Labor Theory of Value

Labor Theory of Value is a Marxism theory that states that the relative price or economic value of a good or service is determined by the amount of labor required to produce it, which means majorly socially necessary labor.

The labor component helps find the real or the natural price of goods and services, which is determined based on the labor required to produce them. Greek philosophers first introduced this theory, but both Smith and Ricardo later worked on it. The market prices keep fluctuating due to market forces of demand and supply but the natural price can keep a control over it.

• The Labor Theory of Value is a Marxism theory. It states that a reasonable or service's relative price or economic value is estimated through the labor necessary to create it, which means majorly socially essential labor.
• The Labor theory was governed in the 18th and 19th centuries. The subjectivist revolution later took it over.
• It was primarily applied to save laborers from getting duped by capitalists. Marx executed this theory to know capitalism more than economic value. It does not consider the role of demand, which is vital in pricing any product or service. Moreover, it cannot estimate the value of non-reproducible goods. Therefore, this theory was eventually taken over by subjectivity theory but was typical for a long time in the 18th-19th century.

Early economists designed this to determine the pattern of exchange of goods and services based on the relative price of it. Thus, it was decided that the economic value of a good or service is associated with the relative man-hours put behind it. This is a crucial pillar to Marxism economics. So it means if producing a shirt requires twice more time as producing a pair of trousers, shirts were considered more valuable than trousers, and the chances of future price rise for shirts were double that of the trouser.

Though implemented with a mindset of protecting workers from the hands of capitalists, Marx labor theory of value faced a lot of backlash too. For example, it ignored the role of demand, which played a vital role in pricing any product or service. Also, it was not able to determine the value of non-reproducible goods. Thus, this theory was finally taken over by subjectivity theory but was prevalent for a long time during the 18^th-19^th century.

Let us look at some labor theory of value example.

• Let us assume a factory worker is working every day for 8 hours to produce an item worth $500. He uses raw material inventory worth $100 for producing the same. According to labor theory, it means the price of $500 of the material is sole because of the labor put towards producing it where the worker of the factory is eligible for $50 an hour. To earn profit by selling the produce the factory owner should pay the worker anything less than $50/hour. The amount the owner pays less to the worker than $50 is the profit earned straight as surplus.
• According to Marx, any profit kept away from workers was an act of capitalism and considered workers from being robbed by the owners. He also had a concept that even the tools used in production were actually the product of other workers. Thus based on the labor theory of value, Marx announced the elimination of profits which was criticized highly across the world.

Thus, the above labor theory of value example explains the concept clearly.

The labor theory of value criticism includes the following.

#1 - Natural Occurring Important Goods

• There are so many goods which are produced by nature itself like spring water, gems, fruits, and vegetables, etc. which do not require any labor. Thus according to the labor theory of value these goods had no economic value because there was no labor required to produce this.
• This also created a parity in the prices where suppose for example one person simply collected water in a bottle and tried selling it. The labor involved here is negligible but he/she charges an exorbitant price to another customer based on the labor applied just to collect the water in a bottle that doesn’t do justice to what the actual price of the water should have been.

#2 - Useless Labor

The labor theory of value criticism  also explains that at times there can be loopholes associated with this theory as lengthy man-hours associated with the product can simply increase its prices even though the time was spent on an inefficient basis. It means drilling a hole and filling it again needs a lot of effort but the net produce is zero.

#3 - Non-Exertion

At times without significant effort, one can charge more or earn more profits than required.  For example, suppose we provide a fundamental idea to another friend who is a businessman and charge him for his sales made based on the idea which was provided. Although we have applied no labor because we provided the picture, the businessman has to shell money for using the same idea.

#4 - Excessive Exertion

At times Marx labor theory of value can downgrade the labor too. For example, I have worked to develop an idea for a patent for years. Thus, a lot of effort and time goes behind it, but when the picture is launched in the market, I only get paid a relative price available at that time. Moreover, even the idea may be replaced by newer versions of the technology. So even though I have spent so much time and effort on the concept, I may not be compensated correctly.

#5 - Incentives

Here there was no scope of incentives as the production by the worker was equal to the disutility brought about by the worker.

#6 - Disproportionate Ability

There was no demand for the skill set but the focus was more placed over the quantity of produce. An example to support this can be two workers X & Y producing chairs. While X produces one chair in one hour, Y produces two chairs in one hour and thus Y will be paid twice than X even if there are some defects with the product.

Labor theory was dominant in the 18^th and 19^th centuries but later was taken over by the subjectivist revolution. It was important because it was more related to the hardship faced by the labor and how it drew attention towards them. It was mainly implemented to save laborers from getting cheated by the capitalists. Marx implemented this theory to understand more about capitalism rather than about economic value.

1. The subjective theory takes over labor theory stating that the object or service is priced not based on the number of man-hours spent on producing it but it is based more on how scarce, useful and necessary the object or service is. It replaced labor theory based on the fact that value can be generated by the perception of usefulness to the consumer or customer. The introduction of it also altered the linkage between raw material or impost cost and price in the market.
2. The labor theory stated that input cost was the driving force behind the economic value of the product whereas the subjectivity theory stated that the economic value of a product is determined by potential use and potential price it can derive from the market. In labor theory more the labor time required more the price of the product whereas in subjectivity theory more the potential need or use of the product more the economic value.

This has been a guide to what is the Labor Theory Of Value. We explain it with example, differences with subjective theory of value, condition & importance. You can learn more about from the following articles -

• Consumer Surplus Formula
• Labor Productivity
• Cost of Labor
• Keynesian Economics
• Heckscher Ohlin Model