Ricardo`s Theory Of Value Essays - Value Theory, Economic Theories

Ricardo`s Theory Of Value 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.