Labor theory of value

The labor theory of value (LTV) is a theory from classical economics that understands the value of an exchangeable good or service as equal to the amount of labor required to produce it, including the labor required to produce the raw materials and machinery used in the process. Value in the labor theory of value is different than other uses of the term value, such as moral value, appraised value (potential price), price or usefulness. Therefore the assessment of a thing's value within the labor theory of value’s use of the term will likely differ from the other assessments of a thing's value according to other meanings of the term.The word value as used in the labor theory of value is therefore a homograph and homonym of the other uses of the term value. Much of the work surrounding the labor theory of value has centered on explaining the relation between value and price, though these mean different things within the theory: in other words value and price are not the same thing for the LTV.

Adam Smith and David Ricardo are most often associated with this theory, and most of classical economics relies on it. Neoclassical economics, on the other hand, does not deploy a concept of value in the sense used by the labor theory of value. It instead relies on other concepts such as price, utility, preferences, technology and endowments which would be understood within classical political economy as things other than 'value'.

Within the field of political economics, Karl Marx used the theory as a tool for understanding the social relations between workers, as owners of labor power, and the owners of capital; as such, the labor theory of value is important to Marxism, but more as an institutional theory for understanding exploitation, alienation, class and crises.

LTV and the labor processUnless 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 .

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.

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's 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 will thus produce more value through the production of greater quantities of the finished commodity: each unit still bearing the same value as all the others of the same class of commodity. By working sloppily, the 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 this 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 — 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, un-extracted minerals, etc. While useful, even crucial, for the production process these bring no value to the 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 comprise 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 coffeeIn the case of instruments of labor, such as the roaster and the brewer (or even a ceramic cup) the value transfered 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:

c+L=W

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 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 homogenous (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) produced to derive the unit value of each item. $\begin{matrix}w_i= \frac{W}{\sum uv}\,\end{matrix}$ where $\sum uv$ 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 ( $s$ ). From the variables defined above, we find two other common expression for the value produced during a given period as:

c+v+s=W

and

c+NL+SL=W

The first form of the equation expresses the value resulting from production, focussing on the costs $c+v$ and the surplus value appropriated in the process of production, $s$ . The second form of the equation focusses on the value of production in terms of the valued added by the labor performed during the process $NL+SL$ .

The relation between values and prices

One issue facing the LTV is the relationship between value quantities on one hand and prices on the other. If a commodity's value is not the same as its price; and therefore the magnitudes of each likely differ, then what is the relation between the two (if any). Various LTV schools of thought provide different answers to this question. For example, some argue that values act as a center of gravity for prices. As counter-intuitive as this may seem to those accustomed to neoclassical price theory, some empirical evidence suggests values are a better predictor of empirically recorded prices than prediction by any other means.

However, other schools within LTV expect, at least conceptually, that prices are more strongly influenced by an equalization in the rate of profit. The equalization in the rate of profit combined with the application of different proportions of means of production and labor-power in various industries implies that the price of any given commodity will often diverge significantly from its value. The demonstration of the relation between commodities' unit values and their respective prices is knows as the transformation problem or the transformation of values into prices of production (in Marx's terminology). The transformation problem has probably generated the greatest bulk of debate about the LTV, even originating as early as Smith's work. 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 compared with before 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.

The justification of the theory

Contrary to popular belief, the LTV does not deny the role of supply and demand influencing price since the price of a commodity is something other than its value. In Value, Price and Profit (1865), Karl Marx quotes Adam Smith and sums up:

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.Marx, Karl (1865). Value, Price and Profit.

It is the level of this equilibrium which the LTV seeks to explain. 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.Smith On Labour Value 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,Marx, Karl Value Price and Profit and that labor is a common substance of what Marx eventually calls commodity-values.

Some statistical evidence for the theory has also been advanced by Shaikh. see for example The Empirical Strength of the Labour Theory of Value

The theory’s development

The birth of the LTV

Benjamin Franklin in his 1729 essay entitled "A Modest Enquiry into the Nature and Necessity of a Paper Currency" is sometimes credited with originating the concept. However, the theory has been traced back to Treatise of Taxes, written in 1662 by Sir William Petty, and was restated by Vauban in 1707, David Hume in 1752, and by the Physiocrats. Parrington vol 1 ch 3

British economist Adam Smith accepted the LTV for pre-capitalist societies but saw a flaw in its application to capitalism. He pointed out that if the "labor embodied" in a product equalled the "labor commanded" (i.e. the amount of labor that could be purchased by selling it), then profit was impossible. David Ricardo (seconded by Marx) 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.Smith on Labor Value

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 Braysee Utopians and Socialists: Ricardian Socialists — 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.

Marx's contribution

Contrary to popular belief, Marx does not base his LTV on what he dismisses as a "ascribing a supernatural creative power to labor", arguing in the Critique of the Gotha Program that:

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.Critique of the Gotha Program ch 1

Here Marx is drawing a distinction between exchange value (which is the subject of the LTV) and use value.

Marx uses the concept of "socially necessary abstract labor-time" to introduce a social perspective distinct from his predecessors and neoclassical economics. Whereas most economists start with the individual's perspective, Marx starts 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 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 labour employed."Value, Price and Profit ch 6 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, which creates value, but labor power sold by free wage workers to capitalists. Another distinction to be made is that between productive and unproductive labour. Only wage workers of productive sectors of the economy produce value.

Robert Nozick, however, has criticized the qualifier "socially necessary" in the labor theory of value as not well-defined and concealing a subjective judgment of necessity.

Exploitation

Marx uses his LTV to derive his theory of "exploitation" under capitalism.

Unlike Ricardo or the Ricardian socialists, Marx distinguishes between labor power and labor. "Labor-power" is the ability of workers to work, given their muscles and brains. "Labor" is the actual activity of producing value. The profit or surplus-value arises when workers do more labor than is necessary to pay the cost of hiring their labor-power.

To explain the normality of exploitation, Marx points to capitalism's institutional framework, in which a small minority (the capitalists) monopolize the means of production, in which the workers cannot survive except by working for capitalists, and in which the state preserves this inequality of power. In this explanation, the normal role of force is structural, part of the usual workings of the system. The reserve army of unemployed workers continually threatens employed workers, pushing them to work hard to produce for the capitalists.

The corn theory of value

Marx stated that only labor could cause an increase in value. This suggests that labor intensive industries ought to have a higher rate of profit than those which use less labor which is empirically false. Marx explained this by that in real economic life prices vary in a systematic way from values. The mathematics applied to the transformation problem attempt to describe this (albeit with the unwelcome side consequences described above).

Critics (following, for instance, studies of Piero Sraffa) respond that this makes the once intuitively appealing theory very complicated; and that there is no justification for asserting that only labor and not for example corn can increase value. Any commodity can be picked instead of labor for being the commodity with the unique power of creating value, and with equal justification one could set out a corn theory of value, identical to the labour theory of value.Karl Marx§ 3 A scholar on the topic of Marxism, Jonathan Wolff says "By reproducing for corn or iron or coal, all the striking results that Marx derived concerning for labor, we have, it seems to me, raised questions about the foundations of Marx's critique of capitalism and classical political economy."Robert Paul Wolff, quoted in Ellerman's Property and Contract in Economics: the case for economic democracy ch 4

However, there are several problems with this criticism. First, the starting point for Marx's argument was: "What is the common social substance of all commodities? It is labor." Value, Price and Profit ch 6 Since neither corn, iron, nor coal could be said to be common to all commodities, they all fail to fulfill the criterion.

Second, the criticism treats labor as a commodity which Marx's theory of value explicitly differentiates from the realm of commodities. Marx distinguished labor from the commodity labor-power. In identifying labor as the common substance of commodities the (the source of value) the LTV identifies a substance that is not itself a commodity. This was a necessary aspect for the substance of value Marx elaborates upon in Capitalsee ch1 of Capital and Theories of Surplus Value.See Marx's discussion of measures such length and the area of triangles in ch 20 p 312

Third, proponents of this argument completely disregard Marx's direct refutation of this very criticism. The corn theory of value is cited by Marx in both Capitalsee footnote 23 of chapter 1 where Marx discusses Bailey's corn theory of value; the more recent claims to have come up with a "corn theory of value criticism" of Marx seem to be simply plagiarizing Marx or Bailey with no attribution and Theories of Surplus ValueTheories of Surplus Valuech 20 p 312. The restatement of this criticism without acknowledging Marx's response ignores the contributions Marx made to this developing theory of value.

Some supporters of the LTV, however, accept the thrust of this critique but emphasize the social aspect of what Marx calls the "common social substance", arguing that labor power is unique as it is the only commodity not sold by capitalists but rather sold by the wage workers themselves, who are vulnerable to exploitation. But it can be argued that this is circular logic, since the LTV is used to show that the workers are exploited.

Modern criticisms

Menger's Critique

Opponents of Marxist economics argue that the Labor Theory of Value is trivially disproven. In his 1871 work Principles of Economics, Austrian Economist Carl Menger writes:

There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production. A non-economic good (a quantity of timber in a virgin forest, for example) does not attain value for men if large quantities of labor or other economic goods were applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command...The quantities of labor or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good. Comparison of the value of a good with the value of the means of production employed in its production does, of course, show whether and to what extent its production, an act of past human activity, was appropriate or economic. But the quantities of goods employed in the production of a good have neither a necessary nor a directly determining influence on its value.

Böhm-Bawerk’s criticism

The Austrian economist Eugen von Böhm-Bawerk argued against both the Ricardian labor theory of price and Marx's theory of exploitation. On the former, he contended that return on capital arises from the roundabout nature of production. A steel ladder, for example, will be produced and brought to market only if the demand supports the digging of iron ore, the smelting of steel, the machines that press that steel into ladder shape, the machines that make and help maintain those machines, etc. Advocates of the LTV point out that every step in that process, however roundabout, involves labor. But Böhm-Bawerk said that what they missed was the process itself, the roundaboutness, which necessarily involves the passage of time.

Roundabout processes, Böhm-Bawerk maintained, lead to a price that pays for more than labor value. This makes it unnecessary to postulate exploitation in order to understand the return on capital.

Furthermore, Böhm-Bawerk's positive theory of interest argued that workers trade in their share of the end price for the more certain wages paid by the entrepreneur. Entrepreneurs, he claimed, have given up a safer wage-earning job to take on the role of entrepreneur. In other words, he claimed that profits compensated the entrepreneur for the willingness to bear risk and to wait to receive income.

Methodological Individualism

The Austrian school, led by Eugen von Böhm-Bawerk, argues against the whole tradition of the LTV (see above). Neoclassical economics also follows this lead — and that of Jevons, Menger, and Walras — from the 1870s and discards the LTV in favor of (general equilibrium theory), which determines prices based on the interaction of preferences, technology and endowments through supply and demand. Some Marxists (see analytical Marxism) have adapted to this neoclassical general equilibrium theory with a new emphasis on individual exchange and markets through what they call methodological individualism.

Inapplicability of LTV

The LTV cannot claim to explain the value of everything. Problematic cases are:

pieces of art (which could be explained as an instance of monopoly)
uncultivated land (which has value, even if there is no labor involved. The value of land is explained by the theory of rent. Both Ricardo and Marx developed theories of land-rent based on the LTV.)
paper money
value of shares (explained similarly like the value of land)

Notes

Opposing Theories

References

Bhaduri, Amit. 1969. "On the Significance of Recent Controversies on Capital Theory: A Marxian View." Economic Journal. 79(315) September: 532-9.
von Böhm-Bawerk, Eugen Karl Marx and the Close of His System (Classic criticism of Marxist economic theory)
—. A critical explanation of LTV
Ellerman, David P. (year needed). Property and Contract in Economics: the case for economic democracy
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. Cheltenham, UK, Brookfield, US 1996.
Keen, Steven Use, Value, and Exchange: The Misinterpretation of Marx
(edition: 1999 English edition)
—Capital, Complete in Three volumes. Frederick Engels, editor, 1867-1894. Definitive Kerr Edition, in English, as re-issued 1906-1909.
- Capital, Volume 1 1867
- Capital, Volume 2 1885
- Capital, Volume 3 1894
— (1863) Theories of Suprlus Value
— Wage Labour and Capital
— Critique of the Gotha Program
Ormazabal, Kepa M 2004). Smith On Labour Value Bilbo, Bizkaia, Spain: University of the Basque Country Working Paper.
Parrington Title Unavailable
Prychitko, David L. Marxism see section 1: "The Labor Theory of Value"
Rubin, I.I. Commentary on Marx's form and content of value (accessible read)
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 Standord Encylopedia of Philosophy
Wolff, Richard D., Bruce B. Roberts and Antonio Callari (1982). "Marx's (not Ricardo's) 'Transformation Problem': A Radical Reconceptualization." History of Political Economy 14(4): 564-82.
Anonymous. Utopians and Socialists: Ricardian Socialists

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