Last week we looked at how a distorted idea of one’s own importance can lead to treating anyone who opposes you as an enemy to be eliminated, and supporters as tools to be discarded once their utility is over. This week we look at the implications of the Ricardian (as opposed to the Smithian) Labor Theory of Value.
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| G.K. Chesterton |
The Ricardian Labor Theory of Value seems to be rooted in what G.K. Chesterton called the inherent “unworthiness” of economic life. Based on what appears to be a misunderstanding of the philosophy of Thomas Aquinas, Chesterton asserted that goods produced “only to sell are likely to be worse in quality than the things they produce in order to consume.” (G.K. Chesterton, Saint Thomas Aquinas: The “Dumb Ox”. New York: Image Books, 1956, 188.) This is allegedly because “trade in the modern sense, does mean selling something for a little more than it is worth, nor would the nineteenth century economists have denied it.” (Ibid.)
Certainly not the nineteenth century economists who, following the lead of David Ricardo and the socialists, assumed a thing is worth the human labor which goes into producing it. (David Ricardo, The Principles of Political Economy and Taxation. London: J.M. Dent & Sons Ltd., 1992, 6-7.) Under the labor or input theory of value, every sale of a thing necessarily means a win-lose transaction, for the buyer either pays more than a thing is worth, or the seller receives less than the thing’s true value.
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| David Ricardo |
Fairness is not factored into the equation. Under the labor or input theory of value, if one party in a transaction is seen as benefiting in any way, it necessarily means he or she is a thief stealing what rightfully belongs to the other party. Suspicion and distrust; the feeling everyone is taking unfair advantage of everyone else, replace cooperation and fair competition in the market. Trade and commerce become economic warfare, not mutually beneficial social interaction.
This may be why socialism and capitalism are so prevalent today. With wealth concentrated, many people look to an all-powerful State or private sector elite for economic and social salvation. They demand authoritarian, even autocratic leaders to control others instead of seeking to empower themselves with control over their own lives through widespread capital ownership.
Economists of the Smithian school, however, would have rejected Chesterton’s statement “trade in the modern sense, does mean selling something for a little more than it is worth” most emphatically.
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| Adam Smith |
According to Adam Smith and those of his school, a thing is not valued at what it costs to produce it in terms of human labor or anything else. Rather, the real value of any marketable good or service is its value to the ultimate consumer; “Consumption is the sole end and purpose of all production.” (Adam Smith, The Wealth of Nations, IV.8.49.) In every fair market transaction, both parties gain something they value more than what they give in payment.
This is the true “art of the deal,” for both sides in every transaction are selling, just as both are buying. As Jean-Baptiste Say explained, people do not purchase the productions of others with money, but with their own productions. (Jean-Baptiste Say, Letters to Malthus. London: Sherwood, Neely, and Jones, 1821, 3.)
A baker selling a loaf of bread for a dollar bill, therefore, is buying a dollar bill with a loaf of bread, while the customer is buying a loaf of bread with a dollar bill by selling the dollar bill to the baker. Assuming a free market and no coercion, each has gained what each wants, and neither one loses.
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| Jean-Baptiste Say |
This becomes even more obvious if it takes the baker an hour to earn a dollar at other work but half an hour to bake a loaf of bread, and it takes the customer half an hour to earn a dollar at work but an hour to bake a loaf of bread at home. When the baker and the customer exchange bread and dollar, each gives up what cost half an hour, and gains what would have cost an hour.
This is Adam Smith’s version of the labor theory of value. Time being money, as the saying goes, a full hour of “money” has been created. This was simply by each party to the transaction paying half an hour of labor for what would cost a full hour to produce. No one has been cheated, and both have gained.
True, there are buyers and sellers everywhere who offer less than good value in their transactions, but that is why there are laws, courts, and judges. There are also honest mistakes made, and unforeseen circumstances. Human beings are not perfect, but perfectible. To expect absolute perfection in this life, the Kingdom of God on Earth, may be the single greatest error of the New Things — and one Chesterton and Belloc may have fallen into unconsciously in their despair at the decreasing possibility of achieving what they called the Distributist State.
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