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Classical theory of value

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Classical economics, concept of value and distribution.

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Classical theory of value

  1. 1. 1. CLASSICALTHEORY OF GROWTH, DISTRIBUTION AND VALUE Prof. Prabha Panth, Osmania University, Hyderabad, India
  2. 2. CLASSICALTHEORY OF GROWTH, DISTRIBUTIONANDVALUE Chief features of Classical System: 1. Capital Accumulation: is the prime mover of the economy, which sets it into motion. Everything proceeds from it. 2. Aggregate Analysis: Analysed the entire economy, Macro analysis, tracing the progress of a nation. 3. Heterogeneous goods: are produced in an economy.To aggregate the heterogenous goods, a common denominator is needed, to enable them to be added together. • Hence theory ofValue is important, to aggregate the heterogenous goods and services in an economy.06/05/2017 Prabha Panth 2
  3. 3. ■ This raises the following questions: • What is meant byValue? • How isValue determined? • What is the unit of measurement ofValue? • How to ensure that theValue-measure, or unit of Value remains constant? ■ Value:The concept, measurement, and depiction of value is one of the most esoteric and widely debated issue in the theory of Economics. 06/05/2017 Prabha Panth 3
  4. 4. • Value is not the same as Price. Market Price is determined by supply and demand in the market. • It can fluctuate widely due to various conditions in the market. • Hence Market Price is not a constant measure of value, for a changing measuring rod cannot give correct value to goods and services. Inflation and deflation cannot give a correct value of output produced in an economy. • Hence an invariant measure of value is required; a measure that will not change when prices and other things change in the economy. • Classicals thought thatValue is determined by the cost of production, chiefly Labour costs. 06/05/2017 Prabha Panth 4
  5. 5. • Value is determined by the Cost of Production. Value = wages + rent + profit Wage rate = subsistence wage rate Rent = MP of land, But in the case of Profit paid on capital, difficulties arise. → For: capital goods are heterogenous, durable, and produced by labour and other capital inputs, e.g. if corn is produced by L and K1, then K1 is produced by L and K2, and so on. K1 and K2 are different capital goods → Capital goods take time to be produced. So during that time period, interest has to be paid on investment. 06/05/2017 Prabha Panth 5
  6. 6. → So value of capital includes cost of inputs, wages, cost of other capital inputs, and interest (paid on Investment). If these change, then value of capital may also change. → Hence value of capital cannot be determined independently of distribution. Hence : Production  output is produced Output  distributed among various classes, but: heterogenous goods to be distributed, requires value to aggregate them, Value  determined by cost of production, which depends on distribution. Changes in distribution, may affect value. 06/05/2017 Prabha Panth 6
  7. 7. Features of Classical theory, continued: 4. Classes: there are three classes of society – land owners – who own land, capitalists – supply capital, and workers – provide labour. 5. Distribution: How should the total output be shared by these three classes? 6. Diminishing Returns: All factors are subject to diminishing returns. 7. Stationary State: As capital accumulates, economic growth takes place. But diminishing returns, and rising wage and rents, reduce profits and hence investment, ultimately leads to a Stationary State. 06/05/2017 Prabha Panth 7

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