Chapter V: Ricardo and the True Classical Labor Theory

1. It is not incumbent upon the historian of a single doctrine to pass judgment upon the question of the proper position of Ricardo as a general economist, compared with Smith and Malthus. But since, in the following chapter, we shall be led to find much fault with Ricardo’s method of exposition of the theory of value, it is necessary to state at the outset that Ricardo’s writings on value possess the distinctive merit, in contrast with those of Smith and Malthus, that they can be reduced to a whole, essentially self-consistent in its large lines. Self-consistency is not the sole test of truth, and this praise does not signify that Ricardo’s is a correct theory, but the longer one studies Ricardo the more satisfactory does his text become, up to the point where one believes he has obtained a complete understanding of it. On the other hand, it is a task of supreme difficulty to read Ricardo critically. His inconsistencies in the use of terms are most trying. It is remarkable that the final result of his reasoning was on the whole self-consistent. The commentator is inclined to quote Senior with approval when he remarked that Mr. Ricardo “is perhaps the most incorrect writer [_i. e._, in the use of terms] who ever attained philosophical eminence.”[44] The point of greatest weight in the labor theory of value, after the vestibule of the subject has been passed through, is treated with a maladroitness which has made a matter that is not over-difficult in itself very hard to understand. This is the theme of sections IV and V of the chapter on value, and is, indeed, in another guise, the difficulty arising out of the “organic composition of capital,” which, under this name, becomes the main point of theoretical interest in the third volume of Marx’s _Das Kapital_.

There is abundant evidence that Ricardo himself considered the theory of value to be a very hard problem, and furthermore that he was not completely satisfied with his own treatment of it. As late as 1823, he wrote to McCulloch:

“The difficult subject of value has engaged my thoughts, but
without my being able satisfactorily to find my way out of the
labyrinth.”[45]

Earlier he wrote to the same disciple:

“I am not satisfied with the explanation I have given of the
principles which regulate value.”[46]

Some things have a value which is obviously not regulated by labor cost. Concerning these, Ricardo wrote:

“I cannot get over the difficulty of the wine which is kept in
the cellar for three or four years [_i. e._, while constantly
increasing in exchange value], or that of the oak tree, which
perhaps originally had not 2 s. expended on it in the way of
labour, and yet comes to be worth £100.”[47]

2. The writer of the present essay has already acknowledged his indebtedness to Professor von Wieser for suggestion of the means of interpreting the main lines of the history of the labor theory. Professor von Wieser’s terse judgment of Ricardo’s writings on value is contained in the following sentences:

“What, then, did Ricardo attempt? His whole endeavor exhausted
itself in trying to show that the philosophical and the
empirical theories of Adam Smith—both of which, indeed, in
taking up this position he had to clear and carry further—did
not contradict each other so much as at first sight would
appear.”[48]

The manner of putting this is objectionable, in that it implies, I believe, an improper subordination of Ricardo’s theory to that of Smith. While Ricardo quotes Smith freely, his exposition of the subject of value is in no sense a summary and criticism of Smith’s views. On the contrary, he writes with a remarkably independent spirit. It is, nevertheless, true that the principal part of the reasoning of Ricardo is concerned with the adaptation of the empirical account of value to the philosophical, that is, to the philosophical account as he understands it. These two accounts are almost inextricably entangled in Ricardo’s work, but their disentanglement is the sole method of exhibiting the ultimate purport of his reasonings. For, in essence, his theory is as follows: The value of those things whose value is subject to an ascertainable principle depends on their cost of production in human labor. (The value of pure scarcity goods which cannot be increased in quantity by the application of common human labor simply “varies with the varying wealth and inclinations of those who are desirous to possess them.”[49] If subject to no law of value, these goods are also, in Ricardo’s view, unimportant.) Labor cost is the kernel of value, so far as it seems to have a kernel. This is the philosophical account. Smith’s labor-command measure is condemned at the outset. There is little doubt that labor is here conceived as disutility, though Ricardo does not pause to discuss the concept of labor. But Ricardo’s theory ends as an empirical doctrine, in which labor-cost figures as the regulator of exchange value only because it is conceived to be the all-important element which governs the amount of entrepreneur’s expenses of production. Smith abandoned the labor-cost regulator for real society because he observed that the “necessary price” of a market commodity, or the price determined by its entrepreneur’s cost of production, must cover payments for rent of land and interest on capital as well as wages of labor. Not so Ricardo. He holds fast to the labor-cost standard, upon the belief that rent does not “enter into” this necessary price, and that the taking of interest causes only a negligible variation of money cost from proportionality with labor cost. The discussion of this variation is the most involved part of his writings. The end is an imperfect reconciliation between the empirical and philosophical accounts.

3. The simpler and more familiar parts of Ricardo’s theory may be considered first. His doctrine, it should be observed, is by no means absolute or unconditional.

(1) Utility is a condition essential to value, but no more. The quantitative discrepancy between utility and exchange value seems as obvious to Ricardo as to Smith. In a letter to Say he expressed his whole theory with respect to utility even a little more concisely than in the _Principles_:

“The utility of things is incontestibly the _foundation_ of
their value, but the degree of their utility cannot be the
measure of their value.” “The difficulty of [a thing’s]
production is the sole measure of its value.”[50]

When arguing against Smith’s corn-measure in Chapter XXVIII (Gonner ed.), our author exclaims: “What can value have to do with the power of feeding and clothing?” as if the instantaneous answer should be, “Nothing whatever.” This curious slip is mentioned only to show how far utility was removed from value in Ricardo’s habitual thought.

(2) “Possessing utility, commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labour required to obtain them.”[51] This proposition has occasioned the claim of the “Austrian” writers that the Ricardian theory of value is “dualistic.” Not all economists have acquiesced in this criticism, for there are those who hold the labor-cost and utility theories to be but two parts of one larger, consistent, whole. Among these latter economists, one of the most uncompromising in his attitude is Professor Heinrich Dietzel, of Bonn, who asserts that Ricardo’s explanation is not dualistic, because the utility and cost views are perfectly reconcilable.[52] Still it appears fair to say that, whether or not some later writer can construct a theory which is itself not dualistic and which is still in inner harmony with what Ricardo _meant_ to say, what Ricardo said was dualistic. Textually, formally, his proposition is dualistic, for an intelligent contemporary reader would interpret his thought as such. Commodities derive value from two sources, and the law of the one kind has no applicability to the other kind of goods.

(3) The value of scarcity goods is “wholly independent of the quantity of labor originally necessary to produce them.” This is because “no labor can increase the supply of such goods.” These commodities are, however, an unimportant element in the market.

(4) The labor-cost regulation of values applies only to goods in the production of which competition acts without restraint.

4. The doctrine that, with the foregoing conditions understood, the exchange value of commodities is governed by the comparative quantity of labor required for their production, involves a number of questions with respect to the manner of determining _quantity of labor_. Ricardo did not carry his inquiry into these questions as far as modern critics of the labor theory have pressed theirs, but in the course of his writings he made three important observations on this subject.

(1) In the first place, Ricardo distinguishes between _quantity_ and _value_ of labor. J. B. Say had in various places endeavored to state Ricardo’s position as being that the _value_ of labor determines the value of its products, for in this form the doctrine can easily be shown to involve a circle. Ricardo wrote to Say:

“You misrepresent me ... when you say I consider the value
of labour to determine the value of commodities; I hold, on
the contrary, that it is not the value, but ‘the comparative
quantity of labour necessary to production which regulates the
relative value of the commodities produced.’”[53]

The purport of this—though not so explained by Ricardo—is that the quantity of labor which an entrepreneur is compelled by the nature of a good to employ to produce that good, determines the amount of wages he has to pay for its production. As far as this single point goes, the answer to Say is satisfactory.

(2) When Marx came to the question of skilled labor, he called it simply “condensed labor.” It goes without saying that he judged the degree of the condensation of any concrete skilled labor purely by its comparative wages, or exchange _value_.[54] Ricardo’s treatment of skilled labor is even less satisfactory than Marx’s. He says:

“If a day’s labour of a working jeweller be more valuable than
a day’s labour of a common labourer, it has long ago been
adjusted, and placed in its proper position in the scale of
value.”[55]

What has long ago been adjusted? In definite words our author does not say, but his meaning is ascertainable.

“If a piece of cloth be now of the value of two pieces of
linen, and if, in ten years hence, the ordinary value of a
piece of cloth should be four pieces of linen, we may safely
conclude, that either more labour is required to make the
cloth, or less to make the linen, or that both causes have
operated.”[56]

If the exchange ratio of cloth to linen alters, the doctrine is that the cause must be that some change has taken place in the quantity of labor required to produce cloth or linen, and _not_ that the “value” of a linen-maker’s day of labor has changed in ratio to the “value” of a cloth-maker’s day. In other words, if ten hours of a cloth-maker’s labor have earned the same wages (and thus occasioned the same cost to entrepreneurs) as twelve hours of a linen-maker’s labor, “we may safely conclude” that it is not alteration of this ratio that causes alteration of the exchange ratio of cloth to linen. It is this ratio between the wage-earning capacity of one kind of labor and another kind that “has long ago been adjusted.” To make this point perfectly clear, let us quote again:

“The comparative degree of estimation [an equivocal expression
which means comparative wage-earning power] in which the
different kinds of human labour are held ... continues nearly
the same from one generation to another, or at least ...
the variation is very inconsiderable from year to year, and
therefore can have little effect, for short periods, on the
relative value of commodities.”[57]

The question is this: In the labor-cost theory of value, does skilled labor count as _more_ labor per day than unskilled, and if so upon what principle? Ricardo’s argument, as just traced, avoids the question, and is faulty in two essential points. In the first place, it is not true, and was not true in Ricardo’s time, that the comparative skilfulness of labor employed in producing different commodities remains unchanged. Machine invention alone produces veritable revolutions in this field. But in the second place (a more important point as a matter of theory), in this argument Ricardo has shifted his ground with respect to the meaning of his labor-cost law. This principle is stated in italics at the head of his chapter:

“The value of a commodity, or the quantity of any other
commodity for which it will exchange, depends on the relative
quantity of labour which is necessary for its production.”

This means precisely that, if one A exchange for two B, it is because, _at this time, without reference to changes in time_, it costs twice as much labor to produce an A as to produce a B. But now Ricardo has virtually changed the principle to mean that _alterations_ in the exchange ratios of commodities will be due to _alterations_ in the comparative amounts of labor required to produce them. This is a different principle, and indeed one no stronger than the other. We are forced to the conclusion that Ricardo unconsciously avoided the real question in the case, and failed to explain away the difficulty of skilled labor in the labor theory.

(3) The quantity of labor required in the production of a commodity, which regulates its value, includes the labor employed in making the raw material, machinery and buildings (capital goods) used up in its production, as well as the labor directly applied to it. This proposition is copiously illustrated by examples drawn from primitive and modern industry, and commands immediate assent. It is obvious, when once stated, that the labor indirectly applied to the production of a commodity is no less _required_, if we are to obtain it, than that directly applied.

5. We have here an important consideration. If the labor _directly_ applied to the production of a commodity were all that is included in its labor-cost, the entrepreneur’s expenses, covering cost to him of machinery and raw material, would be too obviously out of proportion to the labor cost (as manifested in _his_ wages cost). But it is Ricardo’s intention to reduce the cost of capital goods to labor cost. The total labor cost of a commodity produced from capital and raw material is paid for by a series of entrepreneurs in their wages charges. Each entrepreneur exacts a “profit” for the time he has advanced the wages. It is in this way, as Ricardo sees it, that interest enters into entrepreneur’s costs. Does it destroy the force of labor cost as a regulator of exchange value? To make Ricardo’s answer to this question clear, it is necessary to refer first to what he has to say in Chapter IV of the _Principles_ on natural and market price.

The term “Natural Price” has, it happens, a “philosophical” and an “empirical” significance. It is at best an inexact pair of words. Its empirical meaning is simply _normal value_, the excellent term for that value which, under competition, constitutes a center of oscillation for market values. Its “philosophical” meaning, as suggested a few times by Smith, is the _human_ cost of obtaining goods from the physical outer world.

“Labour was the first price, the original purchase-money that
was paid for all things. It was not by gold or by silver, but
by labour, that all the wealth of the world was originally
purchased.”

With this sort of natural or primary price Adam Smith’s empirical chapter on “Natural and Market Price” has nothing to do. This ought also to be true of Ricardo’s chapter (Chapter IV), because it is a chapter explaining how competition always forces the market-price toward a normal value.[58] It turns out in the end that this normal value is a sum of exchange value which is just sufficient to cover the _wages_ of labor and the _interest_ of capital required in production. This is never made clear. Malthus probably never understood Ricardo as meaning this. What we affirm is, that _his text_ means this when it is altered or rectified so as to give it the self-consistency which seems to lie within it.

6. We need now the proof of this interpretation. The opening sentence of the chapter on natural and market price proceeds as follows:

“In making labour the foundation of the value of commodities,
and the comparative quantity of labour which is necessary to
their production the rule which determines the respective
quantities of goods which shall be given in exchange for
each other, we must not be supposed to deny the accidental
and temporary deviations of the actual or market price of
commodities from _this, their primary and natural price_.”[59]

This sentence seems to state that the labor cost of a commodity is its “natural price.” If so, the statement is due to the influence of the philosophical account; but it is an absurdity in this connection. Actual market-price does not deviate temporarily from _labor cost_. Normal value is not an amount of labor, nor can it be spoken of as equal to an amount of labor. The passage is a careless way of saying that the normal values of goods are _in proportion to_ their labor costs. Ricardo’s real conception of normal value is this: The total labor cost of a commodity determines the total wages charges that must be paid by the entrepreneur, or series of entrepreneurs producing it. Competition tends to give the entrepreneurs producing different commodities equal rates of “profits” upon these outlays. Therefore the normal exchange value of a commodity is composed of a sum of wages costs (due to the nature of the commodity as requiring such and such an amount of labor to produce it), which is the independent determining element, and a sum of interest which is merely a uniform rate upon the wages cost. It is in this way that labor cost regulates value, _according to an empirical account_.[60]

To substantiate this view of Ricardo’s meaning, we can quote the following:

“Mr. Malthus appears to think that it is a part of my doctrine
that the cost and value of a thing should be the same;—it
is, if he means by cost, ‘cost of production’ including
profits.”[61]

The only kind of cost that includes “profits” (_i. e._, interest) is entrepreneur’s cost.

7. We may now turn our attention to what is perhaps as difficult a passage as was ever incorporated into a treatise on economics. I refer to Sections IV and V of Chapter I of Ricardo’s _Principles_. These sections treat of the _complication of interest_ in the labor theory of value.[62] But if all Ricardo claims in his labor theory is that normal values are _in proportion to_ labor costs, why is not the explanation satisfactory that interest is merely a rate taken upon wages costs? The difficulty is that in reality two commodities may cost the same amount of wages (because, as Ricardo has it, they require the same amount of labor for production) and yet cost very different amounts of interest. In such a case the two commodities have the same labor costs but have different entrepreneur’s costs, and consequently different exchange values. This comes about because the entrepreneur (or series of entrepreneurs) who produces commodity A may have been compelled to pay the money wages to the labor producing it a longer time before A can be put on the market than is the case with commodity B, though the _amount_ of wages paid in both cases be the same.

8. In the end, Ricardo’s theory of the interest difficulty reduces itself to the statement that has just been finished. That is to say, the above is the true interpretation of his argument. But Ricardo’s own presentation of the difficulty is superficially so different from this statement that it will be necessary to prove this interpretation in detail. (1) In the first place, he separates the general case of “profits” paid on a longer “advance” of wages into three subdivisions.

“According as capital is rapidly perishable, and requires to be
frequently reproduced, or is of slow consumption, it is classed
under the heads of circulating or of fixed capital.” (“A
division not essential, and in which the line of demarcation
cannot be accurately drawn.”—Note.)

“Two trades may employ the same amount of capital; but it
may be very differently divided with respect to the portion
which is fixed, and that which is circulating.” “A rise in the
wages of labour cannot fail to affect unequally commodities
produced under such different circumstances” (in respect to
the proportions of these two kinds of capital in different
trades.)[63]