Before Marx: David Ricardo
David Ricardo, who died 200 years ago this month, was after Marx the person who contributed most in the 19th century towards an understanding of how the capitalist economic system works. Today he is remembered in academic economics only for his theory of comparative advantage in international trade (that a country should not necessarily produce for export what it can produce the cheapest but should concentrate on what it can produce cheaper than others). Socialists remember him for his class analysis of the capitalist economy and for formulating the labour theory of value in clear terms.
The 1817 Preface to his On the Principles of Political Economy and Taxation begins:
‘The produce of the earth — all that is derived from its surface by the united application of labour, machinery, and capital, is divided among 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’.
This three-class division had already been used by Adam Smith and was adopted by Marx in Capital. It was accepted by nearly all those analysing the capitalist system, whether for or against it, up until the end of the 19th century. Academic economics then abandoned both it and the labour theory of value, and for the same reason — the anti-capitalist interpretation given to them by Marx and others.
Ricardo’s use of the word ‘cultivate’ brings out how important a role agriculture played in the economy at that time. It was also important for politics in Britain, with the main struggle in the 19th century being between the representatives of the ‘proprietors of land’ and the ‘owners of stock or capital’. Ricardo was an open supporter of the latter and his economic theory underpinned his politics by showing that rent was an unearned income that impeded capital accumulation. He was himself a capitalist (a financial capitalist rather than a factory owner) and a Whig MP.
By the end of the century the three-class division had become outdated, with the economic and political victory of the ‘owners of capital’ and the merger of the landowners into the capitalist class. Since then there have been only two classes in the capitalist economy — the owning class and the working class.
Labour theory of value
The labour theory of value states, basically, that the exchange-value of a commodity depends on the amount of labour required to produce it. As Ricardo put it, in the opening lines of his book:
‘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…’
He went on to deal with various objections to this view and answered them in a way which socialists still do.
To have an exchange value a commodity must be useful:
‘Utility then is not the measure of exchangeable value, although it is absolutely essential to it. If a commodity were in no way useful — in other words, if it could in no way contribute to our gratification, — it would be destitute of exchangeable value, however scarce it might be, or whatever quantity of labour might be necessary to procure it.’
The theory did not apply to such items for sale as ‘rare statues and pictures’ – since they were unique and could not be reproduced, their exchange-value depended entirely on the demand for them. The theory applied only to commodities that can be reproduced:
‘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’.
It wasn’t just the labour applied at the last stage of production that counted, but also the labour applied in the early stages of their production. So it was the total labour employed in producing a commodity from start to finish including the labour involved in transporting it to the place of sale:
‘Commodities vary in value conformably with this principle: in estimating the exchangeable value of stockings, for example, we shall find that their value, comparatively with other things, depends on the total quantity of labour necessary to manufacture them, and bring them to market’.
Ricardo then went on to spell this out in detail:
‘First, there is the labour necessary to cultivate the land on which the raw cotton is grown; secondly, the labour of conveying the cotton to the country where the stockings are to be manufactured, which includes a portion of the labour bestowed in building the ship in which it is conveyed, and which is charged in the freight of the goods; thirdly, the labour of the spinner and weaver; fourthly, a portion of the labour of the engineer, smith, and carpenter, who erected the buildings and machinery, by the help of which they are made; fifthly, the labour of the retail dealer, and of many others, whom it is unnecessary further to particularize. The aggregate sum of these various kinds of labour, determines the quantity of other things for which these stockings will exchange, while the same consideration of the various quantities of labour which have been bestowed on those other things, will equally govern the portion of them which will be given for the stockings’.
A fall in the amount of labour required at any of these stages would result in a fall in the exchange value of the final product. On the other hand, a fall at the last stage, because it contributes only a part of total value, would not mean an equivalent fall in the product’s value, a point often forgotten when it comes to calculating productivity and which is why an increase in this is not as much as sometimes assumed.
There were inconsistencies. One was over the ‘value of labour’ — what determined wages: how come that there was a difference between what labour produced and what it was paid? Some in the 1820s and 1830s argued that the monopoly of instruments of labour by the ‘owners of stock or capital’ and the competition between workers for jobs meant that workers were not paid ‘the full product of their labour’ and that the source of profits was the ‘unpaid labour’ of the workers. They were later called the ‘Ricardian Socialists’ though this was not what they called themselves.
In his economic writings up until the mid-1850s Marx could be classified as one of these. He, too, saw competition between workers as resulting in them being paid less than the value of what they produced. It was only when he began to study economics more thoroughly in the library of the British Museum in the 1850s that he came up with the solution: what the workers were paid for was the value of their capacity to work (their ‘labour power’) which was different from and less than the value of their labour (what they produced). Marx called this difference ‘surplus value’. This was the same as ‘unpaid labour’, a term still in use inherited from pre-Marxian working-class economics but which must not be understood as saying that workers are not paid the full value of their labour power; they generally are.
Falling rate of profits
There was another question that Ricardo discussed and that Marx was also led into discussing. Ricardo’s chapter ‘On Profits’ is devoted to arguing that there is a ‘natural tendency’ for there to be ‘a fall in the general rate of profits’. He saw this as being the result of diminishing returns from agriculture which would require more labour to be devoted to producing what workers needed to consume to be able to work properly; so wages would rise at the expense of profits. Not only that but the rent paid by the ‘owners of stock’ to those who owned the land they farmed or on which their factory stood would go up as more and more land had to be brought into cultivation to provide food for workers’ consumption.
The general assumption of post-Ricardo economists was that the rate of profit would tend to fall. Marx took up the problem and sought to explain any such tendency from factors internal to the workings of capitalism rather than something external such as diminishing returns from agriculture. He explained it as resulting from a larger and larger proportion of capital consisting of buildings, machinery and plant compared with that used to employ productive workers as only the latter produced the new value, a part of which was the source of profits.
Because Marx devoted so much space to correcting Ricardo on this the impression has been created that Marx saw this tendency as having an actual long-run effect on capital accumulation. Some students of Marxian economics have been so bold as to argue that it would lead to the collapse of capitalism as, at some point, the rate of profit would fall so low that capital accumulation would stop. This was not Marx’s view. He did see a temporary fall in the rate of profit as playing an important role in capitalism’s boom/slump cycle but this was caused by other factors (over-investment in a boom leading to overproduction).