cropped-logo
Lesson Progress
0% Complete

David Ricardo’s kind of influence on the history of economic thought was quite different from that of Adam Smith. In the first place, Ricardo managed in life to form a true school of economics of which he was the undisputed leader. To frame the context, Ricardo’s time was four decades after Smith’s contributions. Therefore, he was indeed able to witness the development of a capitalism moving rapidly towards maturity, where the forces of the industrial revolution had already been unleashed in an irrepressible way. Moreover, precisely as a result of his position in the history of ideas, Ricardo had a privileged point of departure for his own investigations: Smith’s Wealth of Nations. He stands on the shoulders of a giant.

Ricardo’s major contribution to the theory of value is his insistence on the acceptance of Smith’s labour theory of value, according to which the relative prices of goods are approximately proportional to the relative quantities of labour that were spent for their production. Concretely, in Ricardo, the labour time is the primary regulator of natural prices, which in turn are the centre of gravity of market prices:

All the great variations which take place in the relative value of commodities to be produced by the greater or less quantity of labour which may be required from time to time to produce them. (Works, vol. I, pp. 36–37)

Ricardo’s disagreement with Smith is clear. Smith was forced to abandon the labour theory of value in the face of the rise of a capitalist society in which he could not explain the reasons for the difference between the commanded labour (wage) and incorporated labour (product value). Ricardo’s critique indicated that the salary is not – it cannot be – equal to the value of the product but is governed by other laws, since the salary, like the price of any other merchandise, is subject to permanent variations. The “value of work”, that is, the amount of the salary, Ricardo maintains, does not contradict or invalidate the determination of the value for the working time and is not related to the magnitude of the value of the product. 

If the determination of the labour value theory is fulfilled, a change in wages is incapable of modifying prices, as long as the labour time requirements of each product have not changed. However, the variation must be absorbed in some way, and in effect it is because profits are, according to Ricardo, an inverse relationship with wages. The value is determined by the amount of labour, but then this value must be “resolved” into wages and profits. As wages vary, the total magnitude of value does not change, says Ricardo, but its distribution between classes does. The consequences of this simple conclusion are big: on this basis it must be accepted that capitalist society is inexorably traversed by a distributive conflict between capitalists and workers. The opposing interests of one and the other face them fatally: any increase in wages necessarily implies a reduction in profits. When Smith came across the mutual relationship between wages and profit, he abandoned the theory of labour value to embrace that of production costs, which only nullifies the conflict since, according to this approach, increases in wages cause increases proportional to commodity prices, rather than determining a general drop in profits. Harmony reigns then – with the notes that we indicate – between employers and workers.

In spite of the lack of a perfect invariable measure of value, Ricardo accepted the principle according to which the exchange ratios of products (meaning goods prices) are regulated by relative labour times expended in their production not only in ‘the primitive society’ but also in capitalism. The difference is that in capitalism, the labour theory of relative prices needs several qualifications and modifications. These modifications relate to the presence of factors such as capital–labour ratios and changes in income distribution. 

On a final note, Ricardo showed particular interest in questions of international trade. He thought that his labour theory of (exchange) value could be extended to include not only domestic but also international markets. Added to that and by using the quantity theory of money, he derived the principle of comparative advantage, an idea that has survived (albeit modified) until our days and can be found in all books of international trade.

× Chat with us! Available from 10:00 to 18:00 Available on SundayMondayTuesdayWednesdayThursdayFridaySaturday