Labour theory of value
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The labor theory of value (LTV) is a theory of value that argues that the exchange value of a good or service is determined by the total amount of " socially necessary labor" required to produce it. The contrasting system is typically known as the
subjective theory of value The subjective theory of value (STV) is an theory of value (economics), economic theory for explaining how the value of goods and services are not only set but also how they can fluctuate over time. The contrasting system is typically known as the ...
. The LTV is usually associated with Marxian economics, although it originally appeared in the theories of earlier classical economists such as
Adam Smith Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
and
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, politician, and member of Parliament. He is recognized as one of the most influential classical economists, alongside figures such as Thomas Malthus, Ada ...
, and later in anarchist economics. Smith saw the price of a commodity as a reflection of how much labour it can "save" the purchaser. The LTV is central to Marxist theory, which holds that capitalists' expropriation of the
surplus value In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to manufacture it: i.e. the amount raised through sale of the product minus the cost of the materials, plant and ...
produced by the
working class The working class is a subset of employees who are compensated with wage or salary-based contracts, whose exact membership varies from definition to definition. Members of the working class rely primarily upon earnings from wage labour. Most c ...
is exploitative. Modern
mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to ...
rejects the LTV and uses a theory of value based on subjective preferences.


Definitions of value and labor

According to the LTV, value refers to the amount of socially necessary labor to produce a marketable commodity; According to Ricardo and Marx, this includes the labor components necessary to develop any real capital (i.e., physical assets used to produce other assets). Including these indirect labour components, sometimes described as "dead labour," provides the "real price," or "natural price" of a commodity. However,
Adam Smith Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
's version of labor value does not implicate the role of past labor in the commodity itself or in the tools (capital) required to produce it.


Distinctions of economically pertinent labor

"Value in use" is the usefulness or
utility In economics, utility is a measure of a certain person's satisfaction from a certain state of the world. Over time, the term has been used with at least two meanings. * In a normative context, utility refers to a goal or objective that we wish ...
of a commodity. A classical
paradox A paradox is a logically self-contradictory statement or a statement that runs contrary to one's expectation. It is a statement that, despite apparently valid reasoning from true or apparently true premises, leads to a seemingly self-contradictor ...
often comes up when considering this type of value. In a passage of Adam Smith's '' An Inquiry into the Nature and Causes of the Wealth of Nations'', he discusses the concepts of value in use and value in exchange, and notices how they tend to differ:Value "in exchange" is the relative proportion with which this commodity exchanges for another commodity (in other words, its
price A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a ph ...
in the case of
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...
). It is relative to labor as explained by Adam Smith:
The value of any commodity, ..to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities (''Wealth of Nations'' Book 1, chapter V).
According to the classical economists, value is the labor embodied in a commodity under a given structure of production. Marx called this the " socially necessary labor" but it is sometimes also called the "real cost", "absolute value."


Relation between values and prices

While the LTV posits that value is primarily determined by labor, it recognizes that the actual price of a commodity is influenced in the short-term by the profit motive and market conditions, including supply and demand and the extent of monopolization. Adherents to the LTV conceptualize value (i.e., socially necessary labour time) as a "center of gravity" for price over the long-term. In Book 1, chapter VI, Adam Smith writes:
The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command. Labour measures the value not only of that part of price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit.
The final sentence explains how Smith sees value of a product as relative to labor of buyer or consumer, as opposite to Marx who sees the value of a product being proportional to labor of laborer or producer. And we value things, price them, based on how much labor we can avoid or command, and we can command labor not only in a simple way but also by
trading Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market (economics), market. Traders generally negotiate throu ...
things for a profit. The demonstration of the relation between commodities' unit values and their respective prices is known in Marxian terminology as the transformation problem or the transformation of values into prices of production. The transformation problem has probably generated the greatest bulk of debate about the LTV. The problem with transformation is to find an algorithm where the magnitude of value added by labor, in proportion to its duration and intensity, is sufficiently accounted for after this value is distributed through prices that reflect an equal rate of return on capital advanced. If there is an additional magnitude of value or a loss of value after transformation, then the relation between values (proportional to labor) and prices (proportional to total capital advanced) is incomplete. Various solutions and impossibility theorems have been offered for the transformation, but the debate has not reached any clear resolution. LTV does not deny the role of supply and demand influencing price, but suggests that value and price are equivalent when supply-demand equilibrium is met. In ''Value, Price and Profit'' (1865),
Karl Marx Karl Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, political theorist, economist, journalist, and revolutionary socialist. He is best-known for the 1848 pamphlet '' The Communist Manifesto'' (written with Friedrich Engels) ...
quotes
Adam Smith Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
:
It suffices to say that if supply and demand equilibrate each other, the market prices of commodities will correspond with their natural prices, that is to say, with their values as determined by the respective quantities of labor required for their production.
The LTV seeks to explain the level of this equilibrium. This could be explained by a '' cost of production'' argument—pointing out that all costs are ultimately labor costs, but this does not account for profit, and it is vulnerable to the charge of tautology in that it explains prices by prices. Marx later called this "Smith's adding up theory of value". Smith argues that labor values are the natural measure of exchange for direct producers like hunters and fishermen. Marx, on the other hand, uses a measurement analogy, arguing that for commodities to be comparable they must have a common element or substance by which to measure them, and that labor is a common substance of what Marx eventually calls ''commodity-values''.


Labor process

Since the term "value" is understood in the LTV as denoting something created by labor, and its "magnitude" as something proportional to the quantity of labor performed, it is important to explain how the labor process both preserves value and adds new value in the commodities it creates.Unless otherwise noted, the description of the labor process and the role of the value of means of production in this section are drawn from chapter 7 of ''Capital'' vol1 . The value of a commodity increases in proportion to the duration and intensity of labor performed on average for its production. Part of what the LTV means by "socially necessary" is that the value only increases in proportion to this labor as it is performed with average skill and average productivity. So though workers may labor with greater skill or more productivity than others, these more skillful and more productive workers thus produce more value through the production of greater quantities of the finished commodity. Each unit still bears the same value as all the others of the same class of commodity. By working sloppily, unskilled workers may drag down the average skill of labor, thus increasing the average labor time necessary for the production of each unit commodity. But these unskillful workers cannot hope to sell the result of their labor process at a higher price (as opposed to value) simply because they have spent more time than other workers producing the same kind of commodities. However, production not only involves labor, but also certain means of labor: tools, materials, power plants and so on. These means of labor—also known as
means of production In political philosophy, the means of production refers to the generally necessary assets and resources that enable a society to engage in production. While the exact resources encompassed in the term may vary, it is widely agreed to include the ...
—are often the product of another labor process as well. So the labor process inevitably involves these means of production that already enter the process with a certain amount of value. Labor also requires other means of production that are not produced with labor and therefore bear no value: such as sunlight, air, uncultivated land, unextracted minerals, etc. While useful, even crucial to the production process, these bring no value to that process. In terms of means of production resulting from another labor process, LTV treats the magnitude of value of these produced means of production as constant throughout the labor process. Due to the constancy of their value, these means of production are referred to, in this light, as constant capital. Consider for example workers who take coffee beans, use a roaster to roast them, and then use a brewer to brew and dispense a fresh cup of coffee. In performing this labor, these workers add value to the coffee beans and water that compose the material ingredients of a cup of coffee. The worker also transfers the value of constant capital—the value of the beans; some specific depreciated value of the roaster and the brewer; and the value of the cup—to the value of the final cup of coffee. Again, on average, the worker can transfer no more than the value of these means of labor previously possessed to the finished cup of coffee.In the case of instruments of labor, such as the roaster and the brewer (or even a ceramic cup), the value transferred to the cup of coffee is only a depreciated value calculated over the life of those instruments of labor according to some accounting convention. So the value of coffee produced in a day equals the sum of both the value of the means of labor—this constant capital—and the value newly added by the worker in proportion to the duration and intensity of their work. Often this is expressed mathematically as: where * c is the constant capital of materials used in a period plus the depreciated portion of tools and plant used in the process. (A period is typically a day, week, year, or a single turnover: meaning the time required to complete one batch of coffee, for example.) * L is the quantity of labor time (average skill and productivity) performed in producing the finished commodities during the period * W is the value (or think "worth") of the product of the period (w comes from the German word for value: ''wert'') Note: if the product resulting from the labor process is homogeneous (all similar in quality and traits, for example, all cups of coffee) then the value of the period's product can be divided by the total number of items (use-values or v_u) produced to derive the unit value of each item. \beginw_i= \frac\,\end where \begin\sum v_u\end is the total items produced. The LTV further divides the value added during the period of production, L, into two parts. The first part is the portion of the process when the workers add value equivalent to the wages they are paid. For example, if the period in question is one week and these workers collectively are paid $1,000, then the time necessary to add $1,000 to—while preserving the value of—constant capital is considered the necessary labor portion of the period (or week): denoted NL. The remaining period is considered the surplus labor portion of the week: or SL. The value used to purchase labor-power, for example, the $1,000 paid in wages to these workers for the week, is called variable capital (v). This is because in contrast to the constant capital expended on means of production, variable capital can add value in the labor process. The amount it adds depends on the duration, intensity, productivity and skill of the labor-power purchased: in this sense, the buyer of labor-power has purchased a commodity of variable use. Finally, the value added during the portion of the period when surplus labor is performed is called
surplus value In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to manufacture it: i.e. the amount raised through sale of the product minus the cost of the materials, plant and ...
(s). From the variables defined above, we find two other common expressions for the value produced during a given period: and The first form of the equation expresses the value resulting from production, focusing on the costs c+v and the surplus value appropriated in the process of production, s. The second form of the equation focuses on the value of production in terms of the values added by the labor performed during the process NL+SL.


History


Origins

The labor theory of value has developed over many centuries. It had no single originator, but rather many different thinkers arrived at the same conclusion independently. Aristotle is claimed to hold to this view. Some writers trace its origin to
Thomas Aquinas Thomas Aquinas ( ; ; – 7 March 1274) was an Italian Dominican Order, Dominican friar and Catholic priest, priest, the foremost Scholasticism, Scholastic thinker, as well as one of the most influential philosophers and theologians in the W ...
. In his '' Summa Theologiae'' (1265–1274) he expresses the view that "value can, does and should increase in relation to the amount of labor which has been expended in the improvement of commodities." Scholars such as Joseph Schumpeter have cited
Ibn Khaldun Ibn Khaldun (27 May 1332 – 17 March 1406, 732–808 Hijri year, AH) was an Arabs, Arab Islamic scholar, historian, philosopher and sociologist. He is widely acknowledged to be one of the greatest social scientists of the Middle Ages, and cons ...
, who in his '' Muqaddimah'' (1377), described labor as the source of value, necessary for all earnings and
capital accumulation Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the form ...
. He argued that even if earning "results from something other than a craft, the value of the resulting profit and acquired (capital) must (also) include the value of the labor by which it was obtained. Without labor, it would not have been acquired." Scholars have also pointed to Sir William Petty's ''Treatise of Taxes'' of 1662 and to
John Locke John Locke (; 29 August 1632 (Old Style and New Style dates, O.S.) – 28 October 1704 (Old Style and New Style dates, O.S.)) was an English philosopher and physician, widely regarded as one of the most influential of the Enlightenment thi ...
's labor theory of property, set out in the '' Second Treatise on Government'' (1689), which sees labor as the ultimate source of economic value.
Karl Marx Karl Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, political theorist, economist, journalist, and revolutionary socialist. He is best-known for the 1848 pamphlet '' The Communist Manifesto'' (written with Friedrich Engels) ...
himself credited
Benjamin Franklin Benjamin Franklin (April 17, 1790) was an American polymath: a writer, scientist, inventor, statesman, diplomat, printer, publisher and Political philosophy, political philosopher.#britannica, Encyclopædia Britannica, Wood, 2021 Among the m ...
in his 1729 essay entitled "A Modest Enquiry into the Nature and Necessity of a Paper Currency" as being "one of the first" to advance the theory.
Adam Smith Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
accepted the theory for pre-capitalist societies but saw a flaw in its application to contemporary
capitalism Capitalism is an economic system based on the private ownership of the means of production and their use for the purpose of obtaining profit. This socioeconomic system has developed historically through several stages and is defined by ...
. He pointed out that if the "labor embodied" in a product equaled the "labor commanded" (i.e. the amount of labor that could be purchased by selling it), then profit was impossible.
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, politician, and member of Parliament. He is recognized as one of the most influential classical economists, alongside figures such as Thomas Malthus, Ada ...
(seconded by
Marx Karl Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, political theorist, economist, journalist, and revolutionary socialist. He is best-known for the 1848 pamphlet '' The Communist Manifesto'' (written with Friedrich Engels) ...
) responded to this paradox by arguing that Smith had confused labor with wages. "Labor commanded", he argued, would always be more than the labor needed to sustain itself (wages). The value of labor, in this view, covered not just the value of wages (what Marx called the value of labor power), but the value of the entire product created by labor. Ricardo's theory was a predecessor of the modern theory that equilibrium prices are determined solely by production costs associated with Neo-Ricardianism. Based on the discrepancy between the wages of labor and the value of the product, the " Ricardian socialists"— Charles Hall, Thomas Hodgskin, John Gray, and John Francis Bray, and Percy Ravenstone—applied Ricardo's theory to develop theories of exploitation. Marx expanded on these ideas, arguing that workers work for a part of each day adding the value required to cover their wages, while the remainder of their labor is performed for the enrichment of the capitalist. The LTV and the accompanying theory of exploitation became central to his economic thought. 19th century American individualist anarchists based their economics on the LTV, with their particular interpretation of it being called " Cost the limit of price". They, as well as contemporary individualist anarchists in that tradition, hold that it is unethical to charge a higher price for a commodity than the amount of labor required to produce it. Hence, they propose that trade should be facilitated by using notes backed by labor.


Adam Smith and David Ricardo

Adam Smith held that, in a primitive society, the amount of labor put into producing a good determined its exchange value, with exchange value meaning, in this case, the amount of labor a good can purchase. However, according to Smith, in a more advanced society the market price is no longer proportional to labor cost since the value of the good now includes compensation for the owner of the means of production: "The whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him." According to Whitaker, Smith is claiming that the 'real value' of such a commodity produced in advanced society is measured by the labor which that commodity will command in exchange but " mithdisowns what is naturally thought of as the genuine classical labor theory of value, that labor-cost regulates market-value. This theory was Ricardo's, and really his alone." Classical economist David Ricardo's labor theory of value holds that the value of a
good In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil. The specific meaning and etymology of the term and its ...
(how much of another good or service it exchanges for in the market) is proportional to how much labor was required to produce it, including the labor required to produce the raw materials and machinery used in the process.
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, politician, and member of Parliament. He is recognized as one of the most influential classical economists, alongside figures such as Thomas Malthus, Ada ...
stated it as, "The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour." In this connection Ricardo seeks to differentiate the quantity of labour necessary to produce a commodity from the wages paid to the laborers for its production. Therefore, wages did not always increase with the price of a commodity. However, Ricardo was troubled with some deviations in prices from proportionality with the labor required to produce them. For example, he said "I cannot get over the difficulty of the wine, which is kept in the cellar for three or four years .e., while constantly increasing in exchange value or that of the oak tree, which perhaps originally had not 2 s. expended on it in the way of labour, and yet comes to be worth £100." (Quoted in Whitaker) Of course, a capitalist economy stabilizes this discrepancy until the value added to aged wine is equal to the cost of storage. If anyone can hold onto a bottle for four years and become rich, that would make it hard to find freshly corked wine. There is also the theory that adding to the price of a luxury product increases its exchange-value by mere prestige. The labor theory as an explanation for value contrasts with the
subjective theory of value The subjective theory of value (STV) is an theory of value (economics), economic theory for explaining how the value of goods and services are not only set but also how they can fluctuate over time. The contrasting system is typically known as the ...
, which says that value of a good is not determined by how much labor was put into it but by its usefulness in satisfying a want and its scarcity. Ricardo's labor theory of value is not a normative theory, as are some later forms of the labor theory, such as claims that it is ''immoral'' for an individual to be paid less for his labor than the total revenue that comes from the sales of all the goods he produces. It is arguable to what extent these classical theorists held the labor theory of value as it is commonly defined. For instance,
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, politician, and member of Parliament. He is recognized as one of the most influential classical economists, alongside figures such as Thomas Malthus, Ada ...
theorized that prices are determined by the amount of labor but found exceptions for which the labor theory could not account. In a letter, he wrote: "I am not satisfied with the explanation I have given of the principles which regulate value."
Adam Smith Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
theorized that the labor theory of value holds true only in the "early and rude state of society" but not in a modern economy where owners of capital are compensated by profit. As a result, "Smith ends up making little use of a labor theory of value."


Anarchism

Pierre Joseph Proudhon's mutualism and American individualist anarchists such as Josiah Warren, Lysander Spooner and Benjamin Tucker adopted the labor theory of value of
classical economics Classical economics, also known as the classical school of economics, or classical political economy, is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. It includ ...
and used it to criticize capitalism while favoring a non-capitalist market system. Warren is widely regarded as the first American
anarchist Anarchism is a political philosophy and Political movement, movement that seeks to abolish all institutions that perpetuate authority, coercion, or Social hierarchy, hierarchy, primarily targeting the state (polity), state and capitalism. A ...
,Palmer, Brian (2010-12-29
What do anarchists want from us?
'' Slate.com''
Riggenbach, Jeff (2011-02-25
Josiah Warren: The First American Anarchist
'' Mises Institute''
and the four-page weekly paper he edited during 1833, ''The Peaceful Revolutionist'', was the first anarchist periodical published.William Bailie, ''Josiah Warren: The First American Anarchist – A Sociological Study'', Boston: Small, Maynard & Co., 1906, p. 20 Cost the limit of price was a maxim coined by Warren, indicating a ( prescriptive) version of the labor theory of value. Warren maintained that the just compensation for labor (or for its product) could only be an equivalent amount of labor (or a product embodying an equivalent amount).In ''Equitable Commerce'', Warren writes, "If a priest is required to get a soul out of purgatory, he sets his price according to the value which the relatives set upon his prayers, instead of their cost to the priest. This, again, is cannibalism. The same amount of labor equally disagreeable, with equal wear and tear, performed by his customers, would be a just remuneration Thus,
profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...
, rent, and
interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...
were considered unjust economic arrangements.Wendy McElroy,
Individualist Anarchism vs. "Libertarianism" and Anarchocommunism
," in the ''New Libertarian'', issue #12, October, 1984.
In keeping with the tradition of
Adam Smith Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
's ''
The Wealth of Nations ''An Inquiry into the Nature and Causes of the Wealth of Nations'', usually referred to by its shortened title ''The Wealth of Nations'', is a book by the Scottish people, Scottish economist and moral philosophy, moral philosopher Adam Smith; ...
'', the "cost" of labor is considered to be the subjective cost; i.e., the amount of suffering involved in it. He put his theories to the test by establishing an experimental "labor for labor store" called the Cincinnati Time Store at the corner of 5th and Elm Streets in what is now downtown Cincinnati, where trade was facilitated by notes backed by a promise to perform labor. "All the goods offered for sale in Warren's store were offered at the same price the merchant himself had paid for them, plus a small surcharge, in the neighborhood of 4 to 7 percent, to cover store overhead." The store stayed open for three years; after it closed, Warren could pursue establishing colonies based on Mutualism. These included "
Utopia A utopia ( ) typically describes an imagined community or society that possesses highly desirable or near-perfect qualities for its members. It was coined by Sir Thomas More for his 1516 book ''Utopia (book), Utopia'', which describes a fictiona ...
" and " Modern Times". Warren said that Stephen Pearl Andrews' ''The Science of Society'', published in 1852, was the most lucid and complete exposition of Warren's own theories. Mutualism is an
economic theory Economics () is a behavioral science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
and
anarchist school of thought Anarchism is a political philosophy and Political movement, movement that seeks to abolish all institutions that perpetuate authority, coercion, or Social hierarchy, hierarchy, primarily targeting the state (polity), state and capitalism. A ...
that advocates a society where each person might possess a
means of production In political philosophy, the means of production refers to the generally necessary assets and resources that enable a society to engage in production. While the exact resources encompassed in the term may vary, it is widely agreed to include the ...
, either individually or collectively, with trade representing equivalent amounts of labor in the
free market In economics, a free market is an economic market (economics), system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of ...
. Integral to the scheme was the establishment of a mutual-credit bank that would lend to producers at a minimal interest rate, just high enough to cover administration. Mutualism is based on a labor theory of value that holds that when labor or its product is sold, in exchange, it ought to receive goods or services embodying "the amount of labor necessary to produce an article of exactly similar and equal utility". Mutualism originated from the writings of philosopher Pierre-Joseph Proudhon. Collectivist anarchism as defended by Mikhail Bakunin defended a form of labor theory of value when it advocated a system where "all necessaries for production are owned in common by the labor groups and the free communes ... based on the distribution of goods according to the labor contributed".


Karl Marx

Contrary to popular belief, Marx never used the term "labor theory of value" in any of his works, but used the term law of value; Marx opposed "ascribing a supernatural creative power to labor", arguing as such:
Labor is not the source of all wealth. Nature is just as much a source of use values (and it is surely of such that material wealth consists!) as labor, which is itself only the manifestation of a force of nature, human labor power.
Here, Marx was distinguishing between exchange value (the subject of the LTV) and
use value Use value () or value in use is a concept in classical political economy and Marxist economics. It refers to the tangible features of a commodity (a tradeable object) which can satisfy some human requirement, want or need, or which serves a usef ...
. Marx used the concept of " socially necessary labor time" to introduce a social perspective distinct from his predecessors and
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption, and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a go ...
. Whereas most economists start with the individual's perspective, Marx started with the perspective of society ''as a whole''. "Social production" involves a complicated and interconnected
division of labor The division of labour is the separation of the tasks in any economic system or organisation so that participants may specialise (Departmentalization, specialisation). Individuals, organisations, and nations are endowed with or acquire specialis ...
of a wide variety of people who depend on each other for their survival and prosperity. "Abstract" labor refers to a characteristic of
commodity In economics, a commodity is an economic goods, good, usually a resource, that specifically has full or substantial fungibility: that is, the Market (economics), market treats instances of the good as equivalent or nearly so with no regard to w ...
-producing labor that is shared by all different kinds of heterogeneous (concrete) types of labor. That is, the concept abstracts from the ''particular'' characteristics of all of the labor and is akin to average labor. "Socially necessary" labor refers to the quantity required to produce a commodity "in a given state of society, under certain social average conditions or production, with a given social average intensity, and average skill of the labor employed." That is, the value of a product is determined more by societal standards than by individual conditions. This explains why technological breakthroughs lower the price of commodities and put less advanced producers out of business. Finally, it is not labor per se that creates value, but labor power sold by free wage workers to capitalists. Another distinction is between productive and unproductive labor. Only wage workers of productive sectors of the economy produce value.For the difference between wage workers and working animals or
slave Slavery is the ownership of a person as property, especially in regards to their labour. Slavery typically involves compulsory work, with the slave's location of work and residence dictated by the party that holds them in bondage. Enslavemen ...
s confer: John R. Bell: Capitalism and the Dialectic – The Uno-Sekine Approach to Marxian Political Economy, p. 45. London, Pluto Press 2009
According to Marx an increase in productiveness of the laborer does not affect the value of a commodity, but rather, increases the surplus value realized by the capitalist. Therefore, decreasing the cost of production does not decrease the value of a commodity, but allows the capitalist to produce more and increases the opportunity to earn a greater profit or surplus value, as long as there is demand for the additional units of production.


Criticism of the Marxist labor theory of value

The Marxist labor theory of value has been criticized on several counts. Some argue that it predicts that profits will be higher in labor-intensive industries than in capital-intensive industries, which would be contradicted by measured empirical data inherent in quantitative analysis. This is sometimes referred to as the "Great Contradiction".Böhm von Bawerk, "Karl Marx and the Close of His System" Karl Marx and the Close of His System In volume 3 of ''Capital'', Marx explains why profits are not distributed according to which industries are the most labor-intensive and why this is consistent with his theory. Whether or not this is consistent with the labor theory of value as presented in volume 1 has been a topic of debate. According to Marx,
surplus value In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to manufacture it: i.e. the amount raised through sale of the product minus the cost of the materials, plant and ...
is extracted by the capitalist class as a whole and then distributed according to the amount of total capital, not just the variable component. In the example given earlier, of making a cup of coffee, the constant capital involved in production is the coffee beans themselves, and the variable capital is the value added by the coffee maker. The value added by the coffee maker is dependent on its technological capabilities, and the coffee maker can only add so much total value to cups of coffee over its lifespan. The amount of value added to the product is thus the amortization of the value of the coffeemaker. We can also note that not all products have equal proportions of value added by amortized capital. Capital intensive industries such as finance may have a large contribution of capital, while labor-intensive industries like traditional agriculture would have a relatively small one. Critics argue that this turns the LTV into a macroeconomic theory, when it was supposed to explain the exchange ratios of individual commodities in terms of their relation to their labor ratios (making it a microeconomic theory), yet Marx was now maintaining that these ratios must diverge from their labor ratios. Critics thus held that Marx's proposed solution to the "great contradiction" was not so much a solution as it was sidestepping the issue. Steve Keen argues that Marx's idea that only labor can produce value rests on the idea that as capital depreciates over its use, then this is transferring its exchange-value to the product. Keen argues that it is not clear why the value of the machine should depreciate at the same rate it is lost. Keen uses an analogy with labor: If workers receive a subsistence wage and the working day exhausts the capacity to labor, it could be argued that the worker has "depreciated" by the amount equivalent to the subsistence wage. However this depreciation is not the limit of value a worker can add in a day (indeed this is critical to Marx's idea that labor is fundamentally exploited). If it were, then the production of a surplus would be impossible. According to Keen, a machine could have a use-value greater than its exchange-value, meaning it could, along with labor, be a source of surplus. Keen claims that Marx almost reached such a conclusion in the '' Grundrisse'' but never developed it any further. Keen further observes that while Marx insisted that the contribution of machines to production is solely their use-value and not their exchange-value, he routinely treated the use-value and exchange-value of a machine as identical, despite the fact that this would contradict his claim that the two were unrelated. Marxists respond by arguing that use-value and exchange-value are incommensurable magnitudes; to claim that a machine can add "more use-value" than it is worth in value-terms is a category error. According to Marx, a machine by definition cannot be a source of ''human'' labor. Keen responds by arguing that the labor theory of value only works if the use-value and exchange-value of a machine are identical, as Marx argued that machines cannot create surplus value since as their use-value depreciates along with their exchange-value; they simply transfer it to the new product but create no new value in the process. Keen's machinery argument can also be applied to
slavery Slavery is the ownership of a person as property, especially in regards to their labour. Slavery typically involves compulsory work, with the slave's location of work and residence dictated by the party that holds them in bondage. Enslavemen ...
based modes of production, which also profit from extracting more use value from the laborers than they return to laborers. In their work '' Capital as Power'', Shimshon Bichler and Jonathan Nitzan argue that while Marxists have claimed to produce empirical evidence of the labor theory of value via numerous studies which show consistent correlations between values and prices, these studiesExamples of such studies include: Wolff, Edward N. 1975. "The Rate of Surplus Value in Puerto Rico". '' Journal of Political Economy'' 83 (5, October): 935–950. Ochoa, E. 1989. "Values, Prices and Wage-Profit Curves in the U.S. Economy". ''Cambridge Journal of Economics'' 13 (3, September): 413–430. Freeman, Alan. 1998. "The Transformation of Prices into Values: Comments on the Chapters by Simon Mohum and Anwar M. Shaikh". In Marxian Economics. A Reappraisal. Volume 2: Essays on Volume III of Capital: Profit, Prices and Dynamics, edited by R. Bellofiore. London: Mcmillan, pp. 270–275. Cockshott, Paul, and Allin Cottrell. 2005. "Robust Correlations Between Prices and Labour Values: A Comment". '' Cambridge Journal of Economics'' 29 (2, March): 309–316. do not actually provide evidence for it and are inadequate. According to the authors, these studies attempt to prove the LTV by showing that there is a positive correlation between market prices and labor values. However, the authors argue that these studies measure prices by looking at the price of total output (the unit price of a commodity multiplied by its total quantity) and do these for several sectors of the economy, estimate their total price and value from official statistics and measured for several years. However, Bichler and Nitzan argue that this method has statistical implications as correlations measured this way also reflect the co-variations of the associated quantities of unit values and prices. This means that the unit price and unit value of each sector are multiplied by the same value, which means that the greater the variability of output across different sectors, the tighter the correlation. This means that the overall correlation is substantially larger than the underlying correlation between unit values and unit prices; when sectors are controlled for their size, the correlations often drop to insignificant levels.Cockshott, Paul, Shimshon Bichler, and Jonathan Nitzan
"Testing the labour theory of value: An exchange."
(2010): 1-15.
Nitzan, Jonathan, and Shimshon Bichler
''Capital as power: A study of order and creorder''
Routledge, 2009, pp. 93–97, 138–144
Furthermore, the authors argue that the studies do not seem to actually attempt to measure the correlation between value and price. The authors argue that, according to Marx, the value of a commodity indicates the abstract labor time required for its production; however Marxists have been unable to identify a way to measure a unit (elementary particle) of abstract labor (indeed the authors argue that most have given up and little progress has been made beyond Marx's original work) due to numerous difficulties. This means assumptions must be made and according to the authors, these involve
circular reasoning Circular reasoning (, "circle in proving"; also known as circular logic) is a fallacy, logical fallacy in which the reasoner begins with what they are trying to end with. Circular reasoning is not a formal logical fallacy, but a pragmatic defect ...
: Bichler and Nitzan argue that this amounts to converting prices into values and then determining if they correlate, which the authors argue proves nothing since the studies are simply correlating prices with themselves.
Paul Cockshott William Paul Cockshott (born 16 March 1952) is a Scottish academic in the fields of computer science and Marxist economics. He is a Reader at the University of Glasgow. Since 1993 he has authored multiple works in the tradition of scientif ...
disagreed with Bichler and Nitzan's arguments, arguing that it was possible to measure abstract labour time using wage bills and data on working hours, while also arguing Bichler and Nitzan's claims that the true value-price correlations should be much lower actually relied on poor statistical analysis itself. Most Marxists, however, reject Bichler and Nitzan's interpretation of Marx, arguing that their assertion that individual commodities can have values, rather than prices of production, misunderstands Marx's work. For example, Fred Moseley argues Marx understood "value" to be a "macro-monetary" variable (the total amount of labor added in a given year plus the depreciation of fixed capital in that year), which is then concretized at the level of individual prices of production, meaning that "individual values" of commodities do not exist. The theory can also be sometimes found in non-Marxist traditions.Confer: ; For instance, mutualist theorist Kevin Carson's '' Studies in Mutualist Political Economy'' opens with an attempt to integrate marginalist critiques into the labor theory of value. Additionally, economist Joseph Schumpeter pointed out a couple of issues he believed undermined the validity of the labor theory of value. Firstly he wrote that labor theory of value failed to take into account the intrinsic differences in labor quality between individuals (a difference that, he believed, could not be properly encapsulated through the use of a value multiplier). Furthermore, he claims that labor theory of value, both in its Marxist and Ricardian formulations, would entail that labor be the sole input in an economy alongside all labor being homogenous in nature, a thesis which Schumpeter dismisses as unrealistic and one that could be resolved by Marginalism anyway. Schumpeter goes on to divert his attention towards the supposed self-contradictory nature of how labor theory of value allows for the justification of the Marxian exploitation thesis, highlighting that labor itself could not be valued since it was not itself produced by any labor and that the accumulation of surplus value described by Marx could not occur in a static, perfectly competitive market. Thus, although giving Marx the credit for seeing the need for change inherent in capitalist markets, Schumpeter nonetheless concludes that labor theory of value and its consequences remain problematic theories. Some post-Keynesian economists have been highly critical of the labor theory of value. Joan Robinson, who herself was considered an expert on the writings of Karl Marx, wrote that the labor theory of value was largely a tautology and "a typical example of the way metaphysical ideas operate". In ecological economics, the labor theory of value has been criticized, where it is argued that labor is in fact energy over time. Such arguments generally fail to recognize that Marx is inquiring into social relations among human beings, which cannot be reduced to the expenditure of energy, just as democracy cannot be reduced to the expenditure of energy that a voter makes in getting to the polling place. However, echoing Joan Robinson, Alf Hornborg, an environmental historian, argues that both the reliance on "energy theory of value" and "labor theory of value" are problematic as they propose that use-values (or material wealth) are more "real" than exchange-values (or cultural wealth)—yet, use-values are culturally determined. For Hornborg, any Marxist argument that claims uneven wealth is due to the "exploitation" or "underpayment" of use-values is actually a tautological contradiction, since it must necessarily quantify "underpayment" in terms of exchange-value. The alternative would be to conceptualize unequal exchange as "an asymmetric net transfer of material inputs in production (e.g., embodied labor, energy, land, and water), rather than in terms of an underpayment of material inputs or an asymmetric transfer of 'value'". In other words, uneven exchange is characterised by incommensurability, namely: the unequal transfer of material inputs; competing value-judgements of the worth of labor, fuel, and raw materials; differing availability of industrial technologies; and the off-loading of environmental burdens on those with less resources.


See also

* Abstract labor and concrete labor * Cost the limit of price *
Division of labor The division of labour is the separation of the tasks in any economic system or organisation so that participants may specialise (Departmentalization, specialisation). Individuals, organisations, and nations are endowed with or acquire specialis ...
* Labor notes (currency) * Law of value * Prices of production * Producerism * Productive and unproductive labor * Social division of labor * Surplus labor * Surplus product *
Surplus value In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to manufacture it: i.e. the amount raised through sale of the product minus the cost of the materials, plant and ...
* Transformation problem * Value-form * Anarchy of Production Competing theories * Anarcho-communism * Entitlement theory *
Marginalism Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. It states that the reason why the price of diamonds is higher than that of wa ...
* Neo-Ricardianism *
Subjective theory of value The subjective theory of value (STV) is an theory of value (economics), economic theory for explaining how the value of goods and services are not only set but also how they can fluctuate over time. The contrasting system is typically known as the ...


Notes


References


Further reading

* * von Böhm-Bawerk, Eugen ''Karl Marx and the Close of His System'' (Classic criticism of Marxist economic theory). * G.A. Cohen 'The Labour Theory of Value and the Concept of Exploitation', in his ''History Labour and Freedom''. * Duncan, Colin A.M. 1996. ''The Centrality of Agriculture: Between Humankind and The Rest of Nature.'' McGill–Queen's University Press, Montreal. * ——2000. The Centrality of Agriculture: History, Ecology and Feasible Socialism. Socialist Register, pp. 187–205. * ——2004. Adam Smith's green vision and the future of global socialism. In Albritton, R; Shannon Bell; John R. Bell; and R. Westra ds.''New Socialisms: Futures Beyond Globalization. ''New York/London, Routledge. pp. 90–104. * * Eldred, Michael (1984)
''Critique of Competitive Freedom and the Bourgeois-Democratic State: Outline of a Form-analytic Extension of Marx's Uncompleted System''
With an Appendix 'Value-form Analytic Reconstruction of the Capital-Analysis' by Michael Eldred, Marnie Hanlon, Lucia Kleiber and Mike Roth, Kurasje, Copenhagen. Emended, digitized edition 2010 with a new Preface, lxxiii + 466 pp. . * Ellerman, David P. (1992) Property & Contract in Economics: The Case for Economic Democracy. Blackwell. Chapters 4, 5, and 13 critiques of LTV in favor of the labor theory of property. * Engels, F. (1880)
''Socialism: Utopian and Scientific''
* Freeman, Alan: ''Price, value and profit – a continuous, general treatment''. In: Alan Freeman, Guglielmo Carchedi (editors): ''Marx and Non-equilibrium Economics''.
Edward Elgar Publishing Edward Elgar Publishing is a global publisher of academic books, journals and online resources in the social sciences and law. The company also publishes a social science and law blog with regular contributions from leading scholars. About Edwa ...
. Cheltenham, UK, Brookfield, US 1996. . * Hagendorf, Klaus
''The Labour Theory of Value. A Historical-Logical Analysis''
Paris: EURODOS; 2008. * Hagendorf, Klaus
''Labour Values and the Theory of the Firm. Part I: The Competitive Firm''
Paris: EURODOS; 2009. * Hansen, Bue Rübner. (2011). "Review of ''Capital as Power'' by Jonathan Nitzan and Shimson Bichler". ''Historical Materialism'' 19, no. 2: 144–159. * Henderson, James M.; Quandt, Richard E. 1971: Microeconomic Theory – A Mathematical Approach. Second Edition/International Student Edition. McGraw-Hill Kogakusha, Ltd. * Keen, Steve
''Use, Value, and Exchange: The Misinterpretation of Marx''
. * * ( nternet edition: 1999 887 English edition. * * Moseley, Fred. (2016)
''Money and Totality''
Leiden, Netherlands: Brill. * * Ormazabal, Kepa M. (2004)
''Smith On Labour Value''
Bilbo, Biscay, Spain: University of the Basque Country Working Paper. * Parrington, Vernon Louis

* * Rubin, Isaak Illich (1928)
''Essays on Marx's Theory of Value''
* Shaikh, Anwar (1998). "The Empirical Strength of the Labour Theory of Value" in ''Conference Proceedings of Marxian Economics: A Centenary Appraisal'', Riccardo Bellofiore (ed.), Macmillan, London. * * Wolff, Jonathan (2003)
''Karl Marx''
in ''Stanford Encyclopedia of Philosophy''. * * {{DEFAULTSORT:Labor Theory Of Value Labour economics Marxian economics Classical economics Theory of value (economics) Thomas Aquinas