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Tuesday, November 15, 2011

RICARDO'S PRINCIPLES A MINI-TUTORIAL PART FIVE

You will recall that Adam Smith's attempt at a labor theory of natural price immediately foundered on the shoals of "accumulations of stock." In modern terms, his simple theory was unable to handle differences in capital intensity among the several sectors of the economy. Ricardo makes a significant theoretical advance in the treatment of this problem with a brilliant conceptual tour de force: embodied labor.



Before I explain this lovely idea, let me alert those of you who may actually be reading the Principles with this tutorial to the fact that Ricardo's exposition of the concept of embodied labor gets all tangled up with a quite separate issue -- the search for what the classical political economists called "an invariant standard of value." As Ricardo says, "Two commodities vary in relative value, and we wish to know in which the variation has really taken place." Both Smith and Ricardo thought that in the absence of some commodity whose value never varies, and which could therefore be used as the standard against which the value of all other commodities is measured, we would never be able to answer this question. This is actually something of a red herring, although it led Ricardo, as we shall see in a bit, into some very interesting theoretical territory.



How do we deal with the fact that the trap used by the beaver hunter may require less labor to make than the bow and arrow used by the deer hunter [to recur to Smith's famous little example]? Ricardo replies: when the maker of bows and arrows expends her labor on the making of a bow and arrows, that labor is, as it were, embodied in the bow and arrows. It is carried along [so to speak] when the hunter buys the bow and arrows from the bow and arrow maker [or trades her some deer for the bow and arrow, which from the point of view of the classical Political Economists is the same thing.] As the hunter uses the bow and arrows, bits of that embodied labor are transferred from them to the deer that are killed with their aid. Thus, the killing of the deer has actually required more than just the labor expended in hunting them. It has also required some portion of the labor embodied in the tools of the kill. The same is true of the traps used by the beaver hunter. When the two hunters meet to bargain, since they are rational [even if they are only wearing beaver skins and eating venison], they take into account the full quanta of labor embodied in the products they are offering for trade. Now, this notion of "bits of embodied labor being passed along" is of course a faŅ«on de parler, a convenient conceptual fiction. With modern mathematical techniques, it is easy enough to express the entire theoretical story without reference to fantastical imperceptible bits of labor. All one need do is set up and solve a system of simultaneous linear equations, or, what is the same thing, invert a square matrix of unit input coefficients. [Never mind.] Ricardo, despite not having those mathematical tools at his disposal, had the genius to intuit the formally correct solution to the problem.



There is, as he quite well realized, much more to the story than this, for the bow maker, when making the bow, uses knives and saws and hatchets and sandpaper and glue and many other tools and materials, each of which is the product of someone's labor in a previous period of time. And of course each of those inputs into production, as we call them, must be thought of as embodying some quantum of labor which is passed along in the production process until the tools wear out or the materials are used up, at which point we say that all of the embodied labor has been transferred and is no longer present them. [Talk about your miracles of transubstantiation! Marx, as I observed in the Weber tutorial, had a field day with the notion of embodied labor. For a full literary, philosophical, ideological, and metaphysical analysis of all of this, see my little book, Moneybags Must Be So Lucky.]



It should be obvious that we can repeat this story at each previous stage in the production process, for the tools used by the bow maker were themselves produced with the aid of tools and materials produced in an even earlier period. It takes very little imagination to recognize that the accumulated bits of labor embodied in some present-day commodity form an infinite series. It should also be clear, although perhaps not exactly obvious, that as the series goes on, extending farther and farther back in time, the bits of embodied labor being carried along become smaller and smaller. Does the sum of this infinite series of bits of embodied labor converge on some finite quantity? Indeed it does, although I do not think Ricardo ever framed the question to himself in quite this fashion. [If you are seriously interested in formal proofs of all the things I am saying in this discursive and casual way, you can consult the Appendix of my book Understanding Marx.]



So, Ricardo's solution of Smith's conundrum was to revise the theory Smith put forward. The new Ricardian Labor Theory of Value asserts that commodities exchange in the market in proportion to the quantities of labor directly and indirectly required for their production, where the quantities "indirectly required" are what we have been calling the bits of embodied labor transmitted from the inputs into the production of the commodities.



According to Ricardo, we are to understand each commodity as requiring, or embodying, some quantum of labor directly applied to it in the present period of production, and assorted quanta of labor indirectly required and transferred to it in the production process from the tools and materials employed. The sum of those various quanta is then the real value of the commodity, and in a fully competitive capitalist market exhibiting the behavioral and knowledge conditions discussed above, commodities will exchange with one another in proportion to the quanta of direct and indirect labor required for their production. This is the mature form of David Ricardo's Labor Theory of Value or Natural Price.



Alas, no sooner had Ricardo enunciated his new theory than he realized that it was not universally true. The problem was this: In some production processes, there is a very rapid turnover on the capitalist's investment. If his factory is producing woolen thread, let us suppose [I say "his" because at the time that Ricardo was writing, virtually all English capitalists were men], there is almost no gap at all between the time when the raw wool is brought to the factory and spun into skeins of thread and the time when the finished thread can be put on the market so that the capitalist can recoup his investment [suitably augmented by profit, of course] and start over again. But a maker of carriages may find that from raw materials to finished carriage is a matter of weeks, or even a month. Even though the amounts of labor directly and indirectly required in the fashioning of one carriage and some quantum of thread are the same, the carriage and that quantum of thread will not exchange equally for one another, for the carriage maker must be compensated for the time during which his capital is tied up in production. Otherwise, the thread merchant will make a greater return on his capital [for it will turn over one hundred times a year rather than twelve], and the workings of the market will force an adjustment in the relative price of carriages and thread. Once those market adjustments have played out, we will find that commodities containing equal amounts of labor directly and indirectly required for their production will not in general exchange as equals in the market.



This is a genuine theoretical difficulty, and Ricardo spent the last few years of his life, after the publication of the first edition of the Principles, unsuccessfully searching for a solution.


The next major theoretical advance in classical Political Economy did not take place for another half century. It was only with the publication of volume one of Karl Marx's hauptwerk Das Kapital in 1867 that a theoretically interesting effort was made to solve the problem left unresolved by Ricardo's Principles. But that is a story I have already told in my tutorial on The Thought of Karl Marx. Those who are interested will find it at box.net, accessible via the link at the top of this blog.

2 comments:

Andrew Lionel Blais said...

Does manufactured desire not play any role in the determination of natural prices? Suppose that Diana convinces Orion that he simply has to have deer. Indeed, suppose that the constructed desire is so intense that he is willing to trade ten beavers for half a deer. What then are we to think about the "natural" price towards which actual prices are supposed to gravitate?

Robert Paul Wolff said...

That is a very large question totally outside the purview of the classical Political Economists. After I am done with this mini-tutorial, if you remind me I will say something about it. The technical term for this is whether demand is endogenously or exogenously determined. The math gets very hairy if you decide that it is endogenously determkined [which, it should be pretty obvious, it is at least to some extent.] There is a very large literature on this.