Adam Smith proposed a value known as “natural price” toward the assessment of goods and services valuation concerning labor. The efforts of Adam Smith toward acknowledgment of theory of value is limited to some extent thus incorporates less of the theory of value. However, the proposals of Adam Smith on the theory of value and distribution also require an assessment. This behind this formulation of exchange value issues and national product distribution thus led to proposals and assumptions of classical economist David Ricardo.
According to Smith’s model regarding the theories of value, he suggested that production factors casually exist between various countries. This assumption by Adam Smith does not consider the fact that there might be migration which may occur in the states and also the emergence of companies which operates globally. This leads into the public provident fund in the country not changing at all.
However, there are similarities between Adam Smith’s model and David Ricardo’s theories of value. Both base their facts on simplified assumptions. This is because the rationales incorporated by both theories tend to appear in a stylized factual manner which depicts the essence of the model toward identification of factors which affect an economic system. These might be endogenous factors or exogenous factors in the economic forces. Both theories of value identify the gross domestic product, technological advancement and enhancement of economics set up in a country as factors that lead to the distribution of income in an economic state.
Economist David Ricardo’s model of the theory of value however encountered a problem when analyzing economic phenomena of the theory of value concerning labor. The major problem that it was prices evolution for commodities. Since commodity prices are expressed in terms of monetary units a change in the price of the product reflects into currency variation in the economy.
Adam Smith assumed that the quantity of labor and cooperated in the production of commodities is key to what the determination of exchange value of their products. Additionally, Adam Smith puts it clear that the prices of the merchandise in the market depend on the cost of labor. The rationale behind this is that the amount of the commodity will eventually depend on compensation expenses in labor (Bain 26). However, the entire labor product is not accustomed to the laborer because it belongs to the owner of production processes. Moreover, accruing to both the economists’ model, the value of a commodity produced in the modern society is determined by labor which will depict the exchange value for the product. However, Adam Smith denies the assumption that labor theory of value according to classical economists which state that the cost incurred in labor tend to impact the market value of a product. This is where David Ricardo comes in with his classical labor theory of value.
David Ricardo focuses on the value of a commodity being proportionate to the amount of labor applied in its production. The classical economists suggested that the costs accounted for involves labor used in raw material production and machinery (Zhang 56). Thus holding to the fact that the relative amount of labor is necessary toward quantification of the value of the commodity produced. In this way, Ricardo differentiated the amount of labor used to produce a product from the labor expenses in the production process. Unlike Adam Smith, Ricardo encounters a problem of price evaluation alongside the labor quantification required level for commodity production.
Another significant difference between these two models is that as David Ricardo’s model on the theory of value states that commodity prices are determined by the quantity of labor yet, he found exclusives for which the theory could not support. This is behind the rationale of his dissatisfaction of how the principles he gave the regulated value of commodities whereas Adam Smith suggested that the labor expenses determine the value of a commodity.
Bain, Lee. Statistical analysis of reliability and life-testing models: theory and methods. Routledge, 2017.
Zhang, Wei-Bin. Economic Growth Theory: Capital, Knowledge, and Economic Structures. Routledge, 2018.