Chapter X: Section V: is written to show that different degrees of durability in the

durable capital have the same effect as different proportions of the durable to the circulating capital, and is merely an example of the bad arrangement of the _Principles_.[64] Formally, there is a third case. Goods slower to market must bring more “profit.” But all cases come to the same thing, _i. e._, a longer investment of entrepreneur’s “capital” in labor, before the commodity produced can be put finally upon the market.

(2) In the second place, the effect of all this, says Ricardo, is to introduce a _second cause of variation of “relative values”_. The

“variety in the proportions in which the two sorts of capital
may be combined introduces another cause, besides the greater
or less quantity of labour necessary to produce commodities,
for the variations in their relative value—this cause is the
rise or fall in the value of labour.”[65]

A rise in wages affects “relative values,” because wages, being a different fractional part of the entrepreneur’s costs of different commodities, the _whole_ of entrepreneur’s costs is affected in varying degrees by the increase of this one factor. In Ricardo’s view a rise of wages means simply a fall of profits. If the entrepreneur’s cost of production of good A were ½ wages and ½ “profits,” and of good B ¾ wages and ¼ “profits,” then if general wages rise a fixed percentage, and consequently general “profits” fall a fixed percentage, it follows that the entrepreneur’s costs of A and B will change, one relatively to the other, though the costs of these goods in labor are not altered. He concludes:

“It appears that in proportion to the durability of capital
employed in any kind of production, the relative prices of
these commodities on which such durable capital is employed,
will ... fall as wages rise, and rise as wages fall; and on
the contrary those which are produced chiefly by labour with
less fixed capital, or with fixed capital of a less durable
character than the medium in which price is estimated, will
rise as wages rise, and fall as wages fall.”[66]

9. Ricardo’s way of describing the interest difficulty is unnecessarily round-about, but a more important point is that it is positively misleading. He must mean that interest and wages together make up entrepreneur’s costs. In the cost of producing one commodity interest will be a certain fraction of the whole; in the cost of producing another commodity it will be a different fraction. Now, says Ricardo, if the general rate of interest or of wages rises or falls, it will affect the total cost of production of two such commodities in different degrees.[67] Thus a rise or fall of the general rate of wages of labor is a cause of variation of the exchange ratios of products, as well as the cause of changes in the quantity of labor required to produce them. This statement is misleading, because the existence of interest throws the entrepreneur’s costs, and consequently the normal values of commodities, out of proportion to their labor costs without any reference to _variations_ in the general rates of interest or of wages. _At any given time_ values are already out of proportion to labor costs, whether or not there be a future change of the ratio of wages; yet Ricardo is misled in his illustrations to assume the proportionality before the wages rate changes.[68] The origin of Ricardo’s indirection in explaining the law of entrepreneur’s costs lies in the preconceptions of the “philosophical” account of value. To be precise, it is due to Ricardo’s quarrel with one of Smith’s two “philosophical” standards, namely, the labor-command standard. According to this standard, if wages rise or fall, the amount of a given commodity required to command a day of labor in exchange falls or rises. Smith said, in effect, that the “exchangeable value” of commodities in general falls when wages rise. He could not have meant pure exchange value by this, but Ricardo took him at his word, and proceeded to show that when the exchange ratio between day labor and a commodity alters, the exchange value of the labor may change just as much as that of the commodity. Therefore he concluded early in his chapter that the exchange value of commodities depends on the comparative quantity of labor required for their production, and not (as Adam Smith said) on the greater or less compensation which is paid for that labor.[69] On account of this dispute, he is led to state the qualification of the labor-cost law, due to interest, in terms of variation of the compensation of labor. That is, he qualifies slightly his original statement against Smith. The false philosophy that labor cost is the _essence_ of value exercised an influence upon the statement of the empirical law of costs which was truly baleful in English political economy. Its effect on terminology reached at least into the writings of John Stuart Mill, who sometimes referred to cost of production as being composed of _labor and profits_![70] Either wages and profits (interest), or labor and abstinence, but not labor and profits!

10. What Ricardo should have given us is a rectilinear theory of entrepreneur’s costs. For a theory of these costs is truly all he has offered. As for an ultimate answer to the riddle of value—an answer not contained in the simple empirical law of costs—Ricardo has not given us one. For, in answer to the query, _why_ labor cost, barring the qualifications he develops, should regulate value, he has said nothing. He has not even said what labor is; and in explaining the ultimate nature of economic value, and the relation of labor to it, it will not suffice to trust that every one knows exactly what is meant by labor. It should be understood, without remark, that the criticisms here passed are not in the least directed against his greatness as a thinker. His greatness is relative to his time. We criticize him with reference to the developed theory of our time; if we did not do this, this history would be a mere summary of Ricardo’s chapter on value, and would be almost, if not quite, pointless.

To conclude, Ricardo makes four qualifications of the doctrine of the labor-cost regulation of value. (1) Labor must be expended on things of utility. Utility is an absolute condition of value. (2) Goods to be subject to this law of value must be reproducible. The unimportant class of scarcity goods has a value entirely independent of labor-cost. (3) Labor-cost really regulates only the natural or central value of goods. There must be perfect competition to keep the market value at the natural value. (4) Variety in the proportions of fixed and circulating employer’s capital causes an aberration of natural value from proportion to pure labor-cost.

These points reappear explicitly or implicitly in all labor accounts of value. They are interesting in view of the estimates of Ricardo’s theory as being absolute. The second and fourth counts especially negative this estimate. The point of greatest interest in this connection is the question as to how much of a trunk remains of the Ricardian labor theory after so much bark has been stripped off. Ricardo considered the theory to remain for practical purposes intact. The fourth count is the only one that gives him serious concern, and though he is plainly much impressed with the force of the difficulty while he is treating of it, and concludes because of it that labor is not a precise regulator of value, when he has delivered himself of this statement he proceeds with the resolve to abstract from the whole difficulty, and reason as if the thesis first advanced were unqualified.

“In estimating, then, the causes of the variations in the value
of commodities, although it would be wrong wholly to omit
the consideration of the effect produced by a rise or fall
of labour[71] it would be equally incorrect to attach much
importance to it; and consequently, in the subsequent part of
this work, though I shall occasionally refer to this cause of
variation, I shall consider 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.”[72]

This citation from the _Principles_, edition of 1821, indicates the position Ricardo usually took. But occasionally he appears to have wavered regarding the proper emphasis of the qualification. For instance, in 1820 he wrote: “I sometimes think that if I were to write the chapter on value again which is in my book, I should acknowledge that the relative value of commodities was regulated by two causes instead of by one, namely, by the relative quantity of labour necessary to produce the commodities in question _and by the rate of profit_”....[73] Ricardo’s theory of value, as qualified by himself, might be summarized: Objects of utility, “produced by labor” (the function of factors in production other than labor not explained), and capable of further production by the application of more labor, have normal values in proportion to the total quantity of labor required to produce them, except that this proportionality is disturbed “by the employment with labor of capital of various degrees of durability.”

NOTE. Ricardo’s principle of rent is susceptible of development
into a universal principle of competitive distribution. To J.
B. Clark this development is in fact due. (In divers early
articles in the American economic periodicals. Professor
Clark’s views have now been summed up in his _Distribution
of Wealth_. See especially Chapters iv, viii, xii and xiii.)
Perfecting the reasoning, by means of which Ricardo endeavored
to get rid of the rent of land, as a cause of the divergence
of the exchange value of products from proportionality to
their labor costs, Clark gets rid of interest on capital as
well. What is left of the product of industry after interest
(including land rent and rent of other capital goods) has
been deducted is defined by Professor Clark as the _specific_
product of labor, or the marginal product of labor. To assert
proportionality of the specific product of labor to its labor
cost is a very different thing from asserting that the total
product of land, labor and capital in any given business is
governed by the labor cost of that product, defining the labor
cost as Ricardo did. It cannot be said that Ricardo in any
way realized that the principle of land rent could be turned
to account as a universal principle in determining shares in
distribution. But there is a distant hint at such use in the
following passage: “The exchangeable value of all commodities,
whether they be manufactured, or the produce of the mines,
or the produce of land, is always regulated, not by the less
quantity of labour that will suffice for their production
under circumstances highly favourable, and exclusively enjoyed
by those who have peculiar facilities of production, but by
the greater quantity of labour necessarily bestowed on their
production by those who have no such facilities, by those
who continue to produce them under the most unfavourable
circumstances, meaning by the most unfavourable circumstances,
the most unfavourable under which the quantity of produce
required, renders it necessary to carry on the production.”
(P. 50.) In Chapter xi of the present essay we shall attempt
to make clear the difference between the assertion that the
exchange value of the entire product of a given industry is
determined by its labor cost and an assertion that the specific
product of labor has a value determined by its labor cost.

The following chapters will contain many references to Ricardo.
These will concern minor points in his theory which are best
taken up in connection with the arguments of subsequent
economists.