cost of production, as that cost is measured in terms of absorbed labor (Blaug, 1982). The labor theory approach to the analysis of value is the approach of classical economics. Adam Smith was, effec tively, the founder of classical economic theory.
In the formulation of economic theory, Adam Smith was principally concerned with the factors which led to increased wealth in an economy. Smith (1776) contended that the cost of labor provided the basis for the determination of the value of a commodity. He further contended that it was the relative expenditure of labor that mattered. Smith postulated that the relative value of labor provided a basis for the determination of commodity values. He believed that the factors of supply and demand were major determinants of commodity prices, although the value of labor consumed in their production provided a basis for the determination of value (Ekeland, and Hebert, 1983).
David Ricardo was an Englishman who lived from 1772 to 1823. Of the many theories with which he is associated are those which apply to income distribution and economic growth.
In The Principles of Political Economy and Taxation, Ricardo (1817) sought to explain the economic principles which regulated the distribution of economic benefits between land owners, capitalists, and labor. In the basically agricultural society of the time, these participants were the only ones recognized.
Ricardo assumed that costs and profits were the same on all land, regardless of its marginal productivity. Based on this assumption, he analyzed economic effects by applying the same input variables to varying qualities of land (relatively more fertile, or relatively less fertile). He then contended that, as labor cost the same, regardless of which land on which it was applied, that fact would encourage the owners of capital to invested it at the place of highest return, until the pro cess of diminishing returns caused profits on ...