The labor theories of value were generated in response to the quest to determine what constitutes the price or value of a commodity, in other words, what renders value to a commodity? Classical theorists like Smith and Ricardo opine that a commodity derives its value from labor that goes into its production. In the labor theory of value, the amount of labor necessary to produce a given commodity was considered the 1“common denominator”. And as an extension of the value theory, labor itself is essentially a commodity. Like all other things, labor is bought and sold (for wages) and has a natural and market price. The natural price of labor is that price which is necessary to enable the laborer, one with another, to subsist and to perpetuate their race without either increase or diminution (iron law of wages).

I will first present Smith’s labor theory of value, followed by Ricardo’s labor theory of value, in essence because it served as the basis of Ricardo’s labor theory of value. In fact Ricardo’s labor theory of value went hand in hand with his critique of Smith’s labor theory.

The labor theory of value was a by-product of Adam

Illustration of Smith’s labor cost theory and cost of production theory:

For example if we take a society in which land and natural resources are abundant and communally owned/ or not owned by anyone, the wood/bark on a tree has no value (either use or exchange) as long as it is on the tree but when a person cuts the wood from the tree and chops it up it acquires value (both use and exchange). Hence it is the labor that gives it the value. This is what Smith means when he says that in “early and rude state of societies” labor is the source of all value. In a modern society however, Smith postulated a different method of measuring value, which includes not just labor but land and capital too. Using the tree example again, the tree is no longer on a communally owned land but belongs to the landlord, hence land figures in the cost of the wood; also laborer who cuts the tree does so with the help of some tools which are purchased/rented (hence invested capital). Consequently, labor, capital and land figure in the value or price if the commodity.

Both the theorist were caught up in the circular reasoning that the natural price of labor depends upon the commodity necessary to sustain them and the natural price of these commodities (food) depended on the wages of the working class.

According to Ricardo although labor is the foundation of the natural price. The ‘‘faculty or difficulty of production’’ also figures in the determination of price. Apart from these, fluctuations of demand and supply affect the market value of a commodity.

8Adam Smith simply equated the amount of labor in a commodity with the amount of commodities (i.e., wages) commanded by the labor for its 'toil and trouble'. The difficulty with this approach lies in the fact that wages vary over time and place, therefore the value of identical commodities would similarly vary. Ricardo recognized this weakness and criticized Smith for failing to note the difference between the value of a commodity determined by labor and the value of labor, which is just another commodity and whose price- i.e. wages is, of course subject to short run market variations.

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