A Comparison of Marx's versus Ricardo's Labor Theory of Value

There are both similarities and differences between David Ricardo's and Karl Marx's perspectives of the labor theory of value. First we will review Ricardo, and then we will contrast it to Marx.

As you recall from earlier discussion, Ricardo stated that prices = wages + profit (rent zero) because wages and profits determined prices while prices determined rent.

Rent was pushed to the margin and was zero for the least fertile parcel of land. For Ricardo, labor embodied in commodities was the primary determinant of prices, and prices were equal to labor embodied (value) only when capital to labor ratios were the same across industries. In situations where K7L (i.e. capital to labor) ratios differed, differences were of secondary importance or insignificant, and prices equaled value anyway if one were to use a socially average composition of K/L (c/v) with an invariant standard of measurement. Ricardo used this "modifying principle" to explain actual deviations from proportionality between price and labor time (value).

In contrast, Marx stated the prices of production (i.e. c + v + s) were equal to dead labor or fixed capital plus living labor or variable capital plus surplus value or labor. One thing unique to Marx's LTV is that he used only the simplest, pure LTV to explain the nature and origins of profit. Rather than differentiate between the various qualities or types of labor, Marx used "abstract" labor or socially average necessary labor and reduced all skilled labor down to a simple multiple of unskilled labor (homogeneous labor). Marx further suggested that prices of production would eventually equate with the natural market equilibrium prices because competition would equalize profits (i.e. a redistribution of surplus values would occur).

Ricardo's theory of profit was based on his corn models where the profit rate was equal to net product (NP) or total profit (which included both wages and profit but excluded rent) divided by wages (X') that were kept at the subsistence level; r = f(x)/X (marginal production function divided by subsistence wage or the total capital advanced). Here, diminishing returns to agriculture within a country would cause subsistence wages to rise since rent would increase. In turn, this would lead to a falling rate of profit since profits would be squeezed by rising rents (because rents caused the subsistence wage to rise). Ricardo demonstrated that trade or imports of goods included in the subsistence wage basket would compensate for a fall in the rate of profit in the short term. Furthermore, Ricardo held that improvements in technology or increases in f (x) the production function could also keep the rate of profit from falling in the long-run.

In contrast, Marx "stated that profit rate could be expressed by the equation: r = s/v/(c/v + 1). As capitalism expanded and accumulation of capital occurred, the organic composition (i.e. c/v) would increase due to putting more machinery into operation. This would cause a fall in the rate of profit unless offset by a rise in surplus value caused by either exploitation of labor, or decreased wages from trade, or from cheapening of capital. For Marx, the rate of profit decreased over time as the organic composition (c/v) increased at a rate faster than the rate of surplus value.