Adam Smith and David Ricardo: A comparative study
Adam Smith and David Ricardo's labor Theory of ValueThe labor theories of value were generated in response to the quest to determine what constitutes the price or value of a commodity, in other words, what renders value to a commodity? Classical theorists like Smith and Ricardo opine that a commodity derives its value from labor that goes into its production. In the labor theory of value, the amount of labor necessary to produce a given commodity was considered the 1"common denominator". And as an extension of the value theory, labor itself is essentially a commodity. Like all other things, labor is bought and sold (for wages) and has a natural and market price. The natural price of labor is that price which is necessary to enable the laborer, one with another, to subsist and to perpetuate their race without either increase or diminution (iron law of wages).I will first present Smith's labor theory of value, followed by Ricardo's labor theory of value, in essence because it served as the basis of Ricardo's labor theory of value. In fact Ricardo's labor theory of value went hand in hand with his critique of Smith's labor theory. The labor theory of value was a by-product of Adam Smith's attempt
This analysis further posed the question: What constitutes the natural price of a commodity? It is in response to this question, that Smith proposed his labor theory of value. However both had different reasons for this notion. The labor command theory is more relevant for the market price of a commodity. In their own time, Smith's and Ricardo's theories had policy implication and stimulated debate on economic issues. His labor theory of value was aimed more at advanced economies. The difficulty with this approach lies in the fact that wages vary over time and place, therefore the value of identical commodities would similarly vary. Ricardo on the other hand, did not make a distinction between primitive and advanced society. 7For Smith rate of profit would fall because of growing competition among entrepreneur and he was optimist about this development. Ricardo attacked Smith's assumption that the quantity of commendable labor can be usefully regarded as an "invariable" measure of value, when in fact labor is subject to as many fluctuations as the commodities compared with it (supply, demand) . Hence it is the labor that gives it the value. 5The market price of labor is the price that is really paid for it. In a modern society however, Smith postulated a different method of measuring value, which includes not just labor but land and capital too. This somewhat pessimist idea was in line with Malthusian theory. Apart from these, fluctuations of demand and supply affect the market value of a commodity.
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