As we closed the previous posting on this subject, we noted that David Ricardo “corrected” Adam Smith by declaring that labor alone is productive and gives value to something. Things are not to be valued for their utility to the consumer, but in terms of what it cost in labor to produce it.
Today we will consider the implications of Ricardo’s labor theory of value. They are, in fact, devastating, especially when it comes to the whole justification for economic activity. By shifting the basis of value from what the consumer wants, to what the producer wants, Ricardo nullified Smith’s first principle of economics (Ricardo did seem to have a knack for nullifying first principles): that the only reason to produce is to consume, i.e., create value for the consumer. In this way, Ricardo transformed economics from the science of satisfying human need, to that of fueling human greed.
Further, by assigning all production to labor, Ricardo denied that non-human factors are truly factors of production. Non-human factors of production are only true factors if human labor created them in the first place.
Ricardo’s labor theory of value raised two difficulties that he failed to resolve. One, how does it account for land and natural resources? Two, what if immense labor is expended yet nothing of use is produced?
Avoiding the issue of production without utility or value, Ricardo dealt with the question of how to account for land, etc., with his infamous “detour.” This has baffled economists and others for over two-hundred years.
According to Ricardo, land was at one and the same time not a factor of production at all because it was not produced with human labor, and a cost-free factor of production because it clearly could produce without the addition of human labor. Violating the first principle of reason (nothing can both be and not be at the same time under the same conditions),whether or not land is a factor of production depended on whether Ricardo was discussing his labor theory of value, or actual production of marketable goods and services.
Half a century after Ricardo in Das Kapital (1867), Karl Marx attempted to resolve the issue of human labor being used to produce something that has no utility or value. After arguing that all value derives from human labor, Marx added that “nothing can have value, without being an object of utility. If the thing is useless, so is the labour contained in it; the labour does not count as labour, and therefore creates no value.” (Karl Marx, Das Kapital, I.1.2.)
Marx’s error is more subtle than that of Ricardo, but it still violates reason. By raising the question of utility to the consumer, Marx shifted the discussion away from the producer and human labor, and back to the consumer.
Marx thereby invalidated Ricardo’s argument that assumed labor alone gives value because labor alone produces. Where Ricardo’s conclusion was that labor alone is productive except when it isn’t, Marx’s conclusion was that labor alone gives value except when it doesn’t. Both Ricardo and Marx separated production from consumption, nullifying Say’s Law of Markets.
John Maynard Keynes attempted to resolve the paradox of the labor theory of value while at the same time rejecting Say’s Law (John Maynard Keynes, The General Theory of Employment, Interest and Money, I.3.i.). Keynes argued that producing economically useless goods and services is of immense utility because it provides people with jobs and creates demand without increasing supply, and also allows the accumulation of savings for new capital investment . . . to create jobs. This presumably brings an economy back into balance. (Ibid., III.10.vi, IV.16.iii.)
What Keynes failed to mention is the fact that the only way that non-useful production can be turned into money savings for investment is by putting it to use! That is, people must be provided with the means to purchase what they do not want or need in order to ensure that the wealthy have enough money to create jobs for them. To turn waste and surplus production into wealth to make the rich richer, the government must go ever-deeper into debt by creating demand not backed by production to clear production for which no demand was created.
Of course, as Harold Glenn Moulton implied in The Formation of Capital (1935) and Louis Kelso argued in his theory of binary economics, by restoring Say’s Law and reconnecting production and consumption, the question of production for non-consumption is moot. (See Robert Ashford and Rodney Shakespeare, Binary Economics: The New Paradigm. Lanham, Maryland: University Press of America, Inc., 1999, 100-101, 275-278, 286-296.) Further, by financing new capital investment with future savings instead of past savings, promoting waste and consumerism to turn intentional over-production into money savings becomes a non-issue.