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Labor theory of value

The labor theory of value is a theory in economics which equates the value of a thing with the amount of abstract labor required to produce it.

The theory has been used to justify various attitudes towards property relations. Marx and others contended that by virtue of his labor, the worker had (or ought to have) ownership of what he produced. Marx denounced factory owners who did not pay fairly for the labor time of the workers who created commodities for them, likening profits to thievery. Some Marxist writings go beyond the concept of "fair" payment to say that all profit belongs to the worker (see capitalist guilt).

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). In these approaches, the labor theory of value is a theory of objective value. By most interpretations, the theory of value relationships proposed by Karl Marx made similar assumptions about "labour value", "use value" and "exchange 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 persons own their own labor, this ownership being bestowed on each of us by nature, 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. Workers work for a part of each day adding the value required to cover their wages, while the remainder of their labour is performed for the enrichment of the employer.

The classical political economists and Marx knew that the price of a commoditiy does not necessarily equal its "real" value, as they calculated 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 different proportions of labour and capital goods being consumed within different 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, either the labor theory of value cannot be true, or a mysterious mechanism must exist for the transfer of profits from one industry to another. David Ricardo presented a numerical example of this reductio ad absurdum:

Suppose I employ twenty men at an expense of 1000 pounds for a year in the production of a commodity, and at the end of the year I employ twenty men again for another year, at a further expense of 1000 pounds in finishing or perfecting the same commodity, and that I bring it to market at the end of two years, if profits be 10 per cent., my commodity must sell for 2,310 pounds.; for I have employed 1000 pounds capital for one year, and 2,100 pounds capital for one year more. Another man employs precisely the same quantity of labour, but he employs it all in the first year; he employs forty men at an expense of 2000 pounds, and at the end of the first year he sells it with 10 per cent. profit, or for 2,200 pounds. Here then are two commodities having precisely the same quantity of labour bestowed on them, one of which sells for 2,310 pounds--the other for 2,200 pounds.

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 critiques of Marxian value theory. Marx believed he had shown that price phenomena created illusions which obscure the underlying social relations, which are nonetheless properly analyzed in terms of value. Criticism of Marx's attempt to demonstrate the transition from values to prices is known as his "transformation problem", since it is about the "transformation" of values into prices with which Marx concludes the third volume of his Das Kapital (Capital: A Critique of Political Economy).

Since the 1870s the Labor theory of value has been gradually displaced by the marginal theory of value in economics. Within Marxian political economy it was replaced by a theory of value based on "socially-necessary labour time" - a development of Labor theory meant to capture similar social rationalisations as marginal utility theory. The Austrian economist, Eugen von Böhm-Bawerk suggested that the Labour Theory of Value was meaningless because the workers traded in their share of the end price for the more certain and soon wages paid by the entrepreneur. The profit from wages were not therefor exploitation but a rational response from the workers who prefered certainty of income to the risk entailed in a full share of the profits.

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."