Ascertaining labour’s intricate relationship with other agents within an economic system has been a fundamental question in the evolution of economic thought. The predominance of social division provides the basis for determination of many economic factors. Each economist has theorised the role and relative importance of each economic agent. Since labour is copious, it plays a profound role in theories relating determination of prices and distribution in classical economic literature. In the following essay, we assess the pivotal role of labour in shaping classical economic theories and analyse the bias created under social divisions. Most classical theories are centred around “Labour Theory of Value.” Labour Theory of Value percolates through the classical chain of thought, and since its conception by Adam Smith, has been expounded by each successive economist.
Labour Theory of Value finds its origin in “The Wealth of Nations” by Adam Smith. According to Smith, the worth of any possession is measured ultimately by the amount of labour for which it can be exchanged. The value of any commodity to buyers should be equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. Labour wages are set at a minimal level and this came to be known as the subsistence wage theory. Subsistence theory of wage dictated return to labour. Subsistence wages were fixed since industrialists had the power to manipulate public opinion and had a varying degree of control over the government. A high degree of control over the production system as well as the political system, allows the return to capital to be an exaction from the rightful claim of the worker whose toil establishes the price and to whom the return from the sale of the product is presumably due. Rent to landowners would be the residual prices after wages and profits are paid.
The French philosopher Jean-Jacques Rousseau, in his 1755 essay entitled “Discourse on the Origin of Inequality,” was the first to hypothesise and investigate into the nature and determinants of inequality. He concluded that it is detrimental for the society and the political system to locate the rise of inequality in the creation of property rights. They were the main reason behind such disparities. Unless we get rid of the private property regime, we cannot get rid of inequality. If this is not done, it could lead to civil unrest because no society can live in harmony when inequality exists. We need to have a relatively equitable distribution of income. On the other hand, Malthusian theories stand in stark contrast to these liberal beliefs.
Thomas Robert Malthus published “Essay on the Principle of Population” in 1798. Quintessential Malthusian theories are labour centric. Malthus conveniently justifies the presence of class division through his ‘Inevitable law of nature’, a decree that all societies will be divided into a class of proprietors and a class of labourers. In his “Theory of Population”, labour class is responsible for the growing population and due to their insatiable desire, population increases geometrically. Since productive resources are limited, food can only grow at an arithmetic rate—this mismatch between the two leads to starvation. Thus, starvation is inevitable. His theory further concludes that the fundamental difference between the rich and the poor is the relatively high moral character of the former. He, therefore, suggested certain checks for controlling the increase in population.
He acknowledged and accepted Smith’s Labour Theory of Value but reasoned Theory of Distribution under his rationale. According to Malthus, natural price prevailed in the market-leading to normal returns to all the factors. He argued that all wages, rents, and profits has to be taken as a basis of exchange. Returns to labour were at subsistence level due to population pressures.
Ricardo and Marx are considered the most influential economist of the nineteenth century. Ricardo’s “Principles of Political Economy and Taxation” is an integral book in the area of political economy. According to Ricardo, all commodities derive their exchangeable value from two sources, scarcity and the quantity of labour required to obtain them. Therefore, while labour theory focuses on the social aspects of commodity exchange and production, utility theory focuses on the individual aspects of exchange only. Exchange values depend mainly on relative prices, and across periods, comparative skill and intensity of labour remained nearly stable. So, there was no need to attend the question of skill and wage differential as a determinant of price. To address the question of productivity of capital and natural resources, he argued that these are intermediate products and at every level, it is human endeavour that matters. The prices of the commodities are directly proportional to the labour embodied in them in the production process.
For each level of production, values of natural resources and raw materials can be converted in the form of labour and labour theory of value clearly incorporates these stages of value creation. Even stock could be converted in labour embodied in its production. He measured labour embodied in terms of corn units. Profits were determined by productivity, solely by the productivity of labour and capital on the no rent land. If competition equalised all rates of profit, then it follows that the rate of profit in the manufacturing sector as well in agriculture depended solely on productivity on the no rent land. He accepted Malthus’ theory of the relationship between population growth and wage rates, therefore, supported ‘Iron law of wages”. The labour class, in general, would get only the subsistence wage.
Marx raised the most pertinent question in the Labour Theory of Value. Since most commodities are measured by the amount of labour embodied in it, we need to ask: What is the value of labour? To ascertain the value of labour, estimate the number of labour hours required to produce the amount of output for self-consumption. Since the inception of the production process, labour produced a social surplus for the subsistence of workers, a level deemed by society to be ‘right’ for workers. The number of hours required to produce the share of self-consumption is the equivalent amount of its exchangeable value in the market. This value is termed as “socially necessary amount of labour”. Capitalists take a large proportion of returns since they are the owner of capital (advanced machinery). The least amount of socially necessary amount of labour is the price that prevails in the market.
Throughout this essay, we observed the bearing of class bias and the focal role of labour in the development of economic thought. The abstractions from these classical foundations helped in defining the most critical concept in modern theories, which is productivity. Productivity is essential to the study of many subfields in Economics such as development studies, macroeconomics etc. Moreover, these theories have played a critical role in the evolution and shaping of economic thoughts.
Divyansh Singh Parihar is a second year student of O.P Jindal Global University studying Economics.
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One response to “Labour and its pivotal role in classical economics”
What an amazing and informative article on the Labor Theory of Value presented in the Classical Economics and how Marx based his theory on this crucial concept.
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