Labor theory of value
The labor theory of value (LTV) is a theory of value that argues that the exchange value of a good or service is determined by the total amount of "socially necessary labor" required to produce it. The contrasting system is typically known as the subjective theory of value.
The LTV is usually associated with Marxian economics, although it originally appeared in the theories of earlier classical economists such as Adam Smith and David Ricardo, and later in anarchist economics. Smith saw the price of a commodity as a reflection of how much labour it can "save" the purchaser. The LTV is central to Marxist theory, which holds that capitalists' expropriation of the surplus value produced by the working class is exploitative. Modern mainstream economics rejects the LTV and uses a theory of value based on subjective preferences.[1][2][3]
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.)
is the quantity of labor time (average skill and productivity) performed in producing the finished commodities during the period
is the value (or think "worth") of the product of the period ( comes from the German word for value: wert)
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.[note 1]
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 is 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 thus produce more value through the production of greater quantities of the finished commodity. Each unit still bears the same value as all the others of the same class of commodity. By working sloppily, 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, unextracted 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 compose 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.[note 2] 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:
where
Note: if the product resulting from the labor process is homogeneous (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 or ) produced to derive the unit value of each item. where is the total items produced.
The LTV further divides the value added during the period of production, , 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 . The remaining period is considered the surplus labor portion of the week: or . 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 (). 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 (). From the variables defined above, we find two other common expressions for the value produced during a given period:
and
The first form of the equation expresses the value resulting from production, focusing on the costs and the surplus value appropriated in the process of production, . The second form of the equation focuses on the value of production in terms of the values added by the labor performed during the process .
History[edit]
Origins[edit]
The labor theory of value has developed over many centuries. It had no single originator, but rather many different thinkers arrived at the same conclusion independently. Aristotle is claimed to hold to this view.[19] Some writers trace its origin to Thomas Aquinas.[20][21] In his Summa Theologiae (1265–1274) he expresses the view that "value can, does and should increase in relation to the amount of labor which has been expended in the improvement of commodities."[22] Scholars such as Joseph Schumpeter have cited Ibn Khaldun, who in his Muqaddimah (1377), described labor as the source of value, necessary for all earnings and capital accumulation. 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."[23] Scholars have also pointed to Sir William Petty's Treatise of Taxes of 1662[24] and to John Locke's labor theory of property, set out in the Second Treatise on Government (1689), which sees labor as the ultimate source of economic value. Karl Marx himself credited Benjamin Franklin in his 1729 essay entitled "A Modest Enquiry into the Nature and Necessity of a Paper Currency" as being "one of the first" to advance the theory.[25]
Adam Smith accepted the theory for pre-capitalist societies but saw a flaw in its application to contemporary capitalism. He pointed out that if the "labor embodied" in a product equaled 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.[18]
Ricardo's theory was a predecessor of the modern theory that equilibrium prices are determined solely by production costs associated with Neo-Ricardianism.[26]
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, and Percy Ravenstone[27]—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. Hence, they propose that trade should be facilitated by using notes backed by labor.
Adam Smith and David Ricardo[edit]
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."[28] According to Whitaker, Smith is claiming that 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."[29]
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 on the greater or less compensation which is paid for that labour."[30] In this connection Ricardo seeks to differentiate the quantity of labour necessary to produce a commodity from the wages paid to the laborers for its production. Therefore, wages did not always increase with the price of a commodity. However, Ricardo was troubled with some deviations in prices from proportionality with the labor required to produce them.[31] 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 stabilizes 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 would make it 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 is arguable to what extent these classical theorists held the labor theory of value as it is commonly defined.[32][33][34] 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."[35]
Competing theories