Labor theory of value
The labor theory of value is a
theory in economics once used to justify private property. According to John Locke, an object belonged to a person by virtue of the labor he or she invested in producing it. This theory raised questions for later students of economics. Adam Smith observed that in capitalist economies with a complex division of labor, people convert commodities into money and vice versa. He thus distinguished between "real value" (the amount of labor required to produce or acquire an object) and "nominal value" (the amount of money one would give or receive in exchange for a given commodity). Karl Marx similarly distinguished between "labour value", "use value" and "exchange value." In these approaches, the labor theory of value is a theory of objective value.
Much of Western economics turned away in the 1870s
from theories of objective value and
towards the economic subjectivism
associated with the development
of neoclassical economics.
The labor needed to produce a commodity includes both
labor directly expended on production of the commodity
and labor expended on the production of capital goods
used up in the production of the commodity.
For example,
if twenty workers are used for a year to produce capital
goods used by twenty workers in the next year to
produce a consumer good, the consumer good embodies
the labor of forty workers.
This theory has political implications. In its original context, it was used to support the new notion of private-property. John Locke, in his Treatise on Government, asked by what right an individual can claim to own one part of the world, when according to the Bible God gave the world to all humanity. He answered that a person owns ones own labor, and that when a person labored -- even the mere labour of picking an apple off a tree -- that labor entered into the object, and so the object became property of that person. From this Locke and others further argued that commodities have value because of the labor invested in them.
As capitalism developed, this theory was used to support a very different political argument: that the role of owners in production is exploitative, since it is only the workers that add value to the product. The price of the product is said to tend towards the sum
of the value of the capital goods used up in production
and the value added by direct labor. But profit, interest,
rent, etc. is only possible, according to the theory,
if the wages of these direct workers do not fully compensate
them for the value they add to the capital goods to
produce the product.
The classical economists and Marx quickly realized that
the price of a commoditiy does not tend to equal its value, as they conceived of it.
Suppose the proportion of unpaid to paid labor time is
the same for all workers. Further suppose that workers
are paid when the product is sold.
Technology will result in
the ratio of direct labor to the value of capital goods
differing among industries. If products were traded
based on labor values, prices would result in different
industries earning different rates of profits on the
capital invested. But competition among industries
should be modeled as tending to remove differences
in profitability. Thus, the labor theory of value
cannot be true, if the rate of profits is positive
or industries exhibit different capital-intensities.
David Ricardo presented a numerical
example of this reductio ad absurdum:
There are other difficulties with the labor theory of
value associated with varying skills among heterogeneous
workers, land rent, and machinery. The above logical
consequence of varying capital intensity has been the
main focus of economic analysis of Marxist economics. Indeed, Marx concluded that the distinction between value and price is central to capitalist economics.
Marx thought that price phenomena created illusions
that prevented others from noting the social relations
properly analyzed in terms of value.
Discussion of this distinction goes on under the rubric
of the transformation problem, since it is about the
"transformation" of labor values to prices.
Since the 1870s the Labor theory of value has been gradually displaced in non-Marxist circles by the marginal theory of value. The way in which the Labour theory of value was judged to be the prevailing standard was stated in 1848 by John Stuart Mill in his Principles of Political Economy[?] who asserted, "Happily, there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete."
Links