# Labor theory of value: Wikis

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# Encyclopedia

Supply and demand curves in terms of labor values [1]

The labor theories of value (LTV) are economic theories of value according to which the values of commodities are related to the labor needed to produce them.

Various labor theories of value prevailed amongst classical economists, including Adam Smith and David Ricardo, culminating with the socialist theories of Karl Marx. Since then, the concept is most often associated with Marxian economics, while modern mainstream economics replaces it by the marginal utility approach.[2]

## Definitions of value and labor

When speaking in terms of a labor theory of value, value without any qualifying adjective should theoretically refer to the amount of labor "embodied" in a commodity.[3] As explained by Adam Smith:

The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people.(Wealth of Nations Book 1, chapter V)

However even a person drinking water from a good stream at his doorstep must "spend" labor to gain this value, at least if this action is relevant to economics.

In terms of modern orthodox terminology it is important to note that "labor", at least in Smith's approach, is defined as the opposite of utility - "disutility", pain, toil etc. Labor which is pleasant in itself is only therefore partly labor, or perhaps not labor at all (however, see opportunity cost). Labor which is highly skilled on the other hand owes part of its produce to an "investment" made in training and is almost like capital (hence the modern concept of human capital). So many types of pleasant labor can be described as a result of an earlier and more painful investment.

In the example of a person going to a stream at his doorstep, if this is a pleasant activity, it is not labor. If it is not pleasant it could be relevant to economics because, for example, the house could be built closer to the stream, plumbing could be installed, a person could be employed to fetch water, or investment in a better path to the water might be worth considering.

But the above way of defining value is not the only one.

Value "in use" is the usefulness of this commodity, its utility. There is a classical paradox which is often expressed when considering this type of value. Here, once again in the words of Adam Smith:

The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use ;' the other, 'value in exchange.' The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it. (Wealth of Nations Book 1, chapter IV)

Value "in exchange" is the relative proportion with which this commodity exchanges for another commodity (in other words, its price in the case of money). 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; emphasis added).

Value (without qualification) as an intrinsic worth which stands without the process of exchange.

Marx defined the value of the commodity by the third definition. In his terms, value is the 'socially necessary abstract labor' embodied in a commodity. In Ricardo and other classical economists, this definition serves as a measure of "real cost", "absolute value", or a "measure of value" invariable under changes in distribution and technology[4].

Ricardo, other classical economists, and Marx began their expositions with the assumption that value in exchange was equal to or proportional to this labor value. They thought this was a good assumption from which to explore the dynamics of development in capitalist societies.

Other supporters of the labor theory of value used the word "value" in the second sense, to represent "exchange value".[5]

## Conceptual model

A simple model illustrating the concepts and workings of LTV could go as follows:

In a village in Somewhereia, everyone shares a set of skills and their produce is derived from local natural resources. Through custom or inclination each person pursues a particular trade, but is capable of pursuing any other in the village. These people exchange their products on a regular basis. Each would know how long it took their fellow to produce their good, and how long it would take them to make it themself. They would also know how much of their own product they would produce in the same amount of time and how much they would be able to exchange for that product. If anyone tried to overcharge for a good, people would stop buying and make it themselves (or a competitor could enter the market and undercut them). Each person would thus be able to calculate whether it would be better for them to buy a good or make it themselves. In this scenario prices and values would be equal.[6]

## LTV and the 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.[7]

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 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 — 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 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 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 coffee[8] 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, 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 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 value in the sense of the amount of labor embodied in a good acts as a center of gravity for price. As counter-intuitive as this may seem to those accustomed to neoclassical price theory, some empirical evidence suggests labor values are a better predictor of empirically recorded prices than prediction by any other means.[9]

However, most economists would say that cases where pricing is even approximately equal to the value of the labor embodied are only special cases, and not the general case. In the standard formulation, prices also normally include a level of income for "capital" and "land". These incomes are known as "profit" and "rent" respectively. (It should be kept in mind that like the terms "labor" and "value", the terms "price, "capital", "land", "profit" and "rent" here are being used in a theoretical way which will not always correspond to everyday use, even by accountants.)

In Book 1, chapter VI, Smith explains:

As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials.

[...]

The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labour, the labour of inspection and direction. They are, however, altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction.

[...]

In this state of things, 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. Neither is the quantity of labour commonly employed in acquiring or producing any commodity, the only circumstance which can regulate the quantity which it ought commonly to purchase, command, or exchange for. An additional quantity, it is evident, must be due for the profits of the stock which advanced the wages and furnished the materials of that labour. As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.

[...]

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 shows us 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 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 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.

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.[10]

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.[11] 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.[12] 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,[13] and that labor is a common substance of what Marx eventually calls commodity-values.[14]

Some statistical evidence for the theory has also been advanced by Anwar Shaikh.[9]

## 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 (including by Karl Marx) with originating the concept. However, the theory has been traced back to Treatise of Taxes, written in 1662 by Sir William Petty[15] and to John Locke's notion, set out in the Second Treatise on Government (1689), that property derives from labor through the act of "mixing" one's labor with items in the common store of goods, though this has alternatively been seen as a labor theory of property. Other writers (including Joseph Schumpeter) have traced back the concept even further to Ibn Khaldun, who in his Muqaddimah (1377), described labor as the source of value, necessary for all earnings and capital accumulation, obvious in the case of craft. 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.”[16]

Scottish 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.[17]

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[18] — 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.[citation needed] Hence, they propose that trade should be facilitated by using notes backed by labor.[citation needed]

### 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."[19] "Nevertheless, the 'real value' of such a commodity produced in advanced society is measured by the labor which that commodity will command in exchange....But [Smith] disowns 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."[20]

Classical economist David Ricardo's labor theory of value holds that the value of a good (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 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 as the greater or less compensation which is paid for that labour" (Ricardo 1817). In this heading Ricardo seeks to differentiate the quantity of labor necessary to produce a commodity from the wages paid to the laborers for its production. 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 [i.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 will stabilize 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 will be done so much it is 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, 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 must be noted that it is arguable to what extent these classical theorists held the labor theory of value as it is commonly defined.[21][22][23][24] For instance, David Ricardo 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 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."[25]

### Marx's contribution

Contrary to popular belief, Marx does not base his LTV on what he dismisses as "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.[26]

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."[27] 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 labor. Only wage workers of productive sectors of the economy produce value.

#### Exploitation

"The worker becomes all the poorer the more wealth he produces, the more his production increases in power and range. The worker becomes an ever cheaper commodity the more commodities he creates. With the increasing value of the world of things proceeds in direct proportion to the devaluation of the world of men. Labor produces not only commodities; it produces itself and the worker as a commodity -- and does so in the proportion in which it produces commodities generally."
Karl Marx, Economic and Philosophic Manuscripts, 1844 [28]

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 potential or ability of workers to work, given their muscles, brains, skills, and capacities. It is the promise of creating value possessed by human labor that has not yet been expended. "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 describes Capitalism as having an institutional framework in which a small minority (the capitalists) oligopolize the means of production. The workers cannot survive except by working for capitalists, and the state preserves this inequality of power. In 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.

## Modern criticisms

Criticisms of the labor theory of value emerge primarily from marginalist economics. Marginalism contends that discussions of value as such are irrelevant, and all effort should be placed on the consideration of price problems.[citation needed] Böhm-Bawerk’s criticism goes to the cyclical nature of production, and the embodiment of more than immediate labor in produced commodities, and, that profit arises from risk.[citation needed] Methodological individualists argue against generalized systems, and look to a general theory of equilibrium (of price) to replace theories of social construction of values.

## Notes

1. ^ Klaus Hagendorf: "Labour Values and the Theory of the Firm. Part I: The Competitive Firm" ;Paris: "EURODOS"; 2009.
2. ^ Campos, Antonietta (1987). "marginalist economics", The New Palgrave: A Dictionary of Economics, v. 3, p. 320
3. ^ e.g. see - Junankar, P. N., Marx's economics, Oxford : Philip Allan, 1982, ISBN 0-86003-125-X or Peach, Terry "Interpreting Ricardo", Cambridge: Cambridge University Press, 1993, ISBN 0-521-26086-8
4. ^ Ricardo, David (1823), 'Absolute Value and Exchange Value', in "The Works and Correspondence of David Ricardo", Volume 4, Cambridge University Press, 1951 and Sraffa, Piero and Maurice Dobb (1951), 'Introduction', in "The Works and Correspondence of David Ricardo", Volume 1, Cambridge University Press, 1951.
5. ^ Proudhon, Pierre J., 1851, General Idea of the Revolution in the 19th Century, study 6.
6. ^ Friedrich Engels advances such a conceptual model in his Appendix to Marx' Capital v. III
7. ^ 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 (Marx 1867).
8. ^ 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.
9. ^ a b see for example The Empirical Strength of the Labour Theory of Value
10. ^ Marx, Karl (1865). Value, Price and Profit.
11. ^ Piero Sraffa and Maurice H. Dobb (1951). "General Preface", The Works and Correspondence of David Ricardo, Vol. 1, Cambridge University Press
12. ^ Smith On Labour Value
13. ^ Marx, Karl Value Price and Profit
14. ^ (Marx 1867)
15. ^ Parrington vol 1 ch 3
16. ^ I. M. Oweiss (1988), "Ibn Khaldun, the Father of Economics", Arab Civilization: Challenges and Responses, New York University Press, ISBN 0887066984
17. ^ Smith on Labor Value
18. ^ see Utopians and Socialists: Ricardian Socialists
19. ^ Smith quoted in Whitaker, Albert C. History and Criticism of the Labor Theory of Value, pp. 15-16
20. ^ Whitaker, Albert C. History and Criticism of the Labor Theory of Value, pp. 15-16
21. ^ Whitaker, Albert C. Albert C. Whitaker, History and Criticism of the Labor Theory of Value
22. ^ Gordon, Donald, F. What Was the Labor Theory of Value? American Economic Review, Vol. 49, No. 2, Papers and Proceedings of the Seventy-first Annual Meeting of the American Economic Association (May, 1959), pp. 462-472
23. ^ Jstor.org King, Peter and Ripstein Arthur. Did Marx Hold a Labor Theory of Value?
24. ^ University of Toronto.ca
25. ^ Canterbery, E. Ray, A Brief History of Economics: Artful Approaches to the Dismal Science, World Scientific (2001), pp. 52-53
26. ^ Critique of the Gotha Program ch 1
27. ^ "Value, Price and Profit ch 6
28. ^ Knowledge and Postmodernism in Historical Perspective, by Joyce Oldham Appleby, Routledge, 1996, ISBN 0415913837, pg 169

## References

• Wolff, Jonathan (2003). " Karl Marx in Stanford Encyclopedia 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