Political Economist

 5. Trace the treatment of “value” in Ricardo and Marx. Howe does each pose the question, how do they proceed, and how do they end up? What are their differences? Be sure to define what each means by the relevant terms.

Classical Political Economists draw the distinctions between two values: the one is ‘value in use’ and the other is ‘value in exchange.’ Smith pointed out that the ‘value in use’ is ‘utilities of some particular objects.’ It is associated with ‘usefulness’ of products. On the contrary, ‘value in exchange’ is the ‘power of purchasing of other goods.’

According to Ricardo, the value of commodity is ‘exchange rate of other commodities.’ It is an ‘exchanging power’ of particular commodity. Ricardo also differentiated ‘use value’ from ‘exchange value.’ Use value is ‘utilities (satisfaction of social needs) of some objects.’ Ricardo pointed out two different determinants of exchange value of commodity: the one is scarcity and the other is quantity of labor required to produce it.

However, exchange value of particular commodity determined by its scarcity forms a small part of mass of commodities. The quantity of these kinds of commodities is limited. For example, scarce paintings and stamps, rare wines and pictures, statues, etc. are all limited in numbers and do not form the general market. On the contrary, the value of all commodities is determined by the relative quantity of labor (measured by time) required for their production.

Based on these conceptual tools, Ricardo analyzes the source and the origin of value of commodity. Unlike Smith, Ricardo

Relative quantity of labor time

Marx also draws the similar distinction between use value and exchange value. According to him, commodity is both use-value and exchange value. Use value, as a result of concrete labor, is ‘material thing or effect some of whose properties satisfy human want.’ It is an output produced by productive labor.

On the contrary, exchange value is the object of social exchange. While use value is related to concrete labor, exchange value is estimated by the abstract human labor. The abstract labor, or to put it in quantitative way, the abstract socially necessary labor time is the foundation of exchange value of all commodities and the foundation of real exchange on the market. It was the amount of labor time which determined the value of commodity in Smith and Ricardo’s perspective. In Marx, it is the abstract socially necessary labor time which determines the exchange value

Hypothetical state of society - Rude and early state of society (Smith & Ricardo) vs. simple commodity production (Marx)

The object of analysis – modern capitalist society (Smith & Ricardo) vs. capitalist commodity production (Marx)

The determinants of value of commodity - Relative quantity of labor time (Smith & Ricardo) vs. the abstract socially necessary labor time (Marx)

6. How do Smith, Ricardo and Marx analyze the evolution of the rate of profit over time? Analyze the mechanisms involved. What implications can one draw from the trajectories implied by the different theories?

Classical political economists share a lot of theoretical aspects in common: they paved the way for classical labor theory of value; they also used similar theoretical schemes and concepts such as distinction between natural price and market price, use value and exchange value, etc. But there are also huge differences between them. In this essay, I will present the similarities and theoretical differences among classical political economists. While doing so, I will explain how they analyze the falling rate of profit from different perspectives.

Firstly, they point out the fact that the relative amount of labor regulates the relative prices of commodities. In this sense, they are all advocates of classical labor theory of value. But Smith asserted that the rule would be changed due to the introduction of accumulation of capital and the appropriation of land. Smith argues that in modern capitalist economy, the aggregate income becomes split into three parts: wages for labor, profits for capital and the rent for landlords. Smith assumes that this change will lead to the modification of his labor theory of value unlike the case of his early and rude state of society.

Unlike Smith, however, Ricardo proved the validity of labor theory of value even when accumulation of capital introduced. Even though there exist social classes and the separation of aggregate income into different class incomes, competition among labor and competition among capital will equalize both the real wages and profit rates across production sectors. This means that if capital and labor ratios remained the same, the relative prices of commodities would be exactly the same as the quantity of labor required for their production.

Secondly, they draw distinction between natural price and market price. The concept of natural price is converted from the quantity of labor required for commodity production based on the assumption that the value of commodity is the same as the price of commodity. In this scheme, natural price plays a significant role in determining and explaining the fluctuations of market price of particular commodity. The natural price, as a center of gravity, regulated the real price movements.

Thirdly, they argue that the rate of profit will fall in the long term. Smith and Ricardo point out the tendency of the rate of profit to fall. But Smith does not provide any scientific explanation. He just attributes the falling rate of profit to fierce competitions among producers. In this sense, Smith seems to identify the falling rate of profit with the equalizing tendency of profit in production sectors. Smith also does not pay significant attention to the problem of rent. He only dealt with this issue from the perspective of application case of his primitive labor theory of value.

On the contrary, Ricardo’s explanation of falling rate of profit is closely related to the theory of rent. He started from diminishing material return of rent. As accumulation proceeds, demand for food will be increased. Accordingly, much more land and less fertile land will be introduced in order to produce foods. This means that the cost and labor for agricultural production will increase and lead to the rise of corn prices. This, in turn, leads to fierce competition to get into much more fertile land, and the rise of rent. This whole process will raise the wage, and thus reduce the amount of profit for capital.

In this way, Ricardo attributed the falling rate of profit to the rising rent. That is why Ricardo proposed to import cheap corn from abroad. If the cheap-price corn can be imported from abroad, the wages for labor will not increase, and thus the profit for capital will not necessarily fall.