Labor Theory of Value - Essay Example

ffort to transform the product from start to completion. Ricardo here was very concerned about the possible difference between the natural price of labor and the market price of labor. He believed that in a market economy, even if natural price, for example, exceeds the market price, then the equilibrium will move due to the change in demand and supply market forces and therefore the natural and market price will be equal eventually. Ricardo believed that this theory is a correction of the mistakes done by Adam Smith while determining the value of products.

Adam Smith believed that the value of a commodity is determined by the total of the essential and necessary payments to labor, capital and land. Smith had the idea that it was necessary to take all of the factors into account and only then will the total costs per unit can be calculated which will determine the value of the product. Contrary to Adam Smith’s theory, Ricardo believed that the indirect costs of labor should also be accounted in the determination process of value. By indirect costs, Ricardo meant that even the labor costs of production or extraction of raw materials and machinery should be accounted for in this process.

Similarly, even the labor costs of development of land to make it suitable for use should be considered if the true value of a product is to be determined. David Ricardo believed that labor is the sole source of value addition to a product or service, and therefore all other factors and costs are either not necessary to add or are themselves dependent upon the value of the product to be calculated. His emphasis on the labor to be the sole and prominent input can also be realized on the fact that his theory of competitive advantage is based on the assumption that only labor exists as the factor of production.

Since the proposal of this theory from David Ricardo, several economists have passed on their opinions over the credibility of the labor theory of value. Some economists have proposed slight adjustments to this theory by adding up some new elements in the determination of the true value which were ignored by Ricardo, but they have regarded this theory as a decent theory. On the other hand, several economists have heavily criticized the labor value of theory believing that the theory fails to address the issues of the contemporary world and hence it is in no way a practical theory.

Limitations Some economists have argued that only the involvement of labor costs as the determinant of value of products and services is not good enough and that several dynamic aspects have been ignored. The first argument presented by the economists and critics is that some production methods are capital intensive and therefore a majority of costs and value is added by the work done by the machinery. These costs cannot be left out and therefore this proves to be ignorance on part of Ricardo.

Even if the labor costs of manufacturing that machinery are taken into account, even then the value of the firm can