1: On Value
Ricardo refers to Adam Smith, who discussed value in two dimensions: first, the use-value that is placed upon an object by an individual who seeks to derive some benefit by its consumption; and second, trade-value to an individual who seeks to obtain something in exchange for parting with it.
He goes on to note the tendency for things that have the greatest use-value have the least trade-value and vice-versa, "water and air are abundantly useful ... yet under ordinary circumstances nothing can be obtained in exchange for them." (EN: Clever, but I wonder if that's entirely accurate. It certainly seems to be, the necessities of life being cheap and unnecessary luxuries being costly, but I have the sense this is a casual observation.)
As such, the utility of an object and the benefit derived of it is not a measure of trade-value, though it is considered essential to it. If there were no gratification at all to be taken from a thing, no-one would seek to obtain it, but what makes an item valuable in typical trading conditions is not proportionate to the importance of the need it fills.
As such, Ricardo proposes two alternate sources of exchange value for items: their scarcity and the quantity of labor required to produce them.
Scarcity is most evident in collectibles such as works of art, or crops that can only be grown in certain locations, or any item where there is greater demand for consumption than capacity for production. However, this is less a factor in the trade of everyday commodities, available in quantity for reasonable cost than is the labor to produce them.
Ricardo speaks of labor only, not materials or equipment, and defers again to Smith, whose theory is that that all cost is ultimately labor cost - the price of a nail being representative of the labor to mine the ore, distill the metal, and forge the item; the price of lumber to cost to cut and mill the tree, etc.
He also posits that this goes back to primitive societies: if a hunter can take two deer or four beaver in a day's hunt, then one deer exchanges for two beaver. In much the same way, an item that requires two hours to produce is exchanged for two of whatever it takes merely one hour to produce. As such, labor is the foundation of the value of all things that are produced by human industry.
A sort of aside: where politics enters into the marketplace, with the intent to regulate the trade value of any commodity, it does so in disregard of the labor required to produce that commodity, and generally results in discouraging the production of the item rather than increasing its availability.
From this ewe derive the cost of things based on labor efficiency: if a man is twice as skilled at growing corn, and can produce twice the amount for the same amount of labor, then the product can be traded for half the price, which would lead to the notion that the value of goods in the market reflects the average amount of labor required to produce them, the efficient gaining advantage from their competence and the inefficient suffering the consequences of their own incompetence.
Precious metals, among other goods, defy this relationship: these items are never consumed, in the sense of being destroyed by their use, but are always available for trade. Therefore the discovery of a new mine or increased efficiency in mining and extracting metal from ore has but a minor effect for a short duration, their value being derived from the production of additional metal adds to an existing inventory that is generally far greater than production in the present period.
He also points out some problems of considering this equation when once considers that a market does not exist in isolation. If one country discovers a way to increase the production of a crop, or suffers a decrease in production, it represents only a small proportion of the amount that is available from all other markets, where importation and exportation of goods is unrestricted. As such, there can be a significant increase in efficiency without a proportionate impact on price.
And so, Ricardo considers that Smith's assertion that labor can provide any rule or basis for exchanging one item for another, he does not feel that labor alone is the ultimate and real standard by which the values of items, in all places and all times, can be considered in regard to one another.
It may also be somewhat limiting to restrict examinations to two commodities and consider their exchange in terms of one another. In terms of a market, there are many goods in trade, and we may find that if the price of one has risen against the price of another, it may have risen against several others as well. Failure to consider this may lead us to the wrong conclusion when focusing on two goods to the exclusion of all others.
(EN: Ricardo approaches, but doesn't quite touch upon, the interconnectedness of commodities in the market. Where the cost of cotton rises, it increases the cost of clothing and linen; where the cost of grain rises, it increases the cost of bread and meat; where the cost of iron rises, it increases the cost of nails and kettles; etc.)
He also touches on the widespread effect in the supply of the commodity that is used as money. Where gold becomes easier to produce and les scarce, the prices of all other items seem to rise in terms of the gold for which they are all exchanged. In a like manner, if the amount of labor were suddenly increased, by a sudden influx of immigrant workers, this would appear to decrease the price of all things.
Ultimately, to suggest that something "varies" requires us to assume that something else remains fixed. If we consider corn and gold and labor, and the fluctuations in price among the three, the conclusion at which we would arise would depend as much on which of these items we assumed to have remained stationary.
The same factor affects both wages and prices - in that the agreement of a wage is between employer and employee. If an employer in a generous mood grants his workers ten shillings instead of eight, but does not change the price of his product to do so, then the earning power of the workers has increased without a corresponding increase in the price he demands for his goods. It is only where the profit margin is so thin that the employer will take a loss that the wages and prices must be in lock-step, and there is a great deal of latitude that is entirely arbitrary.
The exchange of labor for labor is not, however, determined entirely by the quantity of labor required to produce a good. There is also the principle that different kinds of labor command different wages - the more skilled the worker, or the more unpleasant the task, the more must be paid to have the work done. Also, the trade value of the good produced impacts the value independent of labor: even if it required the same amount of time to create silk as it does to create linen cloth, the exchange rate would not be 1:1. And further, the impact of imported goods can skew the relationship: where goods from a poorer nation are imported (where prices and wages are lower than the domestic market), this decreases the price of goods in the market (an hour of foreign labor being worth less, in exchange, than an hour of domestic labor).
The requirement of capital - materials and equipment - is also considered in setting the price of a good. To return to the example of the exchange between hunters, the cost of a deer also involves the time required to fashion a weapon and the cost of beaver involves the time required to fashion a trap. This remains true whether the hunter spends only his own labor to fashion a trap, or trades some of his catch to a separate individual whose craft is trap-making. And with this, we add additional factors, such as how effective and durable is one maker's trap versus that of another, and the trap-maker's own labor and variances.
Even in the most simplistic of professions, we can witness that there is a great deal of complexity in calculating the cost of producing a good. Bringing to market a fish requires not only the fisherman's time to catch it, but the time to build his boat, and the building of the boat requires the time to fashion nails, and the time to fashion nails requires the time to mine, smelt, and forge metal. And the baot is made of more than just nails; and it is not merely a boat the fisherman needs, but an array of other equipment, each of which carries with it the labor of its entire supply chain.
The state of society that existed in the author's time is already one of incredible complexity, where something as simple as a pair of stockings requires, through a similar chain of fabrication, dozens or individuals to produce the material included in those stockings, not to mention hundreds of others who produce goods that are not material components of the stockings, but were used along the way. To make a convincing statement about the exchange value of a good based on the cost of labor to create it, in a relatively industrialized economy, requires an equation of the utmost complexity in which, inevitably, much would be omitted.
(EN: I have the sense Ricardo is implying, by means of a wall of details that seem confounding, that labor is not as accurate as we might assume. But I do not believe this is so. Each link in the supply chain considers its own labor as a cost in pricing its goods - the labor for all preceding steps is not explicitly considered, but was passed along in the price of materials. As such, I think it remains true that labor determines the price demanded of a good, but the determination and consideration are not made by any single party.)
Efficiency in the use of labor "never fails to reduce" the relative value of a commodity. If fewer workers can create more product, the manufacturer may enjoy profit by keeping the price at its former level, but will eventually be required by competition in the market to lower his prices to reflect the lower cost of production.
Back to price comparisons: the commodity in a society that serves as money is meant to be stable (though it is not always so), such that the price of one good expressed in monetary terms can be compared to the price of another: rather than stating that a deer is worth two salmon, we can say that deer is worth four pounds and salmon worth two. In addition to convenience to a trader who needs to purchase a basket of different goods, the use of money enables the price of goods to fluctuate with more granularity (a deer may be priced at 4.37 pounds).
If the money commodity were an invariable standard, it could be used to measure the variation in the value of other commodities and could witness, for example, whether an increase in the price for a given good (or the wage for a given kind of labor) varied independently of others in the same market, or if the exchange rate of commodities remained stable in spite of an increase in process of all goods in the market (which more accurately is attributed to the change in value of the money commodity).
Ricardo next considers the durability of equipment used in the production of goods - with quite some meticulous detail - but it comes down to a simple equation: divide the price of the equipment by the number of products made with it to consider the per-product share of the cost of the equipment. That is to say that if a one-dollar axe can cut 20 cords of wood before it breaks or wears out, then the price of each cord of wood must compensate for five cents (1/20) worth of the axe. And where multiple goods are involved, each may depreciate at a different rate: the fisherman's boat outlasts his nets - so a small percentage of the boat's cost and a larger one of the net's cost is to be included in the price he sets for his catch.
Capital is classified as circulating or fixed - the former is rapidly perishable, quickly consumed, and/or frequently reproduced, whereas the latter has a longer duration own ownership. Depending on the nature of the business, it may employ a differing proportion of each: a brewer makes considerable investment in storage and equipment, a cobbler has merely a few tools. It's also observed that turnover of capital is vastly different among industries. A farmer must make a significant investment in planting, but must wait several months for the harvest, whereas a baker can purchase wheat in the morning and sell it as bread the very same day, reclaiming the capital he has spent on materials.
While a producer can forego profit to pay more for labor, there is a point at which an industry cannot absorb an increase in cost without an increase in price. However, the greater the proportion of fixed capital, the less impact a rise in the cost of wages will have on the price of the good. This is also true of any instance of an advance that requires less labor to produce a product, though its effect is not as immediate (EN: overlooking instances in which production is increased and labor decreased by the application of additional equipment).
There's also a bit on the increased amount of markup in order to earn the same return on a given amount of money, though I think it's a matter of perspective to suggest that to earn a return of 10% on capital invested for a year requires a mark-up of 10%, but if it cannot be recovered for two years, it requires a mark-up of 21% (10% per year, plus an additional 1% to make a 10% return on the amount of profit that was frozen for an additional year).
Ricardo considers "wear and tear" to be a component of expense: the labor necessary to keep equipment "in its original state of efficiency" is also a cost that must be covered by the revenue of an operation, and provides a few examples that run the gamut of a perfect machine that needs no maintenance at all to a terrible one which requires more labor to maintain than it saves by its operation.
Machines in particular are considered as an alternate to the labor of men: in order to sell a machine to a manufacturer, the seller must present the buyer with a greater efficiency. That is, if the cost of a machine that lasts for a year is the same as the labor of sufficient men to do the same amount of work during the same amount of time, there is no reason to purchase such a machine. Arguably, such a machine would prevent a rise in costs if the cost of labor were to increase, but there is also the potential for it to be less efficient than promised, or to break down before the expected time.
There is some oblique reference of the benefit of efficiency to the public, though I'm not clear on whether it was the author's intent to indicate that the efficiency of technology is of greater social benefit, by virtue of cheaper goods enjoyed by many, than is the opposition to technology for the sake of protecting the income of labor. This seems implied, but is not overtly stated.
In societies in which machinery and technology are unknown, the commodities produced by equal labor were regarded as nearly of equal value, as has been previously suggested. However, in an industrial economy, the introduction of "expensive and durable instruments" mean that labor is less of a factor in the price of goods - and even commodities produced by the use of equal capital and labor are not equal to one another in market prices.
Also, in an interim state of evolution, a firm that relies more on labor and less on machinery will suffer more greatly when the wage demanded for labor increases and will be less capable of offering lower prices to the market - this favors the continued evolution of industry to producers who make greater use of durable capitals.
To determine which commodities in a market are rising or falling in real value, it would be necessary to have some invariable standard of value against which they could be compared, such that the benchmark would be subject to none of the forces that alter the value of the other commodities. No such thing exists. As such, it is not possible to speak of the value of a given good "without embarrassing myself on every occasion" for the oversight of other factors that may have impacted its value.
Even the monetary unit in which items are priced, while it provides a comparison of value at an instant, is not itself fixed in value because the value of money is based on a commodity of which it is composed or for which it can be redeemed.
(EN: Here, there is some specific dispute of gold as a "standard of value" - and my sense is this passage may be considered an objection to the gold standard for currency, but a standard of value for currency and a fixed value against which all commodities can be compared over time are two very different interpretations of "standard.")
Even the value of a permanent asset, such as land, does not provide a fixed standard: while it is generally not created or diminished, its value is based on the value of the resources upon it (farmable soil, timber, mineral), its location, and other factors.
Money is a variable commodity, and the rise of money-wages is "frequently occasioned" by the fall in the value of the money, and by a rise in the price of commodities (as the money paid for wages must be covered in the revenue from the sale of goods). As such, the increased wages of the worker do not grant him the ability to purchase more goods in the market: the nominal prices go up, but he can still afford just what he had been able to purchase in the past.
Channel switch: the entire product of a market, both in terms of what is contributed to the act of production and how the proceeds of production are divided, can be reduced to the three classes: landlord, capitalist, and laborer - by virtue of the fact that all goods produced are combined of land, capital, and effort.
(EN: My sense is that this notion has echoed throughout the history of economic thought, not always with positive effect - the notion that profit is a "pie" to be divided sets each party to demanding a greater share. It also seems to contradict the assertion that capital is itself the embodiment of labor - a hammer being the product of the labor of blacksmith and carpenter - and that land is little different than any other resource in that it is of little use in its natural state. That stated once, I'll refrain from further contradiction.)
If one breaks down the cost of any product into its three components, it's possible to arrive at a conclusion that the value of a product is divided among the three: 20% to the landlord, 30% to the workers, and 50% to the capitalist. Among different goods, or even amount the same good over time, these values will fluctuate. For example, where a machine purchased to reduce the number of workers by half, then their share of the revenue drops from 30% to 15%, and more is taken either by landlord or capitalist. Or if labor remained the same but the wages of workers were increased by half, there would be an increase in revenue to the laborers from 30% to 45% and the additional amount deducted from the share of the landlord or capitalist. Viewed in that light, one can assert that the price of labor is higher in some markets, or at certain times, than it is in others.
The use of ratios in this consideration avoids distraction by the rising cost of things in nominal money. If a laborer is paid two coins for his contribution to a good that sells for five, his welfare is not improved by increasing his pay to four coins and selling the product for ten, and neither is his employer's cost of capital, though the nominal price of both has doubled.
For there to be any real change in the cost of labor or capital, there must be some change in the production, such that a greater quantity of produce results from the same amount of capital, or the amount of produce remains steady while the amount of input is decreased.