Ricardo had thought that the quantity of labour used in production, which is known prior to the determination of distribution, would serve to relate the heterogeneous commodities comprising the rate of profits, such that the rate of profits could be determined.
What happens if distribution affects exchange values independently of the quantity of labour used in production, can we determine the exchange values of commodities comprising the rate of profits independently of distribution -- in other words can we determine the rate of profits? This brings us to part III of Ricardo’s theory of value, the discussion of an invariable standard/measure of value and the notion of absolute value.
We finally have a title for this series, Classical Economics, thanks to PLF515 for his simple and elegant solution! Next week we will begin our examination of the Ricardian Socialists, specifically the works of Thomas Hodgskin and William Thompson.
Ricardo on the measure of value
a) Ricardo's criticism of Smith's measure of value
As I said last week, Ricardo was critical of Smith's choice of labour commanded as the measure of value. Ricardo argues that the labour commanded of a product (i.e., the wage) could not perform the function of a measure of value because the wage itself was too variable. Now, Smith's measure of value was perfectly appropriate for what he was trying to examine which was the impact of technical change on the exchange values of commodities.
However, for what Ricardo is trying to examine, Smith's measure does not work at all, Ricardo is using the measure of value to determine the causes of the alterations in the price of commodities, but he recognizes that changes in w/r will change the prices of commodities, thus taking the wage as the standard or measure of value will not shed much light on the subject, because he is taking as the standard the exact thing that Ricardo wants to examine and determine -- changes in distribution.
Ricardo also takes Smith to task, unfairly I would say, for arguing that the quantity of labour commanded is the same as the quantity of labour embodied in production. Now, Smith only argues this in the context of his discussion of the rude and early state where these two measures are equal, and Ricardo is aware of this from his own statements in the Principles.
Moreover, as we noted before, the relation between labour commanded and labour embodied in Smith's analysis hinged on the constant price of corn, which in Ricardo's theory, given his theory of rent and his argument with respect to the falling rate of profits deriving from the increasing money wage due to the rising price of corn is nonsensical. Ricardo's measure of value is a measure that is specific and appropriate to the needs of his theory of value and what he wants to examine and determine: the exchange values of commodities and the general rate of profit. He is examining a different thing from Smith, thus Smith's measure does not provide an invariable standard along the lines needed for Ricardo's theory.
b) why is a measure of value needed in Ricardo's theory
The theory of value proposed by Ricardo which argues that the quantity of labour required for the production of commodities determined their exchange value was modified considerably by Ricardo's admission that the exchange values of commodities would be affected by changes in distribution (w/r) differently because of the differing proportions of capital and labour used in their production and that the capitals used would be of different durability.
Given that, Ricardo argues that the second effect is minor compared to the quantity of labour, and that if and when the relative exchange values of commodities change it is important to know which commodity's price has changed. Ricardo begins to look for an invariable standard so as to have a basis for ascertaining which commodity's price has altered. If Ricardo can find an invariable standard by which the price of each commodity could be compared, then given the relative prices of commodities each in relation to the standard, we will know which commodity's price has altered.
This is the reason for Ricardo's measure of value. Now, Ricardo in the Principles is more concerned with what he considers to be the primary reason for the change in the exchange values of commodities, that is the quantity of labour required for their production, thus, although he recognizes the impact of changes in distribution, he feels that this effect is small relative to the alterations in the quantity of labour required.
A Small diversion for clarity
In the context of his discussion of the measure of value he raises an earlier criticism of Smith and Malthus's proposition that a rise in the price of labour (i.e., the wage) would necessarily raise the prices of all commodities -- this is an argument that is implied by the adding-up theory of price. The argument advanced by Smith, and then Malthus, was that increases in the price of the primary wage commodity, corn, would raise the wage and hence the prices of all commodities would rise (if the measure of value is taken into consideration, then the prices of all commodities should fall as the wage has risen). This is a return to an earlier criticism of the adding-up theory of price by Ricardo because it initially arose in the Essay on Profits (1815) -- remember Ricardo argued there, that a rise in the price of corn leading to a rise in wages would not lead to a rise in the prices of all commodities, rather it would lead to a fall in the rate of profits. We can see from our discussion in Ricardo's modifications in last week's diary that the rise in the price of all commodities coincident upon a rise in wages would not be the case at all.
Let's recall the example, think of our price equation and let's eliminate depreciation for ease of exposition:
pa = wLa + rKa
pb = wLb + rKb
We are examining relative prices of commodities, let's say that commodity a requires proportionally more capital relative to labour (compared to commodity b) and that commodity b requires more labour relative to capital as compared to commodity a. If there is an increase in w/r, then the commodity which uses more labour would rise in prices relative to the commodity which requires more capital. Assuming that the original w/r = .3/.7 and that commodity a requires 3 units of labour and 7 units of capital for its production and commodity b requires 7 units of labour and 3 units of capital.
Initial prices are:
pa = .3(3) + .7(7) = .9 + 4.9 = 5.8
pb = .3(7) + .7(3) = . 2.1 + 2.1 = 4.2
Changing w/r to .4/.6 (increasing the wage relative to rate of profits)
pa = .4(3) + .6(7) = 1.2 + 4.2 = 5.4
pb = .4(7) + .6(3) = 2.8 + 1.8 = 4.6
Only those commodities which use more labour proportionally to capital and less durable capital will rise in exchange value when wages rise, those using more capital proportionally will fall in price. Ricardo's discussion of the impact of distribution upon exchange values is the final answer to (or criticism of) Smith's adding-up theory of price -- is it clear why the adding-up theory does not hold given the impact of distribution upon exchangeable value?
c) The measure of value in The Principles of Political Economy
The difficulty in finding an invariable measure of value, according to Ricardo, is that not only do we have to make sure that the quantity of labour required for its production is reasonably constant over time, but moreover, that commodity will also be subject to the alterations caused in its value by changes in distribution. As such, any commodity which we choose as the measure of value would react to changes in distribution due to the nature of the proportions of capital and labour used in its production. Thus, if it requires the same proportions of capital and labour as socks and cotton skirts, then it would be a perfect measure for socks and cotton skirts, but it would not be a perfect measure for any other commodity which requires a different proportion of capital and labour in its production.
The commodity which Ricardo needs in order to be an invariable standard would have to contain an average of the various capital/labour ratios used in production in the whole economy and always requires the same quantity of labour in its production (or at least a reasonably constant quantity of labour). In the third edition of the Principles, Ricardo settles upon gold, which he argues, although an imperfect measure of value requires something of an average between the two extremes of all labour and circulating capital and all durable fixed capital, and which requires a pretty constant quantity of labour to produce it.
Given this commodity which required the average proportions of capital and labour, then commodities which required more labour relative to the standard in their production would rise when w/r rises and those which require proportionally more capital than the standard would fall when w/r rises.
If measured in such a standard, the average prices of all commodities, and their aggregate value, would remain unaffected by a rise or fall in wages. Thus, if all commodities are measured in terms of the exchange value of gold, then if we examine all commodities prices and some have varied, we know it is arising from an alteration in the quantity of labour required for their production. Is that clear? Ricardo admits of the difficulty arising from the differing proportions of capital and labour used in the production of different commodities, and chooses a commodity which requires an average proportion of capital and labour and whose labour value is reasonably constant over time.
d) How does this affect his theory of profits?
Ricardo recognized the fact that a commodity’s value does not only depend on the quantity of labour required for its production. The existence of different proportions of capital and labour used in the production of different commodities and the existence of fixed capital means that changes in distribution would affect the exchange values of commodities independently of the quantity of labour required for their. These modifications are significant enough so as to overturn his theory of value. Now, if the prices of commodities change because distribution (wages and the rate of profits) changes, Ricardo's theory of the rate of profit runs into some difficulties.
Why? In order to determine the rate of profit in this case, Ricardo needs to know distribution in order to determine the exchange values of commodities, as the value of the surplus product will change depending on changes in the w/r relationship.
How does Ricardo get around this, because if he doesn't he is unable to determine the rate of profits: you can not need to know the rate of profits in order to determine the rate of profits. What Ricardo does is that he does not extend his modifications of the theory of value when he determines the rate of profit. The rate of profits is determined using a simple labour theory of value, and hence differences (or changes) in the capital-labour ratio and hence changes in w/r are not taken into consideration in the determination of the rate of profits. This is the second criticism of Ricardo's theory of profits by Marx.
e) The Notion of Absolute Value -- Ricardo's later and last measure
Ricardo's theory of value is in some difficulty, the modifications to his theory of value are rather significant, and not merely "modifications." The idea of an invariable standard or measure of value which we discussed above, leads Ricardo naturally to the concept of absolute value. Using this notion, Ricardo tries to separate the two things that affect the exchange values of commodities: 1) the quantity of labour; and 2) the changes in distribution, that is, differing proportions of wages and rate of profits, which affect commodity prices differently depending on the proportions of capital and labour used and the durability of capital and labour.
Ricardo has already in the Principles applied the notion of invariable measure to the problem of two commodities who have changed in relative value arising out of a change in the difficulty of production; Ricardo then uses his notion of real value or absolute value to determine which of the values of these two commodities actually has changed.
Either of these commodities would be a correct measure of value and would therefore shew correctly all the variations which took place in the value of commodities provided there was no other cause of the variation of commodities but the increased or diminished difficulty of producing them. Though this is by far the greatest cause it is not strictly the only one. If by a day’s labour fewer shrimps were obtained and nothing altered in regard to cloth and wine shrimps would sell for more wine and for more cloth and exactly in proportion to the increased quantity of labour required to produce them, the same may be said of wine (supposing that to be the commodity requiring more labour) if measure either by cloth or shrimps, and of cloth if measured by wine or shrimps, but they would be still liable to variations in value from variations in the value of labour which though comparatively of rare occurrence cannot be omitted in this important enquiry (Ricardo, 1823, pp. 367-8).
In Absolute Value and Exchangeable Value (1823) his last paper which remained incomplete at the time of his death in 1823, Ricardo tries to use his criterion of absolute value in the attempt to determine the cause of the variation in the exchange values of two commodities.
Ricardo distinguishes between what he terms absolute value and exchangeable value. Changes in exchangeable value (exchange value) arise from both changes in the difficulty of production (changes in the quantity of labour required for production) and changes in distribution or w/r. The effects on value of the differing proportions of labour and capital used in production can be viewed from two distinct perspectives.
First, differences in proportions of capital and labour will give rise to a difference between the relative values of two commodities which are produced with equal quantities of labour; second, differences in proportions of capital and labour used in different commodities means that relative prices will change differently when there are changes in distribution. The notion of absolute value proposed by Ricardo solely reflects the alteration in exchange values brought about by an alteration in the relative quantities of labour required for production.
It is necessary to know the reason for the alteration in relative prices, does it arise from a change in the quantity of labour required or does it arise from changes in distribution? Ricardo came to the conclusion that all the exceptions to the general rule (that is, the labour theory of value) arose from differences in "time," that is, all of the effects on prices which did not derive from changes in the quantity of labour, that is, different proportions of capital and labour used in production, different durabilities of fixed capital, differences in time it takes to bring commodities to market, could be reduced to the to the idea of labour being employed for a greater or shorter duration.
Thus, the standard of value he adopts in his last paper is that of a commodity produced by labour employed for a year which he views as the mean between the extremes of commodities produced by labour and advances of capital for more than a year (proportionally more capital than labour) and those commodities produced by labour employed for a day without any capital advances.
In this case, Ricardo argued that when the w/r rose, some commodities would rise in relation to the average (those which used more labour relative to capital) and some would fall (those which used more capital relative to labour), but on average these difference would balance out, and then you could argue that the primary determinant of the exchange values of commodities was the quantity of labour used for production.
Ricardo is proposing an absolute price, which is the price of each commodity relative to the numeraire, this is an absolute price because it eliminates the variations in exchange value caused by changes in distribution, thus clearly showing the effect brought about by changes in the quantities of labour embodied in commodities -- it is absolute in that given the standard of value which eliminates deviations brought about by changes in distribution, we can absolutely determine the value of the commodity in relation to the quantity of labour used in its production.
In the attempt to extend the application of absolute value from the first question (that of determining which of the two commodities have varied when relative prices change) to the second question (that of distinguishes the cause of variation), Ricardo runs into a serious difficulty.
Whereas the first question presupposes an exact proportionality between relative and absolute value -- that is, deviations arise solely due to changes in distribution. The second question, on the other hand, implies a deviation of exchange value from absolute value, which changes depending on the different proportions of capital and labour used in production of the different commodities. Ricardo never succeeded in resolving this difficulty. Ricardo is attempting, in his discussion on absolute value, to find a standard of value which would be invariant to changes in distribution or in the division of the product between workers and capitalists.
Why is this so important?
The reason he needs this is because he is trying to determine the rate of profits as a value measure, that is, as the relation between the value of the commodities comprising output and the value of the commodities comprising the costs of capital advanced for production (which he treats as wages advanced). Why is this so important? If exchange values change due to changes in distribution, then the value of the output will change when distribution changes, and hence it would be rather difficult indeed, should we say impossible to make sure it is clear, to determine accurately the effect on profits.
Ricardo is not trying to determine exchange values for their own sake, or to see why two commodities produced with the same quantity of labour are not of the same exchange value. He was concerned with this question only in so far as relative values are affected by changes in distribution. He needs the notion of absolute value or an invariable standard to determine the rate of profits as a ratio between exchange values.
If exchange values depend on distribution, then Ricardo will need to know distribution (wages and the rate of profits) in order to determine the rate of profits, this makes the determination of the rate of profits impossible -- or if you like, the approach is vitiated by circular reasoning. We need to know distribution in order to determine distribution. Moreover, given Sraffa's point -- the change in relative prices becomes indeterminate once we take into consideration the proportions of capital and labour used in the production of the capital goods. This is why, although Ricardo modified his theory of value in chapter one of the Principles he never extended this analysis to the determination of the rate of profits, because if he did he would not have been able to determine the rate of profits.
Earlier diaries in this series:
http://www.dailykos.com/...
http://www.dailykos.com/...
http://www.dailykos.com/...
http://www.dailykos.com/...
Ricardo on Value and Profits:http://www.dailykos.com/...
Ricardo on the Labour theory of value: http://www.dailykos.com/...
Suggested Readings
Garegnani, P (1984) "Value and Distribution in the Classical Economists and Marx," Oxford Economic Papers, 36, pp. 291-325.
Ricardo, D. (1815) "An Essay on the Influence of a Low Price of Corn on the Profits of Stock", in Pamphlets and Papers, 1815-1823, Volume IV of the Collected Works and Correspondence of David Ricardo, ed. By P. Sraffa, Cambridge University Press, 1951.
Ricardo, D (1821) Principles of Political Economy and Taxation, Volume I of the Collected Works and Correspondence of David Ricardo, ed. By P. Sraffa, Cambridge University Press, 1951.
Ricardo, D. (1823) "Absolute Value and Exchangeable Value," in Pamphlets and Papers, 1815-1823, Volume IV of the Collected Works and Correspondence of David Ricardo, ed. By P. Sraffa, Cambridge University Press, 1951.
Sraffa, P. (1951) "Introduction" to Principles of Political Economy and Taxation, Volume I of the Collected Works and Correspondence of David Ricardo, ed. By P. Sraffa, Cambridge University Press, 1951.
Sraffa, P (1960) Production of Commodities by Means of Commodities, Cambridge University Press.
For alternative perspectives and a recent discussion:
Hollander, S (1979) Studies in Classical Political Economy/II The Economics of David Ricardo (Toronto: UTP and London: Heinemann).
Blaug, M. (1999) "Misunderstanding Classical Economics: The Sraffian Interpretation of the Surplus Approach," History of Political Economy 1999 31(2):213-236.
Peach, T. (1993), Interpreting Ricardo, Cambridge University Press.
Garegnani, (2002) "Misunderstanding Classical Economics? A Reply to Blaug," History of Political Economy 2002 34(1):241-254