Value and Distribution in Price of Production Framework and Labor Value Framework Essay Example

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7Value and Distribution

Value and Distribution in Price of Production Framework and Labor Value Framework

Value and Distribution in Price of Production Framework and Labor Value Framework

Classical economics is one of the earliest schools of economic thought. The main proponents of this school of thought include Adam smith, David Ricardo, Karl Marx, and Robert Malthus. The classical economists advanced many theories, some of which are still relevant in modern day society. These theories focused on issues affecting the economy and the society at large such as wage, production, labor, and money (Books Llc, 2010). The theories thus advanced include the labor theory of value or the value theory, production theories, the monetary theory and the theories of growth and development.

Discussion

The classical economics contains mostly the theory of price of production and the value theory. Ricardo, in his cost of production theory of value, argues that the price of a commodity is determined by the summation of all the costs of the various inputs or factors that were used in the production of that commodity. At that time, land, labor and capital were the principle factors of production. Therefore, the price of this commodity would be equal to the total costs that went into its production (Heinz & Salvadori, 1995). The value theory, on the other hand, postulates that the true or intrinsic value of an object is embedded in the amount of labor that is used in its production. These two theories are thus the fundamentals of the price of production framework and the labor value framework. To understand and show how the relation between value and distribution operates in both the price of production framework and in the labor value framework, it is important that we first understand the terms value and distribution and thus establish their relation.

In classical economics, value is equal to price and thus theory of value is also referred to as the theory of price. Value has been divided into two main categories namely market or actual value and natural or normal value or price. Market value, according to Heinz and Salvadori, refer to all kind of influence many of an accidental nature and temporary nature whereas normal value was seen as those forces which were persistent, non accidental and non temporary which govern the economic forces (Bouare, 2009). By this they meant that the market price is exogenous whereas the normal price can be determined by the costs of such factors of production as land and labor. Adam smith argued that the natural price is a summation of wage rates paid to laborers, profits and rent appropriated by the land owner. According to the classical theorists, the market value is seemed to approach the natural value.

Distribution on the other hand can be understood as how this value in a commodity or product is eventually shared out in the economy or society. Distribution may also mean how income earned from the production process is shared out. In classical economics, society is divided into three main classes namely the laborers or workers, the capitalists and the landlords also known as the landowners. The workers supplied their labor to earn a wage while the capitalists were the owners of the means of production such as machinery and the industries. Landowners, on the other hand, owned the tracts of land on which capitalist’s premises were located (King, 2005). Distribution is therefore concerned with how the final product which has in it the value (total costs of production) is shared out between these three different classes in society. The notion that the value in the end product created out of a production process involving the worker, the capitalist and the landowner is eventually shared out between them depicts clearly the strong relation that exists between value and relation. However, they are linked by the concept of markets (Hoppe, 2009).

Adam smith advanced the idea of free markets in his concept of laissez faire and like other classical theorists, believed that markets can actually regulate themselves. They thus called for minimum or no government intervention. Markets act as channels through which the product with the value embedded in it is passed from its producer s to its consumers thus acting as the link between value and distribution. For instance, workers in cotton ginnery will put their labor efforts into the production of the cotton cloth and are paid a wage. The owner of the ginnery earns a profit from selling the cloth in the market while the landowner collects rent from the ginnery owner. However, the value in the cloth is eventually shared out as each of the three, now acting as a consumer, has to purchase the cloth as a basic need (Dussel, 2002).

The concepts of value and distribution play a key role in both the price of production framework and in the labor value framework. In the price of production framework, the price of a commodity is determined by the total summation of the costs of the factors that go into the production of the commodity. These factor inputs are land, labor and capital. The costs to these factors are rent, wages and interest respectively. Taxation is also incorporated as part of the cost that goes into production. The profit that is appropriated by the capitalist is also considered and thus the price of the final product is equal to the sum total of production and is seen as that which just covers the cost incurred by the producer. In this framework, the concept of value comes in. In determining the value or the price of the produced item, remuneration for each of the factors of production has to be taken into account. It is these remunerations (wages, profit, rent and interest) that enter into the value of the end product and hence its price in the market. These determinants dictate the price of the product in the normal price sense (Sowell, 2007).

Distribution in the price of production framework is present in the fact that value or price obtained from the production has and is eventually shared out between the different classes in society. In the markets, the forces of demand and supply will affect the price of the product and hence how it is distributed (O’Brien, 2004). Those with a higher purchasing power will affect the share of those with a lower power. The relationship between prices, also known as the prices of production and distribution is thus clearly shown. The labor value framework has its fundamentals in the value theory or in labor theory of value. The labor theory of value states that the real value of a commodity or product is equal to the amount of labor that was used in the production of the product. For instance, the true value of a table is equal to the labor effort that the carpenter put in to make the table. Different scholars and theorists, mostly from the classical school of thought, have advanced different views about the labor theory of value.

, 2007). He furthered his argument in the labor theory of value by stating that those commodities with a greater value in use command little value in exchange citing the example of water whereas those with a greater value in exchange have a lesser value in use. Karl Marx argued that the value of a commodity is the amount of the socially accepted labor embodied in the commodity. By this he meant that the labor hours put into the production of the commodity should be within what the society considered as acceptable. According to Ricardo, the value of a commodity should be equal to the amount of labor required to produce it if the labor theory of value has to hold (Bowley, 2003).Gozzi, & Freni, Gehrke, Salvadori Smith, in his Wealth of Nations states that the real price of everything is the toil and trouble of acquiring it. He further categorized value as value in exchange and as value in use. Value in use was used to denote the utility or how useful the commodity is whereas value in exchange he explained as the relative proportion with which a commodity exchanges for another (Kurz,

All theorists seem to arrive to one conclusion that the value of a commodity is proportional to the amount of labor that is used in its production or that embodied in the commodity. Having explained the labor theory of value, it is imperative to now show how the concepts of value and distribution fit into the labor value framework. Smith’s argument which divides value in use and value in exchange clearly brings out this. A commodity that can be exchanged possesses both of these two values. In distribution, the argument is how the value embodied in a commodity is to be shared out between the different classes of society. Therefore, if a commodity has these two values, then its value can actually be shared out hence distribution.

Conclusion

In summary, the price of production framework can be explained by the cost of production theory of value as explained by Ricardo. According to the theory, the price of a commodity is determined by the cost of the factors of production that go into its production. These factors are labor, capital, and land. The remuneration of labor, capital and land are wages, interests and rent respectively. These costs should be equal or proportional to the price of the end product. The relation between value and distribution is seen in the sense that the value in a commodity has to be shared out between the different societal classes namely workers, land owners and the capitalists. This is the essence of distribution as seen by the classical theorist. The labor theory of value explains the labor value framework. The theory suggests that the value of any commodity is equal to the amount of labor that is used in producing that commodity.

References

Books Llc., 2010. Classical Economics: Labor Theory of Value, Say’s Law, Primitive Accumulation of Capital, under consumption, Treasury View, Wage-Fund Doctrine.
New York: General Books LLC.

Bouare, O., 2009.An evaluation of David Ricardo’s theory of comparative costs: direct and indirect critiques.
Journal of Economic Development, 34 (1), 99-126.

Bowley, M., 2003. Nassau Senior and Classical Economics.
London: Routledge.

Dussel, E., 2002. ”The four drafts of “Capital. Rethinking Marxism,
13 (1), 10.

Heinz, K., & Salvadori, N., 1995. Theory of production: A long- period analysis. Cambridge: Cambridge University Press.

Hoppe, H. H., (2009, January 30). The Misesian Case against Keynes.
Mises Daily (online). Available from .http://mises.org/daily/2492

King, J. E., 2005.Three Arguments for Pluralism in Economics.Post-autistic economics review, 30 (Online). Available from http://www.paecon.net/PAEReview/issue23/King23.htm.

Kurz, H. D.,
, F., 2007. Gozzi, G., & Freni, C., Gehrke, N., SalvadoriInterpreting classical economics: studies in long-period analysis. London: Routledge.

O’Brien, D. P., 2004.
The classical economists revisited.
Princeton: Princeton University Press.

Sowell, T., 2007.
On Classical Economics.
Connecticut: Yale University Press.