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Key Takeaways
Understanding the Labor Theory
For example, if hunting a deer takes 10 hours and catching a beaver 5 hours, then, 1 deer for 2 beavers would be the exchange ratio. Conversely, if both consumed 10 hours each, then the exchange ratio would be 1:1.
In developing their theories, Adam Smith and David Ricardo envisioned a hypothetical state of humanity (which is foreign to any conception of capital) that comprises elementary commodity production. In this thought experiment, self-producers equipped with their tools and materials are the primary actors in the economy.
Moreover, deer and beaver are produced here. Now, if the production of deer becomes more profitable than the production of beaver, individuals will migrate from beaver production to deer production.
Consequently, as Smith noted, labor, herein, is exchange money for commodities, and an item’s relative value would rise in proportion to the amount of labor required for its production.
Ricardo on the other hand, was more focused on how relative prices of commodities were governed. For instance, the costs of deer and beaver production include not merely the direct costs of hunting but also the indirect costs of producing implements such as traps, bows and arrows.
Therefore, the vertical integration of direct and indirect costs would further raise the costs of production. It is also worth mentioning that the incorporation of indirect costs could alter the relative profitability of an occupation.
For example, the direct labor costs of hunting a deer and trapping a beaver might be 10 hours and 5 hours respectively.
However, if the costs of producing a bow and an arrow for hunting deer, and devising a trap to catch beavers are respectively 5 and 10 hours, the exchange rate between the two commodities would be 1:1.
Under such conditions, neither of the commodities would possess an advantage of relative profitability over the other.
Labor Theory and Marxism
The labor theory of value pervades almost every facet of Marxian economic analysis (Gordon, 2021).Das Kapital, for instance, was primarily focused on the tension between the working class’s labor power and the capitalists’ ownership of the means of production.
Marx held that human labor was the sole characteristic common to all goods and services.
He, nonetheless, contended that two commodities’ having an equivalent amount of labor would not suffice, and that the two commodities must contain the same quantity of ‘socially necessary labor,’ a somewhat nebulous concept which Marx failed to define in computationally robust terms.
Finally, Marx’s critique of free market economics was waged with the weapon of the labor theory.
In formulating hisexploitation theory of capitalism, Marx declared that if all commodities in a capitalist system are exchanged at prices reflecting their true value (measured in labor hours according to Marx), capitalists would not be earning profits unless the laborers were being paid less than the actual value of their labor.
Problems with the Labor Theory of Value
The labor theory of value contains a multiplicity of serious theoretical and practical flaws.
He argues that the “exchanged articles differ from each other in the specific desires which they satisfy” while “they resemble each other in the degree of satisfaction which they confer”.
The more of a commodity you already possess, the less urgent your need would be for an additional unit of the same commodity—although the labor cost associated with its production might remain unaltered. Consequently, you would pay less for each additional unit.
Wicksteed illustrated the point noting that “in a community every member of which possessed two coats already, a further increment of coats would (ceteris paribus) satisfy a less urgent need, possess a less utility, and therefore have a lower exchange value than would be the case in a community each member of which possessed only one coat”.
The values of such commodities too, however, increase and decrease over time “because their utility changes”. Their utility changes because of an alteration “in the desires to which they minister” (Wicksteed, 1884).
Thus, the labor theory of value which is an “analysis of the act of exchange, which reduces the ‘common something’ implied in that act to labour,” cannot be “applied to this class of phenomena”.
The Subjectivist Theory
The Subjectivist Revolution, most notably, ushered in a reversal of the relationship between the cost of production and commodity prices in the market (Gordon, 2021). The labor theory had posited that input costs govern final prices.
The subjectivist theory, on the other hand, noted that the value of inputs actually stems from the final commodities’ potential market prices.
Moreover, the labor theory had argued that the amount of labor required to produce a commodity causes the commodity to be valuable.
However, in the subjective theory of value, the utility people derive from commodities causes people’s willingness to spend labor for the production of commodities.
Further Information
References
Beggs, Mike (Summer 2012). “Zombie Marx and Modern Economics, or How I Learned to Stop Worrying and Forget the Transformation Problem”. Journal of Australian Political Economy (70).
Gordon, Jason (2021). “Labor Theory of Value – Explained.” The Business Professor, LLC, https://thebusinessprofessor.com/en_US/economic-analysis-monetary-policy/labor-theory-of-value-definition.
Mongiovi, Gary (Autumn 2002). “Vulgar economy in Marxian garb: a critique of Temporal Single System Marxism”. Review of Radical Political Economics. 34 (4). pp. 393–416, at p. 398. doi:10.1016/S0486-6134(02)00176-6
Team, The Investopedia (13 July 2021). “Labor Theory of Value Definition.” Investopedia, Investopedia, https://www.investopedia.com/terms/l/labor-theory-of-value.asp.
Thomas, Bradley (12 Dec. 2019). “Three Arguments Debunking Marx”s Labor Theory of Value: Bradley Thomas.” Mises Institute, https://mises.org/wire/three-arguments-debunking-marxs-labor-theory-value.
Wicksteed, Philip H (October 1884). Das Kapital: A Criticism Philip H Wicksteed, https://www.marxists.org/history/international/social-democracy/today/1884/10/wicksteed-capital.htm.
Saul McLeod, PhD
BSc (Hons) Psychology, MRes, PhD, University of Manchester
Saul McLeod, PhD., is a qualified psychology teacher with over 18 years of experience in further and higher education. He has been published in peer-reviewed journals, including the Journal of Clinical Psychology.
Olivia Guy-Evans, MSc
BSc (Hons) Psychology, MSc Psychology of Education
Olivia Guy-Evans is a writer and associate editor for Simply Psychology. She has previously worked in healthcare and educational sectors.
Ayesh PereraResearcherB.A, MTS, Harvard UniversityAyesh Perera, a Harvard graduate, has worked as a researcher in psychology and neuroscience under Dr. Kevin Majeres at Harvard Medical School.
Ayesh PereraResearcherB.A, MTS, Harvard University
Ayesh Perera
Researcher
B.A, MTS, Harvard University
Ayesh Perera, a Harvard graduate, has worked as a researcher in psychology and neuroscience under Dr. Kevin Majeres at Harvard Medical School.
