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The labor theory of value is a

theory in economics that the price of a commodity

traded on a market tends toward the labor time required

to produce that commodity. The labor theory of value is

popularly associated with classical economics and

Marxism. It is a theory of objective value,

superseded in much of Western economics by the turn

toward economic subjectivism

associated with the development of neoclassical economics

in the 1870s.

The labor needed to produce a commodity includes both

labor directly expended on production of the commodity

and labor expended on the production of capital goods

used up in the production of the commodity. For example,

if twenty workers are used for a year to produce capital

goods used by twenty workers in the next year to

produce a consumer good, the consumer good embodies

the labor of forty workers.

This theory supports a highly political conclusion, that the role of owners and managers in production is exploitative, since it is only the workers that add value to the product.

The price of the product is said to tend towards the sum

of the value of the capital goods used up in production

and the value added by direct labor. But profit, interest,

rent, etc. is only possible, according to the theory,

if the wages of these direct workers do not fully compensate

them for the value they add to the capital goods to

produce the product.

The classical economists and Marx quickly realized that

the labor theory of value could not be exactly true.

Suppose the proportion of unpaid to paid labor time is

the same for all workers. Further suppose that workers

are paid when the product is sold.

Technology will result in

the ratio of direct labor to the value of capital goods

differing among industries. If products were traded

based on labor values, prices would result in different

industries earning different rates of profits on the

capital invested. But competition among industries

should be modeled as tending to remove differences

in profitability. Thus, the labor theory of value

cannot be true. David Ricardo presented a numerical

example of this reductio ad absurdum:

Suppose I employ twenty men at an expense of 1000 pounds

for a year in the production of a commodity, and at the end

of the year I employ twenty men again for another year, at

a further expense of 1000 pounds in finishing or perfecting

the same commodity, and that I bring it to market at the end

of two years, if profits be 10 per cent., my commodity must

sell for 2,310 pounds.; for I have employed 1000 pounds

capital for one year, and 2,100 pounds capital for one year

more. Another man employs precisely the same quantity of

labour, but he employs it all in the first year; he employs

forty men at an expense of 2000 pounds, and at the end of

the first year he sells it with 10 per cent. profit, or

for 2,200 pounds. Here then are two commodities

having precisely the same quantity of labour bestowed on

them, one of which sells for 2,310 pounds--the other

for 2,200 pounds.

There are other difficulties with the labor theory of

value associated with varying skills among heterogeneous

workers, land rent, and machinery. The above logical

consequence of varying capital intensity has been the

main focus of economic analysis of Marxist economics.

Discussion

of this aspect of the theory goes on under the rubric

of the transformation problem, since it is about the

"transformation" of labor values to prices.

/Talk