Value vs. Riches (David Ricardo)
David Ricardo, a classical economist, made a crucial distinction between 'value' and 'riches':
- Value: According to Ricardo's labor theory of value, the (exchange) value of a commodity is determined by the relative quantity of labor necessary for its production. If it takes twice the labor to produce a widget compared to a unit of food, then one widget has twice the value of one food item (i.e., 1 widget exchanges for 2 food). Improvements in machinery or skills that reduce the labor needed to produce a good reduce its value in this sense, as it embodies less labor.
- Riches: Riches consist in the abundance of commodities – the actual necessaries, comforts, and enjoyments available to society. Improvements in production (e.g., new tools, better techniques) make goods easier to produce (requiring less labor per unit). This allows a society to produce more goods with the same total labor, or the same amount of goods with less labor, thereby increasing riches.
Key Idea: An increase in riches (more goods) can occur simultaneously with a decrease in the 'value' of those goods (if they all become easier to produce). For instance, if all goods require half the labor to produce, society is much richer (can have twice as many goods), but the total labor-value embodied in those goods might be the same or less. The relative values between different goods, however, will continue to be determined by their respective (new) labor costs.
This app lets you experiment:
- Adjust the base labor hours for food and widgets. See how their relative values change.
- Toggle production improvements (like better tools) which reduce the effective labor needed.
- Change the quantities produced to see the total riches and the total labor cost to achieve them.
Observe how making goods easier to produce (less labor) increases potential riches, even if it changes (often reduces) their individual 'value' relative to labor, and how relative values between goods depend purely on their labor ratios.