Karl Marx’s labor theory of value asserts that the value of an object is solely a result of the labor expended to produce it. According to this theory, the more labor or labor time that goes into an object, the more it is worth. Marx defined value as “consumed labor time”, and stated that “all goods, considered economically, are only the product of labor and cost nothing except labor”.
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The labor theory of value is the fundamental premise of Marx’s economics and the basis of his analysis of the free market. If it is correct, then much of Marx’s critique of capitalism is also correct. But if it is false, virtually all of Marx’s economic theory is wrong.
Here is an example of how the labor theory of value works: A worker in a factory is given $30 worth of material, and after working 3 hours producing a good, and using $10 worth of fuel to run a machine, he creates a product which is sold for $100. According the Marx, the labor and only the labor of the worker increased the value of the natural materials to $100. The worker is thus justly entitled to a $60 payment, or $20 per hour.
If the worker is employed by a factory owner who pays him only $15 per hour, according to Marx the $5 per hour the factory owner receives is simply a ripoff. The factory owner has done nothing to earn the money and the $5 per hour he receives is “surplus value”, representing exploitation of the worker. Even the tools which the factory owner provided were, according to Marx, necessarily produced by other workers.
According to the labor theory of value, all profits are the rightful earnings of the workers, and when they are kept from the workers by capitalists, workers are simply being robbed. On the basis of this theory, Marx called for the elimination of profits, for workers to seize factories and for the overthrow of the “tyranny” of capitalism. His call to action has been heeded in many countries throughout the world.
THE LABOR THEORY OF VALUE
by Donald C. Ernsberger, edited by Jarret Wollstein, at: http://www.isil.org/resources/lit/labor-theory-val.html
Karl Marx’s Labor Theory of Value
In developing a theory of relative prices, or the quantitative relationship between things or commodities, Marx essentially used Ricardo’s theory of value. Commodities manifest in their prices certain quantitative relationships, and this means, according to Marx, that all commodities must contain one element in common that must exist in certain measurable quantities. Marx considered use value, or utility, as a common element but rejected this possibility. He then turned to labor as the common element and concluded that it is the amount of labor time necessary to produce commodities that governs their relative prices. As an advocate of a labor theory of value, Marx worked through the various problems inherent in the formulation of a labor theory of value, as Ricardo had before him, and essentially followed the Ricardian solutions. Marx was able to give a clearer presentation of the difficulties of a labor theory of value, but he was no more able to solve the problems than Ricardo had been.
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To Marx, the only social cost of producing commodities was labor. At the highest level of abstraction, Marx disregarded the differing skills of labor and conceived of the total labor available to society for commodity production as a homogeneous quantity, which he called abstract labor. The production of any commodity requires the use of a part of the total supply of abstract labor. The relative prices of commodities reflect the amounts of this abstract supply of labor, measured in clock hours, necessary to produce the goods. This raises what we have called the skilled labor problem, namely, that labor with varying skills will have varying outputs. Marx then reduced the level of abstraction and met this issue by measuring the amount of labor required to produce a commodity by the socially necessary labor time, which is defined as the time taken by a worker with the average degree of skill possessed by labor at the time. Labor with skill greater than the average is reduced to the average by measuring its greater productivity and making an appropriate adjustment. If, for example, a given laborer, because of greater natural ability, produced 100 percent more than a laborer with average skills, each hour of the superior labor would count as two hours of average labor. In this manner, all labor time is reduced to socially necessary labor time. We saw that Smith became involved in circular reasoning by measuring differences in labor skills by wages paid to labor. Marx sidestepped the entire issue by assuming that differences in labor skills are measured not by wages but by differences in physical productivity.
Another problem raised by a labor theory of value is how to account for the influence of capital goods on relative prices. Marx used Ricardo’s solution to this problem, maintaining that capital is stored-up labor. The labor time required to produce a commodity is, then, the number of hours of labor immediately applied plus the number of hours required to produce the capital destroyed in the process. Marx’s solution, like Ricardo’s, is not completely satisfactory, because it fails to allow for the fact that where capital is used, interest may be paid on the funds used to pay the indirect labor stored in the capital from the time of the payment of the indirect labor until the sale of the product.
A labor theory of value must also address the issues raised by differing fertilities of land. Equal amounts of labor time will produce varying outputs when applied to land of different fertilities. The labor theory of value that Marx developed in the first two volumes of Capital completely neglects this problem, but in Volume III he met the question by adopting Ricardo’s theory of differential rent: the greater productivity of labor on land of superior fertility is absorbed by the landlord as a differential rent. Competition will cause the rent on superior grades of land to rise until the rates of profit on all grades of land are equal. Rent, then, is price-determined, not price-determining.
A final difficulty inherent in a labor theory of value derives from the influence of profits on prices. One of the crucial aspects of this problem involves labor-capital ratios in various industries. Industries that are highly capital-intensive will produce goods whose profits are a larger proportion of final price than industries of lesser capital intensity. Because of his close study of Ricardo, Marx was fully aware of this problem, but throughout the first two volumes of Capital he avoided the issue by assuming that all industries and firms have the same capital intensity. He dropped this assumption in Volume III, however, and attempted to work out an internally consistent labor theory of value. But he failed in this, as Ricardo had before him. Before examining this problem more closely, we need to become more familiar with some other Marxian concepts.