The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of "socially necessary labor" required to produce it.

The LTV is usually associated with Marxian economics, although it also appears in the theories of earlier classical economics such as Adam Smith and David Ricardo and later also in anarchist economics. Smith saw the price of a commodity in terms of the labor that the purchaser must expend to buy it, which embodies the concept of how much labor a commodity, a tool for example, can save the purchaser. The LTV is central to Marxist theory, which holds that the working class is exploited under capitalism, and dissociates price and value. Marx did not refer to his own theory of value as a "labour theory of value".[1]

Mainstream neoclassical economics rejects the LTV, using a theory of value based on subjective preferences.[2][3][4][5]

Here, Marx was distinguishing between exchange value (the subject of the LTV) and use value. Marx used the concept of "socially necessary labor time" to introduce a social perspective distinct from his predecessors and neoclassical economics. 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 of a wide variety of people who depend on each other for their survival and prosperity. "Abstract" labor refers to a characteristic of commodity-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 n

"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."[11] 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.[note 3]

The Marxist labor theory of value has been criticised 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".[48] 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.[48] According to Marx, surplus value 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.[49] 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 labour ratios (making it a microeconomic theory), yet Marx was now maintaining that these ratios must diverge from their labour 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.[50][51]

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 depre

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.[52] 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.[53][54] 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.[55] Keen's machinery argument can also be applied to slavery based modes of production, which also profit from extracting more use value from the laborers than they return to laborers.[56][57]

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 studies[note 4] 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 out output across different sectors, the tighter the correlation. This means that the overall correlation 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.[58][59] 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:[60][61]

The most important of these assumptions are that the value of labour power is proportionate to the actual wage rate, that the ratio of variable capital to surplus value is given by the price ratio of wages to profit, and occasionally also that the value of the depreciated constant capital is equal to a fraction of the capital’s money price. In other words, the researcher assumes precisely what the labour theory of value is supposed to demonstrate.[62]

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.[63][64] Paul Cockshott 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.[65] 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.[66] 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.[67]

The theory

The theory can also be sometimes found in non-Marxist traditions.[note 5] 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.[68]

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,[69] wrote that the labor theory of value was largely a tautology and "a typical example of the way metaphysical ideas operate".[70] The well-known Marxian economist Roman Rosdolsky replied to Robinson's claims at length,[71] arguing that Robinson failed to understand key components of Marx's theory; for instance, Robinson argued that "Marx's theory, as we have seen, rests on the assumption of a constant rate of exploitation",[72] but as Rosdolsky points out, there is a great deal of contrary evidence.[73]

Others have argued that the labor theory of value, especially as it arises in the work of Karl Marx, is due to a failure to recognize the fundamentally dialectical nature of how human beings attribute value to objects. Pilkington writes that value is attributed to objects based on our desire for them and that this desire is always inter-subjective and socially determined; Marxists would reply that this argument fails since Marx says the opposite, and the logic of his theory would not require him to deny this anyway.[74] Pilkington writes the following:

[V]alue is attributed to objects due to our desire for them. This desire, in turn, is inter-subjective. We desire to gain [a] medal or to capture [an] enemy flag [in battle] because it will win recognition in the eyes of our peers. [A] medal [or an enemy] flag are not valued for their objective properties, nor are they valued for the amount of labour embodied in them, rather they are desired for the symbolic positions they occupy in the inter-subjective network of desires.

Pilkington insists that this is an entirely different conception of value than the one we find in the marginalist theory found in many economics textbooks, although Pilkington's theory, like that of the marginalists, concentrates solely on consumer preferences. He writes that "actors in marginalist analysis have self-contained preferences; they do not have inter-subjective desires".[75]

In ecologic

In ecological economics, the labor theory of value has been criticized, where it is argued that labor is in fact energy over time.[76] 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.[77] 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.[78] 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'".[79] 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.[79][80]

Some authors[81][82][83] proposed to reconsider the role of production equipment (constant capital) in production of value, following hints in Das Kapital, where Marx[10] described the functional role of machinery in production processes in Chapter XV (Machinery and Modern Industry).

See also