collect a rent of ?1 per 10 bushels. This rising rent has important
implications. For now, we must understand how this theory of rent fits into
Ricardo’s labour theory of value. Ricardo was able to show that the value of
agricultural commodities, just like the value of manufactured commodities, is
determined by the amount of labour it takes to produce them. The difference is
that, with agricultural commodities, the value is governed by the amount of
labour required under the most unfavourable circumstances – that is, by the
amount of labour needed on the poorest quality land which the level of demand
causes us to bring into production. Taking issue with Smith, Ricardo argued that
"rent is not a component part of the price of commodities." Smith had
claimed that high land rents drove up the price of wheat. Ricardo showed that
high wheat prices – which themselves were caused by a growing population – drove
up rent. Rent was the consequence, not the cause, of high food prices. A Labor
Theory of Value It all fits together into a fairly complete and consistent
theory of value. Value is determined by the amount of labour needed for
production, including, of course, the labour used to produce the raw materials
and the ‘worn out’ part of the capital equipment. For wheat and similar
products, value is determined by the amount of labour needed for production on
the poorest land. Wages are determined by the values of the goods and services
that a working class family needs to survive and reproduce. The capitalist pays
his suppliers, repairs or replaces his worn out equipment, pays the workers and
sells the product for a price determined by the amount of labour it took to
produce it. Whatever is left over is profit. If the price of bread is high,
wages will also be high and there will be little profit, but agricultural
landowners will collect high rents. If the price of bread is low, wages will
also be low and there will be high profits and little rent. Note that profit and
rent are incorporated into this value theory, not added on as a cost as Smith
had done. There was still one major problem with the labour theory of value. It
would only work well as a theory of natural price if the ratio of labour costs
to capital costs were the same in all industries. Labor could not be an
invariant standard of value when some industries used lots of labour and little
capital while others used lots of capital and little labour, since a change in
the distribution of income between wages and profits would alter costs in
different industries by different amounts. Ricardo was still pondering this
problem when he died. Nonetheless, Ricardo’s labour theory of value was
something of a sensation. Thirty years after Ricardo’s Principles of Political
Economy, John Stuart Mill, in his own Principles of Political Economy (1848) saw
little reason to modify Ricardo’s foundation of economics: Happily, there is
nothing in the laws of Value which remains for the present or any future writer
to clear up; the theory of the subject is complete: the only difficulty to be
overcome is that of so stating it as to solve by anticipation the chief
perplexities which occur in applying it. Mill, John Stuart. Principles of
Political Economy, Book 3, Chapter 1 Karl Marx’s (1818-1883) approach to value
was essentially Ricardo’s labour theory of value. According to Marx, the values
of "All commodities are only definite masses of congealed labour
time." As an advocate of Ricardo’s original theory, he also followed and
built on his solutions to the labour value theory’s inherent deficiencies.
Although Marx used the classical concepts of value he applied his vast
philosophical and sociological knowledge to reach conclusions in Capital that
diverged radically from them. In his labour theory, he developed his original
rate of exploitation (s’=s/v) and its resulting critique of
capitalism-"Derriere le phenomene du profit se cache la realite do
surtravail." Like Aristotle, exchange of value or more appropriately
exchange of ‘just’ value had for Marx, moral and judicial implications as well
as economic ones. Despite John Stuart Mill’s (1806-1873) claim to the continuity
of Ricardo’s labour theory of value, his work in retrospect was closer to
Marshall and to the approaching neo-classical school. Mill gave up the
classical-Ricardian search for absolute value for his belief that "The
value which a commodity will bring in any market is no other than the value
which, in that market, gives a demand just sufficient to carry off the existing
supply." Although lacking the tools of the supply and demand schedules,
Mill clearly recognised the effects of demand on the supply in different time
periods of a value theory. Although he acquired a more advanced comprehension on
the subject of value than his contemporary theorists did, unfortunately it led
him to prematurely and embarrassingly state in 1848 that "Happily, there is
nothing in the laws of value which remains for the present or any future writer
to clear up; the theory of the subject is complete." Neo-Classical Thought
Although the origins of modern utility theory can be traced back to Mountifort
Longfield in 1834 at Trinity College Dublin it was William Jevons (1835-1882)
with his Theory of Political Economy and Carl Menger’s (1840-1921) Principles of
Economics who both developed the new tool of marginal analysis in 1871 as a
means of understanding value. For the rising neo-classical school in the 1870s,
the classical cost of production theory of value seriously lacked generality -
especially in determining value of goods with inelastic supply curves. Instead,
Jevons and Menger separately formulated their marginal utility theory, in which
it was calculated that "Value depends entirely on utility." Like
Davanzati in the 16th century, they felt that no matter what costs were incurred
in producing a good, when it arrived on a market its value would depend solely
on the utility the buyer expects to receive. Menger used his marginal utility
table to explain the old water / diamond paradox. The value of diamonds was
greater than the value of water because it was marginal utility and not total
utility that determines consumer choice and hence value. From this they also
argued that value comes from the future and not past production. Henceforth, the
factors of production are not price determining but price-determined, as Jevons
clearly states- "Cost of production determines supply, supply determines
final degree of utility, final degree of utility determines value." Jevons
and Menger like their predecessors before, erred in trying to find a simple
one-way, cause and effect relationship between value, and in their case utility.
It took the intellect of Leon Walras and Alfred Marshall to see that both the
cost of production (supply) and utility (demand) were interdependent and
mutually determinant of each other’s values. Leon Walras (1834-1910) also
independently discovered the concept of marginal utility although he went beyond
Jevons and Mengers application of it to merely a utility value theory. He did
not see their simple and direct causal link from subjective utility to value.
Instead, he saw a complex interrelated and interactive economic system. In his
Elements of Pure Economics, he created his theoretical model of General
Equilibrium as a means of integrating both the effects of the demand and supply
side forces in the whole economy. This mathematical model of simultaneous
equations concluded that "In general equilibrium everything depends upon
everything else". Meanwhile, Alfred Marshall (1842-1924) was also
amalgamating the best of classical analysis with the new tools of the
marginalists in order to explain value in terms of supply and demand. He
acknowledged that the study of any economic concept, like value, is hindered by
the interrelativeness of the economy and varying time effects. As a result,
Marshall who differed from Walras’ general schema, instead used a partial
equilibrium framework, in which most variables are kept constant, in order to
develop his analysis on the theory of value. Marshall divided his study into
four time periods. Firstly, in the market period where time is so short that
supply is fixed, value of a good is determined by its demand. Secondly, in the
short-run period, firms can change their production but cannot vary their plant
size, which allows supply as well as demand to have an effect on value. In the
long-run periods where plant size can be altered, the large effects of the
supply side on value depends on whether the industry of a particular good has
constant, increasing or decreasing costs to scale. Finally, in the secular
period in which technology and population are allowed to vary, the supply side
conditions dominate value. For Marshall a correct understanding of the influence
of time and interdependence of economic variables would resolve the controversy
over whether it was the cost of production or utility which determines value. In
general, however he felt that it was fruitless to argue whether demand or supply
determines value as "we might as reasonably dispute whether it is the upper
or under blade of a pair of scissors that cuts a piece of paper, as whether
value is governed by utility or costs of production." Any attempt to find
one single cause of value as others had unsuccessfully attempted in the past,
were doomed to failure.