FREE ESSAY ON RICARDO ON THE THEORY OF VALUE

RICARDO ON THE THEORY OF VALUE

Overview
One of the enduring questions of economics is Where do profits come from? One of the ways
in which economic philosophers have tried to answer it is by first answering the question
of value. At the center of most economic paradigms is a Theory of Value. The classical
political economists found value to be determined in production; since most of the cost
of production could be reduced to labour, this approach was refined into The Labour
Theory of Value. Neoclassical economists looked for value in the market act of exchange
and developed the Marginal Theory of Value. Both of these theories are currently under
challenge by the post-Keynesians with their Sraffian Theory of Value, which, like the
labour theory of value, is based on production rather than exchange. Any theory of value
in economics is an extremely abstract formulation: in fact, value theory is the major
intersection between economics and philosophy. 
For millennia, literally, scholars and theorists have tried to deduce how items attained
their 'value'. From pre-Christian to pre-Keynesian times, various strands of thought have
proposed (often divergent) explanations for this phenomenon. For instance, economists
sometimes use the term theory of value to mean quite different things. Here, the term is
used to denote a theory that attempts to explain long-run prices in a capitalist economy.
But there are also theories of value which attempt to explain what prices should be.
Medieval scholars used the concept of just price, which was the price that would allow
the producer to earn a living appropriate to his social position. Some Institutionalists
have introduced similar concepts - such as normative value or reasonable value. Whatever
their explanations, theories of value are at the heart of two of the major themes:
i-) the distribution of wealth and income; and 
ii-)the maintenance of microeconomic order. 
A Brief History of Value Theory
The debate on the theory of value, which was initiated in Ancient Greece and which became
inactive during the Middle Ages, later re-emerged at the close of the seventeenth century
to dominate economic thought for the next 200 years. Even today its primary importance is
such that Schumpeter claimed that the problem of value must always hold the pivotal
position, as the chief tool of analysis in any pure theory that works with a rational
schema. Similar hypothetical solutions varied from time to time. 
Considering that this piece is hyperbolic in scope, shall, I would narrow down the
analysis to the following structure. Firstly, I would try to overview sketching
Aristotelian, Scholastic and Mercantilistic views on value. Secondly, I will follow an
analysis of the contribution of pre-classicalist writers like Petty, Cantillon, Galiani
and Law to the debate. Thirdly, the supply oriented theory of value put forward by
classical economists like Smith, Ricardo, Marx and Mill shall be examined. Fourthly,
Jevons and Mengers' neo-classical attempt to replace the classicalists with their
demand-oriented theory of value will be considered. Finally, both Walras' and Marshall's
respective resolution to the conflict shall be investigated by individually accommodating
the interactions of both supply and demand as determinants of value within their overall
economic framework. 
Early Economic Thought 
The first great landmark in the long and tortuous intellectual struggle with the riddle
of value, was laid by the philosophers of the Athenian Academy in the 4th century BC. It
was Aristotle (384-322) who held that the source of value was based on need, without
which exchange would not take place. Originally, it was he who distinguished between
value in use and value in exchange- Of everything which we possess, there are two uses;
For example a shoe is used for wear and it is used for exchange. 
While the Scholastics later adopted and accommodated these views to Christian thought,
like the Aristotelian philosophers before them, economics was not regarded as an
independent discipline but merely as an integral part of ethical and moral philosophy. As
a result, the debate on value was centred and henceforth retarded by a normative approach
- what value should 'justly' be, instead of what actually is. During this period, utility
was widely held as the determinant of value with only a minority of theorists such as St.
Thomas Aquinas (1225-1274) and John Duns Scotus (1265-1308) taking note of the cost of
the production side. 
The search concerning value was continued in the direction of utility by early
mercantilists during the 16th and the first half of the 17th century. The supremacy of
this argument was highlighted in 1588 when Bernardo Davanzati unsuccessfully attempted to
construct a utility theory of value in Lecture On Money. It is not surprising that they
concentrated on the determinants of the demand for goods (utility), since the merchants'
profits depended on the exploiting of the difference between the market buying and the
selling prices rather than controlling the production process. For medieval theorists,
value depended not on any intrinsic value but on utility and scarcity. Shakespeare's
Richard III battle plea A horse, a horse, my kingdom for a horse epitomises the
subjective approach to value of this era. Yet despite the failings and limitation of this
one-sided method, this period is viewed as embryonic with regard to value theories, and
one which would issue subsequent economic developments. 
Pre-Classical Thought 
It was only at the end of the seventeenth century when economists following a Cartesian
philosophy of deduction, broke away from the dominant mercantilistic utility view and
looked for a solution in the cost of production. William Petty (1623-1687) who was
influenced by the scientific advances of his era abandoned the subjective theory of value
and instead objectively searched for the natural and intrinsic laws of reality - of which
'natural value' was one of them. According to Petty, the market price ('actual price') of
any commodity would fluctuate perpetually around its natural value ('natural price'). The
determinants of this natural value were deduced as the factors of production - land and
labour. 
In keeping with his mathematical nature, Petty attempted to reduce his theory of value to
a labour one only, by looking for a 'par' value for land in terms of labour forces. In
the political Anatomy of Ireland (1691), he states that the unit of measure consisted of
The easiest-gotten food of the respective countries of the world- average daily diet
necessary to sustain a worker. Although he successfully anticipated the classical-Marxian
theory of subsistence wages and surplus, he also inherited the endless difficulties
associated with a labour cost theory of value.
Richard Cantillon (168?-1734) who was another practitioner of the Cartesian approach also
began with the labour-and-land theory of value. Although, similar to Petty in that he
reduces the determinants of intrinsic value in terms of one factor, unlike him,
Cantillon, who was influenced by French agrarian protectionists, chose land. Cantillon
finds his 'par' value by equating the value of a labourer with that of twice the produce
of the land he consumes, while allowing for variations in the labourers' skills and
status. Once this 'par' value is calculated, the intrinsic values of any good can be
reduced to land only. With his assumptions of constant returns to scale, Cantillon
provides us with his land theory of value. He also originally shows us how resources were
allocated between different markets when the market price diverge from his intrinsic
'land' value. Unfortunately, Cantillon's land theory, like Petty's labour theory, was
only a true description of value in highly specific cases. 
Meanwhile the medieval subjective approach to value was continued by another branch of
pre-classical economists, which included people like Nicholas Barbon (1640-1698) who
thought that the natural value of goods was simply represented by their market price. For
him the value of all wares arise from their use; things of no use, have no value, as the
English phrase is, they are good for nothing. Furthermore, on the continent, the Italian
Ferdinando Galiani (1728-1787) borrowed the early mercantilistic writings of Davanzati
and Montanari on the subjective nature of value. He devoted his time to developing a
theory of utility value and even implicitly described the notion of diminishing marginal
utility. His deductions just lacked the concept of marginal utility of the neo-classical
economists, Jevons and Menger. 
Although Galiani vaguely accounted for the cost of production in his utility value
theory, he failed to develop it into a fully-fledged supply and demand analysis. The
Scotsman John Law (1671-1729) took up this monumental project. In his Essay on a Land
Bank, Law outlined the old water / diamond paradox of value, in which comparatively
'useless' diamonds are more highly valued than the more 'useful' water and reconciled the
mystery by using a supply and demand analysis. Unlike his predecessors and his immediate
successors (until Walras and Marshall), Law used both demand and supply factors in
determining the value of a good which has a use in society. Henceforth any changes in the
value of goods were due to a change in the quantity supplied or demanded. 
Although John Locke (1632-1704) in, Some Considerations on the Consequences of Lowering
of Interest and the Raising the Value of Money, had developed a theory of price
determination earlier, it lacked the clarity, precision and understanding of Law. In
Money and Trade Considered, Law corrects Locke's unpolished value by stating that The
prices of goods are not according to the quantity in proportion to the vent, but in
proportion to the demand . Surprisingly, Law's early solution to value theory gained
little following owing probably to his failed financial operations in France. Even more
surprisingly has been the reduction of Law's contributions in this area to mere footnotes
in the mainstream economic history books. Unfortunately, for the development of value
theory, this dualistic analysis was suppressed for almost 200 years, until its
resurrection at the close of the 19th century. 
Classical Thought 
The publication of Adam Smith's (1723-1790) Wealth of Nations in 1776 heralded the rise
of the classical school and swung the value debate back towards Petty's objective labour
theory of value. According to J. Niehans, the classical emphasis on the labour cost was a
step backward compared to the pre-classical analysis. The classical political economists
shared three major points in their approach to developing a theory of value. First, all
the classical economists thought it necessary to start their investigations of capitalism
with the question of value. Second, all the classical economists searched for value in
the conditions of production. It was in the workshop or the factory, not the marketplace,
that goods acquired their particular values. Third, although they had somewhat different
reasons, all the classical economists subscribed to one form or another of a subsistence
theory of wages. That meant that the cost of labour was itself equal to the value of the
goods and services that a working-class family needed in order to get by.
Smith: Adding-Up of Costs
Adam Smith found value - which he called natural price- by adding the costs of
production. In a society without private ownership of land and which used only the
simplest of tools, labour would make up the entire cost of production: 
If among a nation of hunters, for example, it usually costs twice the labour to kill a
beaver which it does to kill a deer, one beaver should naturally exchange for, or be
worth two deer. It is natural that what is usually the produce of two days' or two hours'
labour, should be worth double of what is usually the produce of one day's or one hour's
labour. 
The Wealth of Nations, Book 1, Chapter 6
But this simple measure of value is not sufficient for the more complex production
processes and property ownership patterns of capitalism. When the worker is hired by a
capitalist, use equipment owned by the capitalist, and works with raw materials purchased
by the capitalist, there will normally be profit: 
In the price of commodities, therefore, the profits of stock [capital] constitute a
component part altogether different from the wages of labour, and regulated by quite
different principles. 
The Wealth of Nations, Book 1, Chapter 6
By quite different principles, Smith means that the worker is paid by the hour of labour
while the capitalist is paid by the amount of capital and the length of time that the
capital is engaged in that production process. 
Whenever a product involves the use of land, there will be a third component included in
its price: 
As soon as the land of any country has all become private property, the landlords, like
all other men, love to reap where they never sowed, and demand a rent even for its
natural produce. The wood of the forest, the grass of the field, and all the natural
fruits of the earth, which, when land was common, cost the labourer only the trouble of
gathering them, come, even to him, to have an additional price fixed upon them. He must
then pay for the licence to gather them; and must give up to the landlord a portion of
what his labour either collects or produces. This portion, or, what comes to the same
thing, the price of this portion, constitutes the rent of land, and in the price of the
greater part of commodities makes a third component part. 
The Wealth of Nations, Book 1, Chapter 6
The real value, then, of any commodity, will be the sum of the labour cost and the profit
plus any rent. Even though the capitalist purchase raw materials as well as labour, the
raw materials - and anything else the capitalist purchases from other capitalists - can
in turn be broken down into labour, profit and rent. 
Adding Up of Costs We can fabricate a simple example along the lines suggested by Smith.
A capitalist in the pig-raising business produces 1,000 pigs per year. Their value can be
determined by adding up the capitalist's normal costs. There are 50 labourers at ?20 per
year each, for a total direct labour cost of ?1,000 per year. Raw materials run ?600 per
year. Replacement of worn out tools and building repair (depreciation) comes to ?50 per
year. This enterprise requires 100 acres of land at ?2 per acre per year, or ?200 per
year in land rent. The capitalist will need to have a total of ?1,500 tied up in the
business. Some of this will represent investment in buildings and tools, but most of it
will be operating capital - workers and suppliers have to be paid before the capitalist
sells the pigs. If the normal profit rate is 10%, our capitalist will need to get ?150
per year as compensation for having ?1,500 tied up in the business. Since the total
costs, including the ?150 of profit, come to ?2,000 per year, the natural price of pigs
will be ?2 per pig. 
I think it is important to note that labour makes up most of the cost. In this example,
direct labour is only half of the total cost. But if we opened the books of the
businesses that supplied the raw materials and replaced the worn out tools we would find
their costs can also be broken down into labour, profit, rent and supplies. Then we could
look into the costs of their suppliers, and so on. About one-third (actually, 32.5%) of
the costs in this example - raw materials and replacing worn out equipment - are subject
to this process. If the costs in these supplier industries are proportional to the costs
in the pig industry, (There is no reason that they should be, but assuming so makes the
arithmetic easier )then half of these supply costs could be attributed to labour, then
half of their supply costs, then half of those firms' supply costs. When we add it all,
we find that labour costs are close to 75% of total costs; considerably higher than the
50% figure that we get by only looking at direct labour costs.
The Value of Labour The next step is to investigate the value of labour itself. According
to Smith, nature sets the minimum wage: 
A man must always live by his work, and his wages must at least be sufficient to maintain
him. They must even upon most occasions be somewhat more; otherwise it would be
impossible for him to bring up a family, and the race of such workmen could not last
beyond the first generation. 
The Wealth of Nations, Book 1, Chapter 8
It is difficult for wages to rise much above this minimum. Smith partially attributes
this to inequality of bargaining power. The power of the worker to withhold his labour is
far weaker than the power of the employer to withhold access to employment: 
A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a
single workman, could generally live a year or two upon the stocks [capital] which they
have already acquired. Many workmen could not subsist a week, few could subsist a month,
and scarce any a year without employment. In the long-run the workman may be as necessary
to his master as his master is to him; but the necessity is not so immediate. 
The Wealth of Nations, Book 1, Chapter 8
This natural inequality was supplemented by legal inequality. When Smith was writing The
Wealth of Nations - and for another fifty years thereafter - British workers were
prohibited from forming unions and bargaining collectively. There were no similar
prohibitions on employers: 
We rarely hear, it has been said, of the combinations of masters, though frequently those
of workmen. But whoever imagines, upon this account, that masters rarely combine, is as
ignorant of the world as of the subject. Masters are always and everywhere in a sort of
tacit, but constant and uniform, combination, not to raise the wages of labour above
their actual rate. To violate this combination is everywhere a most unpopular action, and
a sort of reproach to a master among his neighbors and equals. We seldom, indeed hear of
this combination, because it is the usual, and one may say, the natural state of things
which nobody ever hears of. Masters, too, sometimes enter into particular combinations to
sink the wages of labour even below this rate. 
The Wealth of Nations, Book 1, Chapter 8
Yet there were sometimes forces leading wages upward. Rapid economic growth can create a
shortage of labour. The reinvestment of profits will lead to ever-greater employment.
However, higher wages, by improving living conditions and thus reducing infant and child
mortality, quickly lead to the great multiplication of the species. The race between the
demand for labour and the supply of labour will eventually be won by the supply of labour
and wages will once again fall to the lowest rate, which is consistent with common
humanity. 
Additionally, labour of greater skill or difficulty will itself take on a natural price
in terms of common labour: 
If the one species of labour should be more severe than the other, some allowance will
naturally be made for this superior hardship; and the produce of one hour's labour in the
one way may frequently exchange for that of two hours' labour in the other. 
Or if the one species of labour requires an uncommon degree of dexterity and ingenuity,
the esteem which men have for such talents, will naturally give a value to their produce,
superior to what would be due to the time employed about it. Such talents can seldom be
acquired but in consequence of long application, and the superior value of their produce
may frequently be more than a reasonable compensation for the time and labour which must
be spent in acquiring them. 
The Wealth of Nations, Book 1, Chapter 6
The Role of Value Value, or natural price is a central concept in Smith's work. Temporary
deviations of market price from natural price provide his capitalists with their
production directions. When the market price is above the natural price, profits will
also be above their natural rates. New capital will be drawn to such an industry until
increased production brings prices and profits down to their natural rates. When the
market price is below the natural price, profits will also be below their natural rates.
Capital will leave such an industry until decreased production brings prices and profits
up to their natural rates. 
The natural price, in turn, is determined by the costs of production. The costs of
production can be broken down into labour costs, rent and profit. Labour has its natural
price, which is the cost of the goods and services the workers need in order to work and
raise families. But how is the natural rate of profit determined? Or the natural rate of
rent? Smith has not provided us with either an economic or sociological principle which
would establish either of these rates. He leaves us with an incomplete theory of value. 
Indeed, Smith who borrowed the water / diamond paradox from Law without acknowledging it,
failed to resolve the riddle and the resulting relationship between use-value and
use-exchange, by mistakenly focusing on total rather than marginal utility. 
His confusion is further shown in his experimentation with three value theories. He
provided a labour cost and a labour command theory of value for a primitive society and
finally a cost of production theory for an advanced one. In his Nation of hunters
analogy, Smith's notion of labour cost of value is determined by the quantity of labour
which is measured by wages which is also extended to his labour command theory- Value of
any commodity.......to the person who processes it and who means not to use or consume it
himself, but to exchange it for other commodities, is equal to the quantity of labour
which enables him to purchase or command . However, when he perceived that if wages were
not the same proportionate part of final prices of all goods, he then realised that his
labour theory of value for an advanced economy would not hold. Instead, it appears that
he opted for a cost of production value theory consisting of land, labour and capital
value theory. 
Up to this part, I have tried to give a brief history of Theory of Value before David
ricardo. Now, I will try to explain Ricardian Theory of Value in detail. First of all, I
would like to give some information about David Ricardo.
His Life and Times
David Ricardo was born 4 years before the publication The Wealth of Nations. His world
was the world of the industrial revolution, his England the nexus of world trade and
finance.
He was the third child of a well-to-do family of Sephardic Jews, from whom he was
astringed at the age of 21, on the occasion of his conversion and marriage to Quaker. His
success as a stockbroker allowed him to devote his attention to questions of public
policy, which in turn led to a successful carer as a Member of Parliament. His writings
also led to a correspondence with Thomas Malhus, a correspondence into a personal
friendship, although they disagreed on many of the fundamental economic issues of their
they. He died in 1823 at the age of 51.
Contibutions 
One of Ricardo's fundamental contributions is the comparative advantage theory of trade,
which explains international trade as the result of relative rather than absolute
differences in productivity across countries. This implies that countries can benefit by
specializing in the production of goods that they produce most efficiently, relative to
the rest of world, and trading them for goods that are most efficiently produced
elsewhere in the world. The theory of comparative advantage suggests that trade is
beneficial to all trading partners and provides a formal rationale for free trade policy.
It discredits the merchantilist view of trade, which sees the accumulation of export
surpluses as the means to benefit from rate.
Also of particular interest to industrial economists is the Ricardian notion of rent.
Ricardo developed his theory of rent in his analysis of the returns to agricultural land,
when such land differs in location or degrees of fertility. In the long run, the price of
grain will be just sufficient to cover the cost of production (including a normal rate of
return on investment, the opportunity cost of inducing the farmer to retain in the
market) and transportation to market of the least productive (or most distant) farm the
output of which is needed to balance supply and demand. But if the least advantaged
farmer earns only a normal rate of return, then those who work more fertile farms, or
farms from which the transportation cost is less, will earn an above-normal rate of
return. This excess return, an income that cannot be competed away that is a return a
unique asset(fertility, location) is an example of an economic rent.
Ricardo's Labor Theory of Value
In the preface of The Principles of Political Economy and Taxation (1817), David Ricardo
laid out the goal of his work. He was setting out to uncover the laws that regulate the
distribution of the 
produce of the earth - all that is derived from its surface by the united application of
labour, machinery, and capital ... among [the] three classes of the community, namely,
the proprietor of the land, the owner of the stock or capital necessary for its
cultivation, and the labourers by whose industry it is cultivated. 
The Principles of Political Economy and Taxation [Preface].
The first step of this project was to understand the laws of value. As the heading of
Chapter 1, he gives us the foundation of what came to be called the labor theory of
value: 
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... 
The Principles of Political Economy and Taxation, Chapter 1, Section 1
Ricardo planned to develop a rigorous theory of value. Rather than make his theory fuzzy
enough to encompass the value of all goods, he would exclude goods such as rare statues
and pictures, scarce books and coins, wines of a peculiar quality, which can be made only
from grapes grown on a particular soil, since their value is wholly independent of the
quantity of labour originally necessary to produce them, and varies with the varying
wealth and inclinations of those who are desirous to possess them. 
These commodities, however, form a very small part of the mass of commodities daily
exchanged in the market. 
The Principles of Political Economy and Taxation, Chapter 1, Section 1
This theory of value would be limited to the goods and services that were typical
products of competitive capitalism: 
In speaking, then, of commodities, of their exchangeable value, and of the laws which
regulate their relative prices, we mean always such commodities only as can be increased
in quantity by the exertion of human industry, and on the production of which competition
operates without restraint. 
The Principles of Political Economy and Taxation, Chapter 1, Section 1
Ricardo was much more consistent than Smith. Smith had identified labour as the major
factor responsible for natural price. But Smith's measure of labour itself varied from
chapter to chapter. Sometimes it was the amount of labour needed to produce the product;
sometimes it was the amount of labour that could be hired for an amount of money equal to
the value of the product; sometimes it was the value of the goods and services that the
worker could purchase with his wages. 
A Measure of Value But Ricardo was searching for an invariable measure of value. This is
truly an impossible goal. When the technology of production of a good or service changes,
its value will change. All theories of value are in agreement on this. Even gold and
wheat, two candidates for such a measure that were rejected by Ricardo, will alter in
value as the technology of production changes. The same is true, in a more roundabout
way, of labor itself. If new farming and/or baking technology reduce the value of bread,
then the value of labor will also fall since the worker's capacity to work can be
produced at a lower cost. (The Principles of Political Economy and Taxation, Chapter 1,
Section 1.)
It might be possible, Ricardo thought, to find a measure of value which would not vary as
the distribution of income changed, even thought it would certainly vary with
technological change. Ricardo's project was to discover which economic forces determined
the distribution of income. The best candidate for such a measure was labour. If profits
rose and wages fell, or if profits fell and rents increased, it would still require the
same amount of labour to weave a bolt of cloth or to build a ship. 
The Level of Wages Ricardo's theory of wages was similar to Smith's, but much more
severe. Thomas Malthus, Ricardo's good friend, had published his famous Essay on the
Principle of Population in 1798. While Adam Smith had noted a tendency for population to
increase when wages were high, Ricardo (and Malthus) turned this tendency into a ruthless
certainty: 
The natural price of labour...depends on the price of the food, necessaries, and
conveniences required for the support of the labourer and his family. With a rise in the
price of food and necessaries, the natural price of labour will rise; with the fall in
their price, the natural price of labour will fall. ... 
It is when the market price of labour exceeds its natural price that the condition of the
labourer is flourishing and happy, that he has it in his power to command a greater
proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and
numerous family. When, however, by the encouragement which high wages give to the
increase of population, the number of labourers is increased, wages again fall to their
natural price, and indeed from a reaction sometimes fall below it. 
When the market price of labour is below its natural price, the condition of the
labourers is most wretched: then poverty deprives them of those comforts which custom
renders absolute necessaries. It is only after their privations have reduced their
number, or the demand for labour has increased, that the market price of labour will rise
to its natural price, and that the labourer will have the moderate comforts which the
natural rate of wages will afford. (The Principles of Political Economy and Taxation,
Chapter 5)
The Theory of Rent Agricultural products presented a particular difficulty. Smith's
solution had been to make land rent one of the components of natural price and simply add
it onto labour costs and profits to get value. Ricardo started by examining how
agriculture was different from manufacturing. When the demand for shovels increases,
manufacturers can build more factories. There is no reason that these new factories
cannot be as productive as the existing factories. That is, the amount of labour needed
to produce a shovel will not change when we double or triple shovel production by
building new shovel factories. 
When the factory is a farm, however, we have a different problem. Land varies greatly in
its productive qualities. It is usually the best land that is first drawn into
agricultural production. Therefore, when the demand for wheat increases, it will take
more than the average amount of labour to produce and transport the additional wheat.
Ricardo's example supposes that there are three grades of land. On the best land it costs
?3 to produce 10 bushels of wheat and deliver it to the town market. This cost includes
the necessary amount of profit to get someone to farm the land. On the middle grade of
land it costs ?4 to produce the same amount of wheat and transport it to the town market.
On the poorest land, it costs ?5 to produce and transport 10 bushels of wheat. The
differences in costs reflect differences in the amount of labour required. 
With a small population, the demand for wheat can be met by farming only the best land.
The price of wheat will be ?3 per 10 bushels. But as population grows, some of the middle
grade land will be brought into cultivation. Now the price of wheat will rise to ?4 per
10 bushels. If I own some of the best land and you farm that land, I can charge you a
rent of ?1 per 10 bushels of wheat. If I own some of the middle grade land, I cannot
collect any rent since the cost of production on that land is the same as the price of
the wheat. As population continues to grow, cultivation is extended even to the poorest
land and the price of wheat rises to ?5 per 10 bushels. Now the owners of the best land
will enjoy a rent of ?2 per 10 bushels and the owners of the middle grade land can
collect a rent of ?1 per 10 bushels. 
This rising rent has important implications. For now, we must understand how this theory
of rent fits into Ricardo's labour theory of value. Ricardo was able to show that the
value of agricultural commodities, just like the value of manufactured commodities, is
determined by the amount of labour it takes to produce them. The difference is that, with
agricultural commodities, the value is governed by the amount of labour required under
the most unfavourable circumstances - that is, by the amount of labour needed on the
poorest quality land which the level of demand causes us to bring into production. Taking
issue with Smith, Ricardo argued that rent is not a component part of the price of
commodities. Smith had claimed that high land rents drove up the price of wheat. Ricardo
showed that high wheat prices - which themselves were caused by a growing population -
drove up rent. Rent was the consequence, not the cause, of high food prices. 
A Labor Theory of Value It all fits together into a fairly complete and consistent theory
of value. Value is determined by the amount of labour needed for production, including,
of course, the labour used to produce the raw materials and the 'worn out' part of the
capital equipment. For wheat and similar products, value is determined by the amount of
labour needed for production on the poorest land. Wages are determined by the values of
the goods and services that a working class family needs to survive and reproduce. The
capitalist pays his suppliers, repairs or replaces his worn out equipment, pays the
workers and sells the product for a price determined by the amount of labour it took to
produce it. Whatever is left over is profit. If the price of bread is high, wages will
also be high and there will be little profit, but agricultural landowners will collect
high rents. If the price of bread is low, wages will also be low and there will be high
profits and little rent. Note that profit and rent are incorporated into this value
theory, not added on as a cost as Smith had done. 
There was still one major problem with the labour theory of value. It would only work
well as a theory of natural price if the ratio of labour costs to capital costs were the
same in all industries. Labor could not be an invariant standard of value when some
industries used lots of labour and little capital while others used lots of capital and
little labour, since a change in the distribution of income between wages and profits
would alter costs in different industries by different amounts. Ricardo was still
pondering this problem when he died. Nonetheless, Ricardo's labour theory of value was
something of a sensation. Thirty years after Ricardo's Principles of Political Economy,
John Stuart Mill, in his own Principles of Political Economy (1848) saw little reason to
modify Ricardo's foundation of economics: 
Happily, there is nothing in the laws of Value which remains for the present or any
future writer to clear up; the theory of the subject is complete: the only difficulty to
be overcome is that of so stating it as to solve by anticipation the chief perplexities
which occur in applying it. 
Mill, John Stuart. Principles of Political Economy, Book 3, Chapter 1
Karl Marx's (1818-1883) approach to value was essentially Ricardo's labour theory of
value. According to Marx, the values of All commodities are only definite masses of
congealed labour time. As an advocate of Ricardo's original theory, he also followed and
built on his solutions to the labour value theory's inherent deficiencies. Although Marx
used the classical concepts of value he applied his vast philosophical and sociological
knowledge to reach conclusions in Capital that diverged radically from them. In his
labour theory, he developed his original rate of exploitation (s'=s/v) and its resulting
critique of capitalism-Derriere le phenomene du profit se cache la realite do surtravail.
Like Aristotle, exchange of value or more appropriately exchange of 'just' value had for
Marx, moral and judicial implications as well as economic ones. 
Despite John Stuart Mill's (1806-1873) claim to the continuity of Ricardo's labour theory
of value, his work in retrospect was closer to Marshall and to the approaching
neo-classical school. Mill gave up the classical-Ricardian search for absolute value for
his belief that The value which a commodity will bring in any market is no other than the
value which, in that market, gives a demand just sufficient to carry off the existing
supply. Although lacking the tools of the supply and demand schedules, Mill clearly
recognised the effects of demand on the supply in different time periods of a value
theory. Although he acquired a more advanced comprehension on the subject of value than
his contemporary theorists did, unfortunately it led him to prematurely and
embarrassingly state in 1848 that Happily, there is nothing in the laws of value which
remains for the present or any future writer to clear up; the theory of the subject is
complete. 
Neo-Classical Thought 
Although the origins of modern utility theory can be traced back to Mountifort Longfield
in 1834 at Trinity College Dublin it was William Jevons (1835-1882) with his Theory of
Political Economy and Carl Menger's (1840-1921) Principles of Economics who both
developed the new tool of marginal analysis in 1871 as a means of understanding value.
For the rising neo-classical school in the 1870s, the classical cost of production theory
of value seriously lacked generality - especially in determining value of goods with
inelastic supply curves. Instead, Jevons and Menger separately formulated their marginal
utility theory, in which it was calculated that Value depends entirely on utility. Like
Davanzati in the 16th century, they felt that no matter what costs were incurred in
producing a good, when it arrived on a market its value would depend solely on the
utility the buyer expects to receive. 
Menger used his marginal utility table to explain the old water / diamond paradox. The
value of diamonds was greater than the value of water because it was marginal utility and
not total utility that determines consumer choice and hence value. From this they also
argued that value comes from the future and not past production. Henceforth, the factors
of production are not price determining but price-determined, as Jevons clearly states-
Cost of production determines supply, supply determines final degree of utility, final
degree of utility determines value. Jevons and Menger like their predecessors before,
erred in trying to find a simple one-way, cause and effect relationship between value,
and in their case utility. It took the intellect of Leon Walras and Alfred Marshall to
see that both the cost of production (supply) and utility (demand) were interdependent
and mutually determinant of each other's values.
Leon Walras (1834-1910) also independently discovered the concept of marginal utility
although he went beyond Jevons and Mengers application of it to merely a utility value
theory. He did not see their simple and direct causal link from subjective utility to
value. Instead, he saw a complex interrelated and interactive economic system. In his
Elements of Pure Economics, he created his theoretical model of General Equilibrium as a
means of integrating both the effects of the demand and supply side forces in the whole
economy. This mathematical model of simultaneous equations concluded that In general
equilibrium everything depends upon everything else. 
Meanwhile, Alfred Marshall (1842-1924) was also amalgamating the best of classical
analysis with the new tools of the marginalists in order to explain value in terms of
supply and demand. He acknowledged that the study of any economic concept, like value, is
hindered by the interrelativeness of the economy and varying time effects. As a result,
Marshall who differed from Walras' general schema, instead used a partial equilibrium
framework, in which most variables are kept constant, in order to develop his analysis on
the theory of value. 
Marshall divided his study into four time periods. Firstly, in the market period where
time is so short that supply is fixed, value of a good is determined by its demand.
Secondly, in the short-run period, firms can change their production but cannot vary
their plant size, which allows supply as well as demand to have an effect on value. In
the long-run periods where plant size can be altered, the large effects of the supply
side on value depends on whether the industry of a particular good has constant,
increasing or decreasing costs to scale. Finally, in the secular period in which
technology and population are allowed to vary, the supply side conditions dominate value.

For Marshall a correct understanding of the influence of time and interdependence of
economic variables would resolve the controversy over whether it was the cost of
production or utility which determines value. In general, however he felt that it was
fruitless to argue whether demand or supply determines value as we might as reasonably
dispute whether it is the upper or under blade of a pair of scissors that cuts a piece of
paper, as whether value is governed by utility or costs of production. Any attempt to
find one single cause of value as others had unsuccessfully attempted in the past, were
doomed to failure.