Ricardo’s Value Theory, Economic Value Theory Definition

Ricardo's theory of value was developed in response to the Corn Law contro­versy. A number of writers, chiefly Malthus, argued that raising tariffs on the importation of grain would be beneficial to England. Ricardo, however, was in favor of free international trade and against tariffs, which he maintained would be harmful to English economic development. He reasoned that high tariffs would reduce the rate of profits, which in turn would mean a slower rate of capital accumulation. Because the rate of economic growth depended upon the rate of capital accumulation, tariffs would lower the growth rate.

Ricardo found Adam Smith's economic theory unsatisfactory in several ways in dealing with this problem. The cost of production theory of value was being used by protectionists to argue that higher tariffs would not result in lower profits. Ricardo and the protectionists agreed that higher tariffs would result in higher money wages, but a long and bitter debate arose concerning their effect on profits and rent. Both sides agreed that increased tariffs would push down the margin as less fertile lands were utilized and land under cultivation was farmed more intensively. The resulting increase in the costs of producing grain would require an increase in money wages in order for workers to maintain a subsistence standard of livin'g, because the cost of grain was a major part of the workers' food budgets. The protectionists argued, using Smith's cost of production theory of value, that higher money wages would not necessarily reduce profits.

Some protectionists also argued that removing or lowering the tariffs ori grain would produce falling food prices and money wages, followed eventually by a general fall in all prices, which would lead to depression. Ricardo, therefore, wanted to refute the prevailing cost of production theory of value in order to establish the benefits to England of removing the tariffs on grain. He also saw that the most important economic consequence of the Corn Laws was their impact on the distribution of income and that the prevailing economic theory had no satisfactory income distribution theory. Thus, he was led to develop an alternative theory of value.

Most theories of value attempt to explain the forces determining relative prices at a given point in time. However, according to Ricardo, the primary problem for a value theory is to explain the economic forces that cause changes in relative prices over time. Ricardo attacked the question of value in this way because of his interest in the income distribution consequences of the Corn Laws. So he is not concerned with determining why two deer can be exchanged for one beaver at a point in time, but with what forces cause changes in this ratio over time. If, for example, the price of beaver increases so that 3D = IB, there is a problem of interpretation. Which is it correct to say: that the price of beaver increased, or that the price of deer decreased? Both conclusions are correct, but neither tells us as much as an invariable measure of value would. With an invariable measure of value, we could ascertain whether the price of beaver increased because beaver had become more costly to produce or because deer had become less costly to produce. If there were some commodity whose value was invariant over time, then the true causes of changes in relative prices over time could be discovered.

Ricardo recognized that no such commodity existed; but finding this problem challenging, he expended some effort in trying to formulate a measure of absolute value that would be invariant over time. He considered the problem in the first edition of the Principles and discussed it thoroughly in his last paper, "Absolute Value and Exchangeable Value." (Curiously enough, this paper was lost and not rediscovered until 1943. It had passed from James Mill to John Stuart Mill and then to Mill's heirs. It can be found in Volume IV of Ricardo's Works.) But Ricardo was never able to formulate a satisfactory measure of absolute value. We turn, therefore, to Ricardo's primary concern with respect to value: what causes changes in relative prices over time?