Absolute Value and Exchangeable Value: The Invariable Standard of Value
In the Principles Ricardo pointed out the limits of the labour theory of value. The relative prices determined as the ratio between the quantities of labour directly and indirectly required to produce the different commodities violate the condition of a uniform rate of profits in the different sectors of the economy for three reasons: different durability of productive processes, changing ratio between fixed and circulating capital, and different durability of fixed capital in the different sectors. The labour theory of value may therefore be considered at most an approximate theory of relative prices. For Ricardo, however, the problem was not so much that of establishing how wide the margin of approximation might be; rather, the problem revolved upon the possibility of finding rigorous anchorage, an ‘invariable standard’, for exchange values.
In the search of this anchorage, Ricardo utilised a traditional term of reference, namely the labour time required to obtain a certain quantity of product. The use of labour as a standard - that is, the choice to use as standard a commodity produced by a given and unchangeable quantity of labour - has the advantage that it provides precise answers when confronted with changes in technology; it also satisfies the dialectical need to oppose to the thesis of exchange values based on the notion, ever present in economic debate, of a mechanism based on demand and supply, a theory based on the difficulty of production. In Ricardo’s thought, as already in Smith’s, the interrelationship between supply and demand only concerns the adjustment of market prices to natural prices, not determination of the latter:
It is the cost of production which must ultimately regulate the price of commodities, and not, as has been often said, the proportion between supply and demand: the proportion between supply and demand may, indeed, for a time, affect the market value of a commodity, until it is supplied in greater or less abundance, according as the demand may have increased or diminished; but this effect will be only of temporary duration.
However, the standard chosen by Ricardo proves inadequate when confronted with changes in the distribution of income between wages and profits. Indeed, when two commodities produced by the same quantity of labour are obtained over different periods of production or with a different proportion between fixed and circulating capital, their relative value changes when distribution changes, and our invariable standard can give no indication of the origin of this variation in exchange value.
When we take these difficulties into account, the path Ricardo took appears a dead end. Let us try to see why. Like so many economists since Petty, Ricardo adopted a theory of exchange values based on the relative difficulty of production of the various commodities. The problem of value would then be solved, taking this approach, were it possible to find an exact measure of the difficulty of production. To address this task, the invariable standard of value should have a twofold characteristic, namely invariance both with respect to changes in technology and with respect to changes in the distribution of income. Labour embodied fulfils the first requisite, but as far as the second requisite is concerned, it contradicts the assumption - a crucial one for the whole of classical political economy - of a uniform rate of profits in the presence of competition.
Ricardo realised that his efforts in this direction were getting nowhere, but he remained convinced - at a pre-analytical level, we might say - that labour time must have something to do with such an invariable standard of value. This means that there was in Ricardo (as there would be, in still more acute form, in Marx) a metaphysical residuum: the purely analytical problem of a precise measure of value was mixed up with the purely metaphysical problem of finding the foundation, the ultimate origin (or, as Marx said, the ‘substance’) of value: and such an ultimate origin, in Ricardo’s (or Marx’s) mind, cannot be found but in labour. The search for an absolute measure of the difficulty of production corresponds to the desire to isolate a ‘natural’ aspect in interpreting the functioning of a society based on the division of labour. However, any such attempt is vitiated by a basic flaw: the division of labour is only possible in the presence of a web of exchanges linking the different sectors of the economy and the different economic agents; the mechanisms of exchange then express not only the relative difficulties of production of the various commodities but also the institutions, customs and social structure of the society under consideration that regulate the functioning of the web of exchanges and income distribution between social classes. In the case of a capitalistic economy, alongside technology (difficulty of production, in Ricardo’s terminology) it is essential to take into account also such elements as the assumption of a uniform rate of profits, expressing at the analytical level an essential characteristic of a capitalistic society, namely the ‘competition of capitals’. No society exists devoid of social institutions: the idea of an absolute value, grounded on exclusively natural foundations, is a chimera.
-  Ricardo (1951-55, vol. 1, p. 382).