According to mercantilists there are two types of value,viz,

1. Intrinsic value and

2. Extrinsic value.

Former is the power of the commodity to satisfy human wants(in other words it depends upon ‘utility’ of a commodity).By extrinsic value,the mercantilists mean only the cost of production.William Petty clearly mentioned that value depended on the expenses of production.According to him,market value was extrinsic value of a commodity which fluctuated according to a rise or fall in the supply and demand.Locke indicated the important of labor and its contribution towards the determination of value. He was the for runner of the Labor Theory of Value which was developed later. In two treaties concerning government (1690)he continued to use-value


Physiocrats had taken little interest in its theory of value. According to Turgot value depend upon utility. But they didn’t regard value inherent in commodities,they also differentiated value in use and value in exchange. But they treated price and value as one and the same thing. Value according to physiocrats was not fixed but changed from time to time depending upon demand. Any how the theory of value was not much important part of the physiocratic school.


The body of doctrines which tells Sway in England for nearly hundred years after the doctrine of physiocracy is named as classicism.These doctrines are pre founded by Adam Smith and his followers. His followers include Ricardo,Malthus,Mill and Senoor. These writers following the foot steps of their leader ADAM Smith,contributed much in the development of science of political economy. However ,Adam Smith has been regarded as the father of the English Classical economics and the leader of classical school.

The word ‘classic’ has been introduced first by Karl Marx. This term used in the economic literature to convey three different meanings. First ,it is used to indicate economic writings of the period from Adam Smith to J.s Mill. Secondly the Keynes has used the term used to indicate the teaching of Marshall and his immediate followers. Lastly ,Schumpeter has used this term to mean the consolidation of the original writings that went before. Any how ,the economist who wrote between the period 1750 to 1850formed the classical school. The classical theory of value was stated by Adam Smith. The same theory was developed later by David Ricardo. But Ricardian labor theory of value has some weakness and some loopholes. The shortcomings in the Ricardian theory of value was bridged by Karl Marx and he perfected the labor theory of value.


Adam Smith started his discussion of value by distinguishing between two,

1. value in use (utility)

2. value in exchange (the power of a commodity to purchase other commodities in the market)

He mentioned that the commodity possessing greatest value in use (eg . water)have little or no value in exchange. On the contrary the commodity having little or no value –in-use (eg. Diamond)have the greatest value in exchange. This paradox is called “water diamond paradox”. Thus he came to the conclusion that use-value or the utility can’t be the basis of the exchangeable value of commodities.


The theory of value occupies a strategic position in classical economics. But Adam Smith was much confused regarding his theory of value. In his “Wealth of Nations”,we can pointed out the elements of labor theory of value as well as reputation of it. We can find an admixture of the price theory and the distribution theory. Similarly we can find a confusion between labor cost (labour embodied) and labor command aspects of the value of a commodity.

Adam Smith begins his discussion of value by distinguishing value-in-use from value-in-exchange. Value in use means utility of a commodity. Value in exchange means the power of a commodity to purchase another commodity in exchange. Then he tries to explain value-paradox or water -diamond paradox. He mentioned that the utility or use value can’t be the basis of exchange value. He is concerned with exchange value alone.


By source or course of value ,we mean the factor which is responsible for value. Measure of value means the way value is to be computed or measured.

Adam Smith considered labour as the original source of all value. “the annual labour of the nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes”(Adam Smith observes that labour is the real measure of the exchangeable value of all commodities).


According to Smith ,labour is both measure and source of value. It is the real measure of the exchangeable value of all commodities. The Labour Theory of Value has two distinct versions. They are,

1. The labour cost or the labour embodied theory and

2. The labour command theory.


According to labour cost theory,the exchangeable value(real price)of a commodity is nothing but the amount of labour required to produce it. Thus the quantity of labour embodied (ie the amount of labour contained)in a commodity determines its value in a primibisingle factor (labour)societies. In primitive societies where labour is the only factor of production both the source and measure of value coincide in labour. Hence,in each societies labour embodied is equal to labour commanded. Relative labour cost determines the relative value.


According to labour command theory,the price of a commodity is equal to amount of labour which its possessor can purchase or command in the market in exchange for it. The real price of everything ,what every thing really costs to the man who wants to acquire it is the toil and trouble of acquiring it ?

In advanced societies ,production of a commodity is the result of the cooperative effort of labor ,land and capital. In such a situation,the price of a commodity will be the sum of the wages ,rent and profit. There is now a difference between the labour cost of production and the labour commanded. Labour commanded is the market value and is equal to the cost paid to all the factors. Labour cost is only a part of the total cost. In this case labour embodied in a commodity will be less than the labour commanded by that commodity. In shortly it represents ,in essence a cost of production theory of value.

The labour embodied value and labour command value of a commodity will be identical only when labour is the only factor which is to be paid for. In short ,labour theory of value is valid only in primitive societies. When labour is the main or the only factor of production. But in advanced societies the labour command theory or cost of production theory lead the way

Smith was in search of an variable measure of value. According to Smith ,variable measure is the labour ,because its value remains more or less the same. The equal quantities of labour ,at all times and places,may be said to be of equal value to the labourer. The final conclusion is that labour is the only universal as well as the only accurate measure of value,or the only standard by which we can compare the value of different commodities,at all times and at all places.


Smith analysed value in terms of money that is price. In the ultimate analysis of value theory Smith distinguishes between natural price (normal or real price)and market price. The natural price of a commodity is defined as that price which covers the natural rates of wages ,profit and rent. It is the longterm price which is exactly equal to labour –commanded value of a commodity.

In this sense ,the concept of natural price is essentially the cost of production theory of value.

The market price is the actual price prevailing in the market. It is determined by the forces of demand and supply. The market price lie above or below natural price or it may be equal to natural price. Natural price is the ideal towards which the market price is continually gravitating. Smith argues that in Laizes –fair economy an automate mechanism (say price mechanism or invisible hand) brings about equality between market price and natural price.


1. Smith did not have one theory of value ,and certainly not the labour theory of value.

2. he regarded labour as the soul source of production or value.This is not correct in the case of advanced economies.

3. He did not a full account of the determination of value or price. He totally neglected the demand side in the determination of value.


Ricardo starts in the foot steps of Adam Smith on the subject of value. In the outset, he has drawn a distinction between “Natural Value and Market Value”. By natural value ,he meant that point around which market value fluctuates and ultimately tends to equalize with it.

He starts the analysis of natural value by distinguishing between value-in-use and value-in-exchange. To pointed out that to have exchangeable value,a commodity must have utility. But utility can’t be the measure of exchangeable value.

Commodity possessing utility derive this exchangeable value fom two sources,

a. Scarcity and

b. The quantity of labour required to obtain them.

In this contexts Recardo distinguishes two kinds of commodities.

a. Those that can be multiplied and

b. Those can’t be multiplied.

In case of commodity that can’t be multiplied ,their value is determined by scarcity alone(eg.rare statues and pictures). In fact, he considers that such commodity are limited in number. Therefore he has given more attention to those commodities which can be multiplied according to desire without any assignable limit. Such commodity derive their exchangeable value from the quantity of labour required to obtain them as well as from their scarcity.

Ricardo divided the commodities in to,

a. Non-reproducible commodities and ,

b. Re –producible commodities.

In the case of non-reproducible commodities ,scarcity alone matters in the determination of exchange value.

In case of re-producible commodities the value is determined in terms of the quantity of labor embodied in each commodity. In short ,Recardo measure the exchange valu of re-producible commodities in terms of their labour costs. He has thus a lbour theory of value.


Ricardo’s labour theory of value may be expressed as follows, “the value of a commodity or the quantity of any other commodity for which it will exchange depend on the relative quantity of labour which is necessary for its production and not on the greater or the less compensation which is paid for that labour”

He suggested that the “exchangeable value of the commodities produced would be in proportion to the labour bestowed on the production”

In short Ricardian theory of value contends that the labour in the foundation of all value and the relative quantities of labour embodiment determines the relative value of commodities. It follows that ,the Ricardian theory of value is the labour embodied theory of value both to the rude state of society as well as to the advanced state of society. Ricardian theory of value attaches sole importants to the supply side.

Assumptions of the theory:-

1. perfect competition

2. re-producible commodities

3. labour is the only factor of production

4. perfect mobility of labour

5. constant returns to scale

6. homogenous production function

7. full employment condition

Problems faced in the labour theory of value:-

1. Labour is assumed to be the homogenous factor.

But Ricardian was aware of the un-realistic nature of the assumption of homogeneity nature of the labour. Ricardo removed this problem by transforming labour quality in to labour quantity. He said that skilled labour can be treated as multiple of ordinary labour.

2. Use of capital.

Another problem arises when the when the capital is used for assisting labour is the process of production. Then the value is not proportionate to the quantity of labour embodied in the production but to the cost of production. Ricardo solving this problem by saying that capital is only congeable or accumulated labour(dead or stored up labour). It is the result of past sacrifice in terms of human effort. Therefore labour is treated as the sole determinant of exchangeable value.

Then also Ricardo faces certain problems. Ricardo introduced the differences of capital quality in to the frame work of his theory of value. Differences in the quality of congealed in its nature –whether it is circulating or fixed capital. Similarly the difference in capital quality is reflected in the differences in the time taken to bring the final product in to the market. Therefore he tried to introduce the time element in his theory. The price of the commodity will be greater, greater the length of time which must elapse before it can be brought to market.

Put the introduction of capital will not in validate the labour theory of value if ,

a. The ratio of fixed capital to labour remains the same every where

b. All fixed capital are equally durable and

c. The rturn on capital is the same in all lines of production.

3. Wages and profits as cost of production.

According to Ricardo the value of product is appropriated by the capitalists in two forms

a. wages paid to the labourer and

b. the profit retained by the capitalist.

According to him wages and profits inversely related. When wages increase,profit will fall and vice-versa. But this has no effect on the relative value of commodities.

4. Influence of the composition of capital.

Ricardo maintains that the differences in the proportion of fixed and circulating capital will cause change in the relative values. He observed that the relative value of those goods which are produced with a more durable capital will fall and the relative value of goods produced by using less durable or perishable capital will tend to rise.

The effect of different proportions of durabilities of capital on value can be seen from another angle. A rise in wages lowers the value of capital intensive goods inrelation to the labour intensive goods. Thus a rise in wages results in lengthening the average period of production. Hayeck calls this effect as the “Ricardo effect”. It shows the influence of change in the distribution of national income upon the value of national income.

After eliminating all those disturbing factors in the way of labour theory of value Ricardo concluded that the real value is determined by the labour content of the commodity. In fact the ,the labour cost, according to Stingler , in the Ricardian labour theory of value comes to nearly 93% of the total cost.,the rest nearly 7% is accounted for by capital element. Thus Stingler rightly christens Ricardian theory of value as 93% labour theory of value. However Ricardo was not satisfied with his formulation of value theory ,he wrote to MC Cullochi, “I am not satisfied with the explanation which I have given by the principle which regulates value. I wish a more able pen would undertake it”


Ricardo was in search of an invariable measure of value. Ricardo selected gold as the standard commodity which can be used for the invariable measure of value.


a. Ricardian theory of value is based on unrealistic assumption

b. Ricardian labour theory of value is one sided. It di not consider the demand side.

c. Ricardo neglected the scarcity aspect in the determination of exchangeable value of re -producible commodities

d. Ricardian theory did not deal with the short run problem

e. He has not taken in to account the depreciation of capita.