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Jump to: navigation, search The labor theories of value (LTV) are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics. Marginal utility modified labor theories of value in mainstream economics by adding the concepts of marginality (the tendency of the consumer to substitute one product for another in the marketplace and for producers to substitute one commodity for another in the production of goods and services) and diminishing utility to the original labor theory. Thus, under marginal utility, the first unit of production of a good or service yields more than the second or subsequent units but still costs an amount of socially necessary labor determined by marginal productivity of labor. This may cause a reduction of the price of the subsequent units, but the units continue to reflect the total value ( i.e. the socially necessary labor applied at the prevailing level of labor productivity) that was used to produce the subsequent units.
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 necessary to the production of a marketable commodity, including the labor necessary to the development of any real capital employed in the production. Both David Ricardo and Karl Marx attempted to quantify and embody all of the labor components in order to set the real price, or natural price of a commodity. The labor theory of value, as presented by Adam Smith, however, did not require the quantification of all past labor, nor did it deal with the labor needed to create the tools (capital) that might be employed in the production of a commodity. The Smith theory of value was very similar to the later utility theories in that Smith proclaimed that a commodity was worth whatever labor it would command in others (value in trade) or whatever labor it would "save" the self (value in use), or both. But this "value" is subject to supply and demand at a particular time. 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) Smith's theory of price (which for many is the same as value) has nothing to do with the past labor spent in the production of a commodity. It speaks only of the labor that can be "commanded" or "saved" at present. If there is no use for a buggy whip then the item is economically worthless in trade or in use, regardless of all the labor spent in its creation.
see opportunity cost). a person could be employed to fetch water. So many types of pleasant labor can be described as a result of an earlier and more painful investment. is defined as the opposite of utility "disutility". It is relative to labor as explained by Adam Smith: The value of any commodity. . Value "in use" is the usefulness of this commodity. chapter IV) Value "in exchange" is the relative proportion with which this commodity exchanges for another commodity (in other words. In Ricardo and other classical . or investment in a better path to the water might be worth considering. at least in Smith's approach. for example. plumbing could be installed. but to exchange it for other commodities. (Wealth of Nations Book 1. and who means not to use or consume it himself. In the example of a person going to a stream at his doorstep. Labour. There is a classical paradox which is often expressed when considering this type of value. but a very great quantity of other goods may frequently be had in exchange for it. has two different meanings. pain. once again in the words of Adam Smith: The word VALUE. on the contrary.. 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). value is the 'socially necessary abstract labor' embodied in a commodity. to the person who possesses it. Nothing is more useful than water: but it will purchase scarce any thing. its utility. toil etc. the house could be built closer to the stream.' The things which have the greatest value in use have frequently little or no value in exchange. therefore. Marx defined the value of the commodity by the third definition. is equal to the quantity of labour which it enables him to purchase or command. those which have the greatest value in exchange have frequently little or no value in use. Labor which is pleasant in itself is only therefore partly labor. and on the contrary. or perhaps not labor at all (however. has scarce any value in use. and sometimes the power of purchasing other goods which the possession of that object conveys. emphasis added). A diamond. If it is not pleasant it could be relevant to economics because. But the above way of defining value is not the only one. Value (without qualification) as an intrinsic worth which stands without the process of exchange. scarce any thing can be had in exchange for it. Distinctions of economically pertinent labor A person drinking water from a good stream at his doorstep must "spend" labor to gain this value. it is not labor.' the other. it is to be observed. its price in the case of money). Here. and sometimes expresses the utility of some particular object. chapter V. The one may be called 'value in use . In his terms. In terms of modern orthodox terminology it is important to note that "labor". 'value in exchange.. if this is a pleasant activity. is the real measure of the exchangeable value of all commodities (Wealth of Nations Book 1. at least if this action is relevant to economics.
production not only involves labor. However. 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.  LTV and the labor process Since the term value is understood in the LTV as denoting something created by labor. 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. the unskilled workers may drag down the average skill of labor. but is capable of pursuing any other in the village. Through custom or inclination each person pursues a particular trade. materials. These means of labor — also known as means of production — are often . thus increasing the average labor time necessary for the production of each unit commodity. Ricardo. and Marx began their expositions with the assumption that value in exchange was equal to or proportional to this labor value. These people exchange their products on a regular basis. or a "measure of value" invariable under changes in distribution and technology. Each would know how long it took their fellow to produce their good. They thought this was a good assumption from which to explore the dynamics of development in capitalist societies. power plants and so on. other classical economists. Part of what the LTV means by "socially necessary" is that the value only increases in proportion to this labor as it is performed with average skill and average productivity. and how long it would take them to make it themselves.  Conceptual model A simple model illustrating the concepts and workings of LTV could go as follows: In a village in Somewhereia. Other supporters of the labor theory of value used the word "value" in the second sense. to represent "exchange value". 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. it is important to explain how the labor process both preserves value and adds new value in the commodities it creates. this definition serves as a measure of "real cost". By working sloppily. 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).economists. but also certain means of labor: tools. and its "magnitude" as something proportional to the quantity of labor performed. 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. "absolute value". everyone shares a set of skills and their produce is derived from local natural resources. So though workers may labor with greater skill or more productivity than others. The value of a commodity increases in proportion to the duration and intensity of labor performed on average for its production.
un-extracted minerals. some specific depreciated value of the roaster and the brewer. variable capital can add value in the labor process. is called variable capital ( ). use a roaster to roast them. The amount it adds . and then use a brewer to brew and dispense a fresh cup of coffee. even crucial to the production process. etc. week year or a single turnover: meaning the time required to complete one batch of coffee. these bring no value to that process. 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. (a period is typically a day. . The first part is the portion of the process when the workers add value equivalent to the wages they are paid. The remaining period is considered the surplus labor portion of the week: or . for example. as constant capital. In performing this labor. So the labor process inevitably involves these means of production that already enter the process with a certain amount of value. 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. The worker also transfers the value of constant capital — the value of the beans. for example the $1. into two parts. This is because in contrast to the constant capital expended on means of production. Labor also requires other means of production that are not produced with labor and therefore bear no value: such as sunlight. air. these workers add value to the coffee beans and water that comprise the material ingredients of a cup of coffee.000 to — while preserving the value of — constant capital is considered the necessary labor portion of the period (or week): denoted . and the value of the cup — to the value of the final cup of coffee. if the period in question is one week and these workers collectively are paid $1. in this light. The value used to purchase labor-power. where is the constant capital of materials used in a period plus the depreciated portion of tools and plant used in the process. Again. Due to the constancy of their value. on average the worker can transfer no more than the value of these means of labor previously possessed to the finished cup of coffee 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. uncultivated land. these means of production are referred to. While useful. then the time necessary to add $1.000. where is the total items produced. The LTV further divides the value added during the period of production. For example. for example) is the quantity of labor time (average skill and productivity) performed in producing the finished commodities during the period is the value of the product of the period ( comes from the German word for value: wert) Note: if the product resulting from the labor process is homogeneous (all similar in quality and traits.000 paid in wages to these workers for the week.the product of another labor process as well. Consider for example workers who take coffee beans. Often this is expressed mathematically as: .
we find two other common expression for the value produced during a given period as: and The first form of the equation expresses the value resulting from production. then what is the relation between the two. purchase or command. As counterintuitive as this may seem to those accustomed to neoclassical price theory. (It should be kept in mind that like the terms "labor" and "value".) In Book 1. the value added during the portion of the period when surplus labor is performed is called surplus value ( ). if any? Various LTV schools of thought provide different answers to this question. The final sentence shows us how Smith sees value of a product as relative to labor of buyer or consumer. Finally. and not the general case. 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 . even by accountants. some empirical evidence suggests labor values are a better predictor of empirically recorded prices than prediction by any other means. some argue that value in the sense of the amount of labor embodied in a good acts as a center of gravity for price. .depends on the duration. price them. and of that which resolves itself into profit.  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. most economists would say that cases where pricing is even approximately equal to the value of the labor embodied are only special cases. chapter VI. "profit" and "rent" here are being used in a theoretical way which will not always correspond to everyday use. intensity. focusing on the costs and the surplus value appropriated in the process of production. And we value things. prices also normally include a level of income for "capital" and "land". each of them. These incomes are known as "profit" and "rent" respectively. From the variables defined above. but of that which resolves itself into rent. it must be observed. the terms "price. Labour measures the value not only of that part of price which resolves itself into labour. and therefore the magnitudes of each likely differ. "land". Smith explains: The real value of all the different component parts of price. "capital". is measured by the quantity of labour which they can. However. productivity and skill of the labor-power purchased: in this sense the buyer of labor-power has purchased a commodity of variable use. based on how much labor we can avoid or . In the standard formulation. For example. as opposite to Marx who sees the value of a product being proportional to labor of laborer or producer. If a commodity's value is not the same as its price.
controversies or matters relative to the article subject as a whole. but the debate has not reached any clear resolution. Marx. This could be explained by a "cost of production" argument. 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. that is to say. incidents. Karl Marx quotes Adam Smith and sums up: It suffices to say that if supply and demand equilibrate each other. and we can command labor not only in a simple way but also by trading things for a profit. The transformation problem has probably generated the greatest bulk of debate about the LTV. the market prices of commodities will correspond with their natural prices. Various solutions and impossibility theorems have been offered for the transformation. and that labor is a common substance of what Marx eventually calls commodity-values. with their values as determined by the respective quantities of labor required for their production. Price and Profit (1865). LTV does not deny the role of supply and demand influencing price since the price of a commodity is something other than its value. on the other hand. (March 2012) .  The theory's development An editor has expressed a concern that this article lends undue weight to certain ideas. Some statistical evidence for the theory has also been advanced by Anwar Shaikh. uses a measurement analogy. but this does not account for profit. Smith argues that labor values are the natural measure of exchange for direct producers like hunters and fishermen. It is the level of this equilibrium which the LTV seeks to explain. 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. and it is vulnerable to the charge of tautology in that it explains prices by prices. Please help to create a more balanced presentation. is sufficiently accounted for after this value is distributed through prices that reflect an equal rate of return on capital advanced.command. in proportion to its duration and intensity. pointing out that all costs are ultimately labor costs. In Value. The problem with transformation is to find an algorithm where the magnitude of value added by labor. Marx later called this "Smith's adding up theory of value". arguing that for commodities to be comparable they must have a common element or substance by which to measure them. Discuss and resolve this issue before removing this message.
David Ricardo (seconded by Marx) responded to this paradox by arguing that Smith had confused labor with wages.The neutrality of this article is disputed. would always be more than the labor needed to sustain itself (wages). written in 1662 by Sir William Petty and to John Locke's notion. obvious in the case of craft. in this view. though this has alternatively been seen as a labor theory of property. Thomas Aquinas. The value of labor. and John Francis Bray — applied Ricardo's theory to develop theories of exploitation. he argued. He argued that even if earning “results from something other than a craft.e. (March 2012)  The birth of the LTV Early insights in the labor theory of value appear in Aristotle´s Politics. Without labor. Please do not remove this message until the dispute is resolved. the "Ricardian socialists" — Charles Hall.. based on Aristotle's theories. produced early labor values theories. he expresses that ". covered not just the value of wages (what Marx called the value of labor power). who in his Muqaddimah (1377). In his Summa Theologiae. value can. Scholastic philosophers like St. Relevant discussion may be found on the talk page. holding that the value of labor skills is given by the goods they command in the market. the value of the resulting profit and acquired (capital) must (also) include the value of the labor by which it was obtained. does and should be increase in relation to the amount of labor which has been expended in the improvement of commodities". then profit was impossible. He developed a "theory of the value of labor". that property derives from labor through the act of "mixing" one's labor with items in the common store of goods. necessary for all earnings and capital accumulation. Ricardo's theory was a predecessor of the modern theory that equilibrium prices are determined solely by production costs associated with "neo-Ricardianism". the amount of labor that could be purchased by selling it). described labor as the source of value. . Thomas Hodgskin. Other writers (including Joseph Schumpeter) have traced back the concept even further to Ibn Khaldun. Some writers (including Bertrand Russell and Karl Marx) think the labor theory of value can be traced back to him.” Scottish economist Adam Smith accepted the LTV for pre-capitalist societies but saw a flaw in its application to capitalism. Based on the discrepancy between the wages of labor and the value of the product. set out in the Second Treatise on Government (1689). but the value of the entire product created by labor. 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 in its modern form. He maintained that value is not created solely by the expenditure of labor in the production process.. but also the utility and labor skills are pertinent to the determination of exchange values and exchange ratios. the theory has been traced back to Treatise of Taxes. He pointed out that if the "labor embodied" in a product equalled the "labor commanded" (i. it would not have been acquired. However. John Gray. "Labor commanded".
"(Quoted in Whitaker) Of course. including the labor required to produce the raw materials and machinery used in the process. he said "I cannot get over the difficulty of the wine which is kept in the cellar for three or four years [i. hold that it is unethical to charge a higher price for a commodity than the amount of labor required to produce it. 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. which perhaps originally had not 2 s. or the quantity of any other commodity for which it will exchange. expended on it in the way of labour. For example.  Adam Smith and David Ricardo Adam Smith held that. There is also the theory that adding to the price of a luxury product increases its exchange-value by mere prestige. with their particular interpretation of it being called "Cost the limit of price". 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.But [Smith] disowns what is naturally thought of as the genuine classical labor theory of value." 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. as well as contemporary individualist anarchists in that tradition. and yet comes to be worth £100. in a primitive society.. 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. However. such as claims that it is immoral for an . They. The labor theory as an explanation for value contrasts with the subjective theory of value. This theory was Ricardo’s. as are some later forms of the labor theory. or that of the oak tree. arguing that workers work for a part of each day adding the value required to cover their wages.Marx expanded on these ideas. they propose that trade should be facilitated by using notes backed by labor. the amount of labor put into producing a good determined its exchange value. according to Smith. However. Ricardo was troubled with some deviations in prices from proportionality with the labor required to produce them. 19th century American individualist anarchists based their economics on the LTV.e. while constantly increasing in exchange 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. "The value of a commodity. David Ricardo stated it as. that labor-cost regulates market-value. with exchange value meaning in this case the amount of labor a good can purchase.. Ricardo's labor theory of value is not a normative theory." "Nevertheless.. that will be done so much it is hard to find freshly corked wine. depends on the relative quantity of labour which is necessary for its production. He must in most cases share it with the owner of the stock which employs him. and not as the greater or less compensation which is paid for that labour" (Ricardo 1817). and really his alone.. the 'real value' of such a commodity produced in advanced society is measured by the labor which that commodity will command in exchange. Hence. The LTV and the accompanying theory of exploitation became central to his economic thought. while the remainder of their labor is performed for the enrichment of the capitalist.
" Part of a series on Marxism Theoretical works[show] Social sciences[show] Economics[show] History[show] Philosophy[show] . "Smith ends up making little use of a labor theory of 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. For instance. It is arguable to what extent these classical theorists held the labor theory of value as it is commonly defined. he wrote: "I am not satisfied with the explanation I have given of the principles which regulate value. As a result. In a letter. David Ricardo theorized that prices are determined by the amount of labor but found exceptions for which the labor theory could not account.individual to be paid less for his labor than the total revenue that comes from the sales of all the goods he produces.
"Socially necessary" labor refers to the quantity required to produce a commodity "in a given state of society. Whereas most economists start with the individual's perspective. the concept abstracts from the particular characteristics of all of the labor and is akin to average labor.People[show] Categories[show] Socialism portal v· t· e  Marx's contribution Contrary to popular belief. 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. Marx uses the concept of "socially necessary abstract labor-time" to introduce a social perspective distinct from his predecessors and neoclassical economics. Here Marx is drawing a distinction between exchange value (which is the subject of the LTV) and use value. arguing in the Critique of the Gotha Program that: Labor is not the source of all wealth. "Abstract" labor refers to a characteristic of commodity-producing labor that is shared by all different kinds of heterogeneous (concrete) types of labor. with a given social . under certain social average conditions or production. 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. That is. Marx does not base his LTV on what he dismisses as "ascribing a supernatural creative power to labor". human labor power.
 The labor theory of value predicts that profits will be higher in labor-intensive industries than in capital-intensive industries. Nonetheless. The profit or surplus-value arises when workers do more labor than is necessary to pay the cost of hiring their labor-power. In normal role of force is structural. Only wage workers of productive sectors of the economy produce value. pushing them to work hard to produce for the capitalists. and average skill of the labour employed. and the state preserves this inequality of power. Another distinction to be made is that between productive and unproductive labor. it produces itself and the worker as a commodity -and does so in the proportion in which it produces commodities generally. brains. With the increasing value of the world of things proceeds in direct proportion to the devaluation of the world of men. Most economists today also contest that the value of capital is limited to the "congealed labor" that it took to build the capital when that capital can increase the productive capability of labor much more than that. Economic and Philosophic Manuscripts.  Criticisms Main article: Criticisms of the labour theory of value Many liberal economists believe that the Marxist labor theory of value has been "discredited". part of the usual workings of the system." Marx responds to this in his third volume of Capital with his competition of capitals theory. the value of a product is determined more by societal standards than by individual conditions. and empirical data contradicts this. a mathematical transformation that has been fiercely debated. It is the promise of creating value possessed by human labor that has not yet been expended. or the theory is presented in a non-Marxist tradition . Marx describes capitalism as having an institutional framework in which a small minority (the capitalists) oligopolize the means of production.average intensity. Finally. "Labor" is the actual activity of producing value. "Labor-power" is the potential or ability of workers to work. To explain the normality of exploitation. but labor power sold by free wage workers to capitalists. skills. Labor produces not only commodities. which creates value. Marx distinguishes between labor power and labor. it is not labor per se." — Karl Marx. This is sometimes referred to as the "Great Contradiction." That is. the more his production increases in power and range. The worker becomes an ever cheaper commodity the more commodities he creates. The reserve army of unemployed workers continually threatens employed workers. Unlike Ricardo or the Ricardian socialists. given their muscles. certain elements of the theory are still believed to be valid. This explains why technological breakthroughs lower the price of commodities and put less advanced producers out of business. and capacities. 1844  Marx uses his LTV to derive his theory of exploitation under capitalism.  Exploitation "The worker becomes all the poorer the more wealth he produces. The workers cannot survive except by working for capitalists.
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