a profit. This profit makes a second deduction from the produce of the labour which is employed upon land.

The produce of almost all other labour is liable to the like deduction of profit. In all arts and manufactures the greater part of the workmen stand in need of a master to advance them the materials of their work, and their wages and maintenance till it be completed. He shares in the produce of their labour, or in the value which it adds to the materials upon which it is bestowed; and in this share consists his profit." -- Adam Smith (1976, Book I, Chapter VIII)

This reading of Adam Smith, in which he offers an account of the source of profits in the exploitation of workers, was a commonplace in the 19th century among the so-called Ricardian socialists. I find it of interest that Adam Smith offers this account while rejecting the (embodied) labor theory of value. I'm not sure this account makes sense, as a quantitative approach, without the labor theory of value, or, at least, without Marx's invariants (see Table 8). I do not think the tremendous continuity, as well as differences, between the ideas of Adam Smith and of Karl Marx is any secret among scholars.

Update: Gavin Kennedy agrees with me that Smith thought the (embodied) labor theory of value inapplicable to commercial society, in which laborers do not obtain all of their produce. For some reason, Kennedy presents his agreement as disagreement. (Although I did not go into it in my original post, I also hold that Smith did not have a labor commanded theory of value, as opposed to a labor commanded theory of welfare.)

Selected References

• Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations
• Thompson, Noel W. (1984). The People's Science: The Popular Political Economy of Exploitation and Crisis 1816-34, Cambridge University Press

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Adam Smith On An Information Asymmetry

I think I once read Michael Perelman pointing out this parallel between Smith and Stiglitz:

"...In a country, such as Great Britain, where money is lent to government at three per cent. and to private people upon good security at four, and four and a half, the present legal rate, five per cent., is perhaps as proper as any.

The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be too much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent., the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into the those which were most likely to waste and destroy it. Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred as borrowers to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people, then in those of the other. A great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage." -- Adam Smith, Wealth of Nations, Book II, Chapter IV

Gavin Kennedy titles his blog, "Adam Smith's Lost Legacy". So he must be only joking in this post when he whines about Stiglitz advocating government action to counter imperfections in information. (Kennedy also goes off, as right-wingers tend to do, with strawpersons and irrelevancies about the former Soviet Union.)

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