The concepts that used in economics are quite varied both in approach and areas that they seek to address. Each of the theories defined in economics has a distinct feature that defines its application. The Labor theory of value is one example of such economic theories. The theory stipulates that the value of commodities is closely linked to the labor that had to be used in producing the commodity. Several economists have provided different in-depth analysis of their understanding and assertion of the concept of labor theory of value. The most prominent of these economists was the 18th century Scottish economist Adam Smith who explored different facets of the economics of labor, productivity and capacity to improve production in his publication Wealth of Nations. Smith’s assertions of labor theory of value drew assessment and criticisms from different sources and scholars. David Ricardo, a British economist, businessman, financier and Member of Parliament also provided his view about the Smiths’ Labor theory of value. The second and perhaps one of the most prominent scholars of the 18th century was Karl Marx, a renowned German philosopher who among others explored different aspect of economics and sociology. This research paper evaluates the Labor theory of value as proposed by Adam Smith. The research will then provide an analysis of the views held by David Ricardo and Karl Marx with respect to the labor theory of value as proposed by Smith.
Adam Smith’s Labor Theory of Value
Adam smith was one of the earliest illustrators of the concepts of economics based on labor to value commodities of products. Smith publishes his theory in his famous works Wealth of Nations that claims that a nation’s wealth is based on the labor of the entire working population (Douglas, 8). The beginning statement of the book categorically illustrates that “the annual labor of every nation defines annual consumption for its population” (Douglas, 10). The statement simply illustrates that, according to Smith, the total consumption of a nation is based on the labor that has been used in producing the commodities. Smith therefore asserts the value of commodities can directly be attributed to the labor used in producing the commodity. This assertion according to several scholars may be true for both primitive and civil societies.
Smith appreciates the intricacies that are presented by civil societies where land is appropriated and there exists a social stratification due to capital accumulated. Here, Smith presents an assertion based on economic concepts of profits as product of investment of accumulated capital. In this part of the argument, Smith asserts that the laborer does not get to keep or consume all the produce. Here Smith states that the laborer, who works for an employer, has to share the produce with employer who is, in the most cases, the owner of the stock (Sowell, 28).
Smith also understood the nature of economics that presented itself when land turned to purely private ownership structures. Here, Smith asserts that landlords prefer to make income without having to work at all. Thus rent is levied on any produce for the land, be it natural produces or cultivated. In this model then, the price of commodity relied on three basic parts, that is, wages, profits and rent.
David Ricardo’s view on Adam Smith's Labor Theory of Value
David Ricardo generally accepted the arguments presented by Adam Smith with regard to labor theory of value. Ricardo held the view that the value of a commodity, that is, the value the amount which the good traded at the local market, was proportional to the labor that was employed in producing the commodity . The labor that Ricardo refers to here is the total labor used right from getting the raw material to the costs in machinery process. However, Ricardo slightly differs from Adam direct labor theory and proposes the concept of relative quantity of value. Ricardo attempts to differentiate the relative quantity of labor required to produce a commodity and the total wages needed to be paid.
Ricardo agrees with Smith’s argument that the society can be stratified into the three social classes, that is, the landlords, laborers and the capitalists. The main concern that Ricardo sought to explain was the manner in which produce and income was to be divided among the three social classes. The classes, according to Ricardo, created the concepts of rent, wages and profits. This division of income to the different facets of the society has an implication that the value of a commodity is relative on the labor used at a comparative measure but not on pure basis (Sinha, 24). Ricardo states that labor simply provides a foundational basis under which exchangeable goods are valued. Other aspects such as rent and need for profits in capitalists and landlords have a huge impact on the value of commodities. That fact that each social class of the society has a role to play in determining the value of a commodity then corrects the view as presented by Smith
Ricardo further provides a differentiated look at commodities that do not follow the principles of labor value theory. These exceptions are associated with goods that are naturally occurring yet very scare in nature. The values of such commodities are not based on the labor required to produce rather they are based on the scarcity. Thus Ricardo asserts that labor laws presented by Smith only apply to newly produced commodities that can be sold in markets.
Marx’s View on Adam Smith Labor Theory of Value
Karl Marx in his part also appreciates the concepts of labor theory as presented by Adam Smith and praises the comprehensive nature in which Smith views labor and values of produce. However, just like Ricardo, Marx asserts that the labor theory, when applied in a primitive society and in a civil society is contradictory in nature. Marx argues that while primitive societies may rely on purely labor-based foundation to define the values of commodities, civil societies have a much different valuation mechanism based on the cost of production. The contradictory nature of the two concepts is that while the primitive labor value theory provides and analysis of the direct relation between labor and value of commodity is an esoteric relation, cost of production on the other hand provides an exoteric relation that explains the manifestation of competition and political stratification of a society (Douglas, 32). Therefore, Marx argues that Smith argument is misleading by pooling these two contradictory concepts into single concepts of economics.
Marx also agrees with Ricardo on the theory of value due to the fact that the different social structures of the society presented a conflicting approach to value of goods. Laborers seek to make the most income in terms of labor time by increasing the wages. On the other hand, capitalist who invest on seek to exploit the working hours of the laborers in order to make most profits. Finally, landlords want to make most income without having to work at all. This conflict of interest had been evaluated by Ricardo as a social concern that could only approached through a social solution. Karl Marx however took this social concern to a new level by proposing communism.
Marx also agrees with Ricardo on the basis that labor theory may be applied in valuing commodities. Here, Marx asserts that for a labor to provide a foundational basis for defining the value of a commodity, that commodity must first be a useful product. Secondly, that commodity must be exchangeable in a competitive market. Thus the exchange value of the commodity will rely on the useful nature whose value is based on the labor embodied on the product.
Adam Smith sets the foundation of value of commodities asserting that the value of a good is purely based on the labor employed in producing that product. Smith continues to claim that a nations wealth is based on the goods produced and thus on the labor of the population. David Ricardo and Karl Marx seem to share the same opinion that while labor has a role to play in defining the values of commodities, other key aspect have a significant role in determining the value of the good. Here social constructs of a civil society such as capitalism and privately owned land have a significant impact on the valuation of commodities.
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