University of Oxford

Ricardo's Theory

Question:

Ricardo claimed that differing capital-labour ratios in the production of commodities considerably modified his principle that their value is determined by `the quantity of labour bestowed in production. ` Is the principle modified, or destroyed?

Introduction:

David Ricardo formulated the theory of comparative advantage in which he considered labour as the only factor of production, the amount of labour used in the production process determines the value of the product, he considered wine and cloth which were products produced by both England and Portugal, however Portugal had comparative advantage in both the production of wine and cloth over England.

The ratios of capital and labour used in the production process does not destroy Ricardo’s principle that labour determines the value of final goods, it only modifies this principle because the capital labour ration used in the production process means the method of production whether a capital intensive method of production or a labour intensive method of production, the method used in production depends on the availability and cost of the factors and also the type of goods to be produced.

Capital and labour determination of final value:

The concept that differing capital and labour ratios simply modifies his theory that the value of goods is determined by the amount of labour involved in the production of that good, one reason why this concept only modifies his theory is because the theory of comparative advantage is based on the assumption that we assume that there exist only one factor of production, however many scholars have criticised this as a drastic assumption.

Other goods require more labour and they are termed as labour intensive goods and an example of this is agricultural products, in his theory he considered goods that were at that time labour intensive goods and the method used by both England and Portugal was labour intensive methods of production.

The cost of both capital and labour therefore determines the final value of the products produced, different goods however require different quantities and different combinations of both factors and therefore this leads to differing final value of different products.

Therefore the principle that differing capital labour ratios only modifies Ricardo’s theory of labour determination of value, this theory has been criticised for considering only one factor of production which is labour but if we considered capital as the only factor that determines the value of goods than the theory would still apply and be relevant also if we considered both capital and labour our theory will still apply that factors of production used in the production process determine the final value of goods produced.

Conclusion:

Both capital and labour will determine the final value of goods produced, different goods have different ratios combinations of both capital and labour used and for this reason this concept only modifies Ricardo’s principle, we will also have to consider that Ricardo set his theory with the assumption that there exist only one factor of production which is labour, many theories that have come up after Ricardo’s principle have based their theories on his theory and if we are to consider both factors of production we will still come up with the same outcome that Ricardo proved.

References:

Hadjimichalakis M. (1982) Modern Economics, Prentice Hall Publishers, New Jersey

H. Stratton (1999) Economics: A New Introduction, Pluto Press, USA

Martin U. (1976) Agricultural Production Economics and Resources Used, Oxford University Press, Oxford

P. Samuelson (1964) Economics, McGraw-Hill publishers, USA

Thomas A. Boylan and Paschal Francis (1995) Beyond Rhetoric and Realism in Economics: Towards a reformulation of economic methodology, Rout ledge, UK

S Good all and Ian Livingstone (1970) Economics and Development: an introduction, Oxford University Press, Oxford

Follow us