Labor theory of value
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The labor theory of value (LTV) is a
The LTV is usually associated with
Definitions of value and labor
According to the LTV, value refers to the amount of socially necessary labor to produce a marketable commodity; According to Ricardo and Marx, this includes the labor components necessary to develop any real capital (i.e., physical assets used to produce other assets).[4][5] Including these indirect labour components, sometimes described as "dead labour,"[6] provides the "real price," or "natural price" of a commodity. However, Adam Smith's version of labor value does not implicate the role of past labor in the commodity itself or in the tools (capital) required to produce it.[7]
Distinctions of economically pertinent labor
"Value in use" is the usefulness or utility of a commodity. A classical paradox often comes up when considering this type of value.
In a passage of Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations, he discusses the concepts of value in use and value in exchange, and notices how they tend to differ:
The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called "value in use;" the other, "value in exchange." The things which have the greatest value in use have frequently little or no value in exchange; on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.[8]
Value "in exchange" is the relative proportion with which this commodity exchanges for another commodity (in other words, its price in the case of money). It is relative to labor as explained by Adam Smith:
The value of any commodity, [...] to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities (Wealth of Nations Book 1, chapter V).
According to the classical economists, value is the labor embodied in a commodity under a given structure of production. Marx called this the "socially necessary labor" but it is sometimes also called the "real cost", "absolute value."[9]
Relation between values and prices
While the LTV posits that value is primarily determined by labor, it recognizes that the actual price of a commodity is influenced in the short-term by the profit motive[10] and market conditions, including supply and demand[11][12] and the extent of monopolization.[13] Adherents to the LTV conceptualize value (i.e., socially necessary labour time) as a "center of gravity" for price over the long-term.[14][15]
In Book 1, chapter VI, Adam Smith writes:
The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command. Labour measures the value not only of that part of price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit.
The final sentence explains how Smith sees value of a product as relative to labor of buyer or consumer, as opposite to Marx who sees the value of a product being proportional to labor of laborer or producer. And we value things, price them, based on how much labor we can avoid or command, and we can command labor not only in a simple way but also by trading things for a profit.
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. The transformation problem has probably generated the greatest bulk of debate about the LTV. The problem with transformation is to find an algorithm where the magnitude of value added by labor, in proportion to its duration and intensity, is sufficiently accounted for after this value is distributed through prices that reflect an equal rate of return on capital advanced. If there is an additional magnitude of value or a loss of value after transformation, then the relation between values (proportional to labor) and prices (proportional to total capital advanced) is incomplete. Various solutions and impossibility theorems have been offered for the transformation, but the debate has not reached any clear resolution.
LTV does not deny the role of supply and demand influencing price, but suggests that value and price are equivalent when supply-demand equilibrium is met. In Value, Price and Profit (1865), Karl Marx quotes Adam Smith:
It suffices to say that if supply and demand equilibrate each other, the market prices of commodities will correspond with their natural prices, that is to say, with their values as determined by the respective quantities of labor required for their production.[16]
The LTV seeks to explain the level of this equilibrium. This could be explained by a
Smith argues that labor values are the natural measure of exchange for direct producers like hunters and fishermen.[18] Marx, on the other hand, uses a measurement analogy, arguing that for commodities to be comparable they must have a common element or substance by which to measure them,[16] and that labor is a common substance of what Marx eventually calls commodity-values.[15]
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Labor process
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 foundation of classical economic theory, the Labor Theory of Value (LTV), holds that the average time and effort required to create a good or service has a significant impact on its intrinsic value. Essentially, "socially necessary" in LTV means that, if a commodity is produced with an average level of productivity and competence, its value will increase in direct proportion to the labor input. According to this hypothesis, competent and productive workers considerably increase the overall value of the workforce since they can produce a greater amount of the final product, even though they may not be as brilliant or efficient as their colleagues. In addition, all units in the same category of commodities are considered to have the same value, which guarantees a just and equitable determination of value. Therefore, value is established by the combination of labor input, average skill level, and productivity rather than by individual talent or prowess under the broad framework of the LTV, yielding a fair and thorough assessment of economic worth.
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
- 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)
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
Origins
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.
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 "
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
Adam Smith and David Ricardo
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
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]
Anarchism
Warren is widely regarded as the first American
Mutualism is an
Collectivist anarchism as defended by Mikhail Bakunin defended a form of labor theory of value when it advocated a system where "all necessaries for production are owned in common by the labour groups and the free communes ... based on the distribution of goods according to the labour contributed".[49]
Karl Marx
Contrary to popular belief Marx never used the term "Labor theory of value" in any of his works but used the term Law of value,[50][51][52] Marx opposed "ascribing a supernatural creative power to labor", arguing as such:
Labor is not the source of all wealth. 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, human labor power.[53]
Here, Marx was distinguishing between
"Socially necessary" labor refers to the quantity required to produce a commodity "in a given state of society, under certain social average conditions or production, with a given social average intensity, and average skill of the labor employed." Therefore, decreasing the cost of production does not decrease the value of a commodity, but allows the capitalist to produce more and increases the opportunity to earn a greater profit or surplus value, as long as there is demand for the additional units of production.
Criticism
The Marxist labor theory of value has been criticised on several counts. Some argue that it predicts that profits will be higher in labor-intensive industries than in capital-intensive industries, which would be contradicted by measured empirical data inherent in quantitative analysis. This is sometimes referred to as the "Great Contradiction".[55] In volume 3 of Capital, Marx explains why profits are not distributed according to which industries are the most labor-intensive and why this is consistent with his theory. Whether or not this is consistent with the labor theory of value as presented in volume 1 has been a topic of debate.[55] According to Marx, surplus value is extracted by the capitalist class as a whole and then distributed according to the amount of total capital, not just the variable component. In the example given earlier, of making a cup of coffee, the constant capital involved in production is the coffee beans themselves, and the variable capital is the value added by the coffee maker. The value added by the coffee maker is dependent on its technological capabilities, and the coffee maker can only add so much total value to cups of coffee over its lifespan. The amount of value added to the product is thus the amortization of the value of the coffeemaker. We can also note that not all products have equal proportions of value added by amortized capital. Capital intensive industries such as finance may have a large contribution of capital, while labor-intensive industries like traditional agriculture would have a relatively small one.[56] Critics argue that this turns the LTV into a macroeconomic theory, when it was supposed to explain the exchange ratios of individual commodities in terms of their relation to their labour ratios (making it a microeconomic theory), yet Marx was now maintaining that these ratios must diverge from their labour ratios. Critics thus held that Marx's proposed solution to the "great contradiction" was not so much a solution as it was sidestepping the issue.[57][58]
This article may lend
category error. According to Marx, a machine by definition cannot be a source of human labor.[60][61] Keen responds by arguing that the labor theory of value only works if the use-value and exchange-value of a machine are identical, as Marx argued that machines cannot create surplus value since as their use-value depreciates along with their exchange-value; they simply transfer it to the new product but create no new value in the process.[62] Keen's machinery argument can also be applied to slavery based modes of production, which also profit from extracting more use value from the laborers than they return to laborers.[63][64]
In their work Capital as Power, Shimshon Bichler and Jonathan Nitzan argue that while Marxists have claimed to produce empirical evidence of the labor theory of value via numerous studies which show consistent correlations between values and prices, these studies[note 4] do not actually provide evidence for it and are inadequate. According to the authors, these studies attempt to prove the LTV by showing that there is a positive correlation between market prices and labor values. However, the authors argue that these studies measure prices by looking at the price of total output (the unit price of a commodity multiplied by its total quantity) and do these for several sectors of the economy, estimate their total price and value from official statistics and measured for several years. However, Bichler and Nitzan argue that this method has statistical implications as correlations measured this way also reflect the co-variations of the associated quantities of unit values and prices. This means that the unit price and unit value of each sector are multiplied by the same value, which means that the greater the variability of output across different sectors, the tighter the correlation. This means that the overall correlation is substantially larger than the underlying correlation between unit values and unit prices; when sectors are controlled for their size, the correlations often drop to insignificant levels.[65][66] Furthermore, the authors argue that the studies do not seem to actually attempt to measure the correlation between value and price. The authors argue that, according to Marx, the value of a commodity indicates the abstract labor time required for its production; however Marxists have been unable to identify a way to measure a unit (elementary particle) of abstract labor (indeed the authors argue that most have given up and little progress has been made beyond Marx's original work) due to numerous difficulties. This means assumptions must be made and according to the authors, these involve circular reasoning:[65][66]
Bichler and Nitzan argue that this amounts to converting prices into values and then determining if they correlate, which the authors argue proves nothing since the studies are simply correlating prices with themselves.[65][66] Paul Cockshott disagreed with Bichler and Nitzan's arguments, arguing that it was possible to measure abstract labour time using wage bills and data on working hours, while also arguing Bichler and Nitzan's claims that the true value-price correlations should be much lower actually relied on poor statistical analysis itself.[68] Most Marxists, however, reject Bichler and Nitzan's interpretation of Marx, arguing that their assertion that individual commodities can have values, rather than prices of production, misunderstands Marx's work.[69] For example, Fred Moseley argues Marx understood "value" to be a "macro-monetary" variable (the total amount of labor added in a given year plus the depreciation of fixed capital in that year), which is then concretized at the level of individual prices of production, meaning that "individual values" of commodities do not exist.[70] The theory can also be sometimes found in non-Marxist traditions. Additionally, economist Joseph Schumpeter pointed out a couple of issues he believed undermined the validity of the labor theory of value. Firstly he wrote that labor theory of value failed to take into account the intrinsic differences in labor quality between individuals (a difference that, he believed, could not be properly encapsulated through the use of a value multiplier). Furthermore, he claims that labor theory of value, both in its Marxist and Ricardian formulations, would entail that labor be the sole input in an economy alongside all labor being homogenous in nature, a thesis which Schumpeter dismisses as unrealistic and one that could be resolved by Marginalism anyway. Schumpeter goes on to divert his attention towards the supposed self-contradictory nature of how labor theory of value allows for the justification of the Marxian exploitation thesis, highlighting that labor itself could not be valued since it was not itself produced by any labor and that the accumulation of surplus value described by Marx could not occur in a static, perfectly competitive market. Thus, although giving Marx the credit for seeing the need for change inherent in capitalist markets, Schumpeter nonetheless concludes that labor theory of value and its consequences remain problematic theories.[72] Some post-Keynesian economists have been highly critical of the labor theory of value. Joan Robinson, who herself was considered an expert on the writings of Karl Marx,[73] wrote that the labor theory of value was largely a tautology and "a typical example of the way metaphysical ideas operate".[74]
In ecological economics, the labor theory of value has been criticized, where it is argued that labor is in fact energy over time.[75] Such arguments generally fail to recognize that Marx is inquiring into social relations among human beings, which cannot be reduced to the expenditure of energy, just as democracy cannot be reduced to the expenditure of energy that a voter makes in getting to the polling place.[76] However, echoing Joan Robinson, Alf Hornborg, an environmental historian, argues that both the reliance on "energy theory of value" and "labor theory of value" are problematic as they propose that use-values (or material wealth) are more "real" than exchange-values (or cultural wealth)—yet, use-values are culturally determined.[77] For Hornborg, any Marxist argument that claims uneven wealth is due to the "exploitation" or "underpayment" of use-values is actually a tautological contradiction, since it must necessarily quantify "underpayment" in terms of exchange-value. The alternative would be to conceptualize unequal exchange as "an asymmetric net transfer of material inputs in production (e.g., embodied labor, energy, land, and water), rather than in terms of an underpayment of material inputs or an asymmetric transfer of 'value'".[78] In other words, uneven exchange is characterised by incommensurability, namely: the unequal transfer of material inputs; competing value-judgements of the worth of labor, fuel, and raw materials; differing availability of industrial technologies; and the off-loading of environmental burdens on those with less resources.[78][79] See also
Competing theories
Notes
References
Further reading
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