| The labor theory of value (LTV) is a theory in economics and political economy concerning a market-oriented society: the theory
equates the "value" of an exchangeable good or service (i.e., a commodity) with the amount of labor required to produce it.
The dominant view sees this as a theory of price determination in competitive markets, a substitute for the neoclassical theory of price determination. But to others, it
is a tool for understanding the social relations of production, more of an historical and institutional theory than a price theory.
David Ricardo and Karl
Marx are most often associated with this theory. However, the theory is older, going back to John Locke.
The theory's development
In his Second Treatise on Government,[1] (http://libertyonline.hypermall.com/Locke/second/second-frame.html) the philosopher John Locke, asked by what right an individual can claim to own one part of the world,
when according to the Bible, God gave the world to all humanity in common. He answered
that persons own themselves and therefore their own labor. When a person labors, that labor enters into the object. Thus, the
object becomes property of that person.
Locke argued in support of individual property rights as
"natural rights". Locke argued that a landowner's property was "his"
because he had worked for it. Locke held that this relation between labor and ownership pertained only to property that was
unowned before such labor took place.
Later British political economy focused on issues of price theory. Adam
Smith distinguished between "nominal value" (the amount of money one would exchange for a given commodity) and "real
value" (the amount of labor required to produce an object). Making matters confusing, he also used a "labor commanded"
definition of value, referring to the real value of a product as the amount of labor that could be purchased by selling
it. That these two different kinds of labor-value (labor embodied and labor commanded) seldom correspond gave rise to the
so-called transformation problem discussed below.
David Ricardo stressed the role of the first kind of labor value, the
amount of labor "embodied" in a commodity, developing what might be called a "labor theory of price": the amount of labor
embodied in a commodity determines its price. This theory of price determination by costs is a predecessor of the modern theory
that prices are determined solely by production costs associated with "neo-Ricardianism (http://cepa.newschool.edu/het/schools/neoric.htm)".
The "Ricardian socialists" — Charles Hall, Thomas Hodgskin, John Gray, and John Francis Bray[2] (http://cepa.newschool.edu/het/schools/utopia.htm#hall) — applied Ricardo's theory to
develop theories of exploitation which were similar in some ways to that
later developed by Marx.
Marx returned to Locke's
issues of the origins and legitimacy of property rights. He used the LTV to support a very different political argument than
Locke's, clarifying the Ricardian socialists' contributions: in his view, landowners are exploitative because only labor adds
value to the product. His LTV holds that, in aggregate, the price of the product equals the sum of the value of the capital goods
(means of production) used up in production and the value added by direct labor.
In this theory, the receipt of property income is only possible if the wages of direct producers do not fully compensate them
for the value they add to the capital invested to allow the production of the product. Workers work for a part of each day adding
the value required to cover their wages, while the remainder of their labour is performed for the enrichment of the capitalist.
Very early on, the Austrian school, led by Eugen von Böhm-Bawerk, argued against the whole tradition of
the LTV (see below). Much of
Western economics followed this lead — and that of Jevons, Menger, and Walras — in the 1870s to
discard the LTV as a theory of price determination in favour of neoclassical models based on demand and
supply. In the end, the neoclassical "theory of value" (general
equilibrium theory) is identical to the theory of price. Corresponding to this shift is one from Marx's emphasis on
the inner workings of the societal process of production to an emphasis on individual exchange and markets.
The theory explained
Marxian political
economy uses the concept of "socially
necessary abstract labor-time" to modify the Ricardian LTV. To some, this modification is profound enough to support the
claim that Marx's theory is not, after all, a labor theory of price of the Ricardian sort, but a new type of value theory.
Marx goes to some lengths in the first chapter of Capital to spell
out the significance of three aspects of value - its substance, magnitude, and most unusual of all, its form. His theory would
therefore seem resistant, at least, to reduction to just one such aspect, the magnitude. The substance of value is labor. The
magnitude of value is the number of labor hours. The form of value is, roughly, that institutional framework within which a society's production decisions can be directed through
the free exchange of commodities. This aspect of value as a social process, unexamined by Marx's predecessors in classical
political economy, cannot be reduced to magnitudes.
The phrase "socially necessary", far from being an arbitary adjunct to the theory (as charged by Robert Nozick), expresses that societal perspective, radically distinct from neoclassical economics. Whereas the latter starts with the
individual's perspective and exchange, Marx starts with the perspective of society as a whole. "Social production"
involves a complicated and interconnected division of labor of a
wide variety of people who depend on each other for their survival and prosperity. Individual labors are contributions to the
whole. "Abstract" labor refers to a characteristic of commodity-producing labor that is shared by all different kinds of
heterogenous (concrete) types of labor. That is, the concept abstracts from the particular characteristics of all of the
labor and is akin to average labor. Socially necessary abstract labor is measured in hours of application of labor-power but can only be realized in exchange: only labor which produces a
commodity that is a use-value to someone else (which they can afford and are
willing to buy) counts as socially necessary.
Some definitions
Marx's LTV holds that the labor needed to produce a commodity includes both labor directly expended on production of the commodity and labor expended on the
production of means of production used up in its production.
For example, if twenty workers are used for a year to produce means of production used by twenty workers in the next year to
produce a consumer good, the
good embodies the labor of forty workers. (This example assumes that technology is unchanged between the two years.)
The amount of labor done by an average worker under the prevailing conditions in a society (for instance the technology and transport in use) will
produce the same amount of value regardless of the manner of that labor. Greater value can be produced by trained workers or by
workers using leading-edge technologies: the increase in value is created by the training process or the work required to create
the technologies.
However, a lazy or inept worker (who spends more time producing an item) does not produce more value than an industrious one.
Rather, the first worker's time produces less because the value depends on what is socially necessary. That is, the value
of a product is determined more by societal standards than by individual conditions.
Exploitation
Marx used his LTV to derive his theory of exploitation
under capitalism. He assumed that all commmodities sell at prices equal to values (with both measured in the same units).
In his era, this "equal exchange" represented a standard of fair exchange: an hour of labor could be used to purchase the product
of an hour of labor.
In effect, he asked, "under equal exchange, how is it that a capitalist can sell commodity X at price P and make
a profit?" If a boss hires labor at value and then sells the commodity at value, where does profit come from?
Unlike Ricardo or the Ricardian socialists, Marx distinguished between labor-power and labor. "Labor-power" is the ability of workers
to work, given their muscles and brains. "Labor" is the actual activity of producing use values (goods and services) and value. In his examples, Marx assumed that the value of labor-power (v)
was constant, determined by prevailing socioeconomic conditions. (In his time, this was seen as "subsistence.") The profit or
surplus-value can arise if workers do more labor (L) than is
necessary to pay the cost of hiring their labor-power.
Marx's numerical examples in volume I of Das Kapital never "prove" that
capitalism always involves exploitation, i.e., that L always exceeds v. Instead, this relationship involves
class struggle over the length of the working day, the intensity of labor, the use of machinery, etc. The existence of
exploitation reflects the capitalists' victory (so far) in the struggle.
Instead, the "proof" that capitalism typically involves exploitation comes from his institutional and historical analysis of
capitalism as a whole. One way to get L > v is to use force against the workers. But unlike other systems (such
as feudalism or slavery), under capitalism the direct use of force to get workers to produce a surplus is the exception rather
than the rule. To Marx, under capitalism workers are free to quit their jobs, while they are rarely beaten.
To explain the normality of L > v, Marx instead pointed to capitalism's institutional framework, in which a
small minority (the capitalists) monopolize the means of
production, in which the workers cannnot survive except by working for capitalists, and in which the state preserves this inequality of power. In this explanation, the normal role of force is structural, part of
the usual workings of the system: the reserve army of unemployed workers continually threatens employed workers, pushing them to work hard to produce for
the capitalists.
Böhm-Bawerk's critique
The Austrian economist, Eugen von Böhm-Bawerk argued against both the Ricardian labor theory of price and Marx's theory
of exploitation. On the former, he contended that return on capital arises from the roundabout nature of production. A
steel ladder, for example, will be produced and brought to market only if the demand supports the digging of iron ore, the smelting of steel, the machines that
press that steel into ladder shape, the machines that make and help maintain those machines, etc. Advocates of the labor theory
will point out that every step in that process, however roundabout, involves labor. But Böhm-Bawerk said that what they missed
was the process itself, the roundaboutness, which necessarily involves
the passage of time.
Roundabout processes, Böhm-Bawerk maintained, lead to a price that pays for more than labor value, even the labor value of all
the process involved added together statically, and given any empirical standard for the latter. This makes it unnecessary to
postulate exploitation in order to understand the return on capital.
Marx might respond that this did not contradict his understanding of prices, in which sectors of the economy which have higher
"capital intensity" (greater roundaboutness) have higher prices
(see below). The difference, it
seems, between Marx and Böhm-Bawerk concerns perspective: for Böhm-Bawerk, roundaboutness explains entrepreneurial profits on the
microeconomic level, whereas for Marx, a society-wide institutional explanation is needed. To him, roundaboutness explains only
those profits of the more capital-intensive operations relative to less capital-intensive ones.
Furthermore, in Böhm-Bawerk's development of a positive theory of interest he said that workers trade in their share of the
end price for the more certain and soon wages paid by the entrepreneur. In other words, he claimed that profits compensated the
entrepreneur for the willingness to bear risk and to wait to receive
income.
Critics of Böhm-Bawerk's theory argue that workers are often exposed to risks such as
injury on the job, a more profound kind of risk than the merely financial risk that the entrepreneur takes. A capitalist
entrepreneur also has a greater ability to diversify (to minimize
risk) than does the laborer because the latter has only one main asset, i.e., labor-power. Further, when the entrepreneurs' risk-taking does not pay off, this cost can be shifted to workers
as wage cuts and/or layoffs. The existence of the "reserve army of the unemployed" means that even if they are aware of these risks, they often have little
choice but to take them. In the Marxian view, this argument means that entrepreneurs have no right to compensation for bearing entrepreneurial risk.
Böhm-Bawerk and other Austrian economists replied to such critics by claiming that they played upon the ambiguities of the
term "risk," that specifically financial risk must be isolated in order to understand the production process. Furthermore, the
fact that capital markets lead to the control and minimization of
financial risk is a valuable development in itself -- an argument for, not against, the overall social efficacy of capitalism.
Some critics take another tack, observing that not all risk-taking seems worth rewarding: for example, the invention and
promotion of "crack" cocaine or e-mail spam were clearly a matter of risk-taking entrepreneurship, yet both seem to have more
social costs than benefits. This is the problem of external costs, a form of
market failure which (if serious enough) encourages people to seek
non-market solutions.
The transformation problem
The most common interpretation of the LTV is as a theory of price determination, which makes Marx's theory roughly correspond
to that of Ricardo. In this view, a commodity's price derives neither from its utility to
the consumer (Marx's "use value") nor from supply and demand but from the labor that society has expended on its production. Early in volume
III of Capital, Marx presents an analysis of the relationship between
values and prices. Most read this as describing how prices can be calculated from given values.
The problems with Marx's "solution" to this mathematical problem have spawned a long debate concerning the "transformation problem." This problem of finding (or
rejecting) mathematical formulae linking individual prices to individual values is central to the dominant interpretation of the
Marxian LTV.
Even as "a simple theory of price" in which prices are directly determined by values, Marx's LTV does not deny the role
of demand. Not only must each commodity have a use-value to its buyer, but demand
and short-term supply determine its "market price" (p). Following the classical-school perspective, Marx saw each p as tending toward the "price of production"
(Smith's "natural price") due to market forces. Prices of production (p*) are long-term average prices, seen as totally
determined by costs. It was thus only in the long run that Marx denied the role of demand in determining relative prices
(under competitive markets, with no land-rent).
A simple example shows that on the micro level, the p* cannot be proportional to values, even when pure competition
prevails. Even before Marx presented his numerical examples exploring price/value relationships, David Ricardo had presented a numerical example of this fact.
1. Again measure values and prices in the same units, labor hours. Thus, the value/price contrast corresponds to Smith's
distinction between labor-embodied values and labor-commanded values and Marx's distinction between "values" and "exchange values."
2. Assume that each p initially equals value so that for any given commodity, total profits are proportional to unpaid
labor-time (surplus-value, S), total wages are proportional to paid labor-time (W), and the total amount of money
invested by the capitalist is proportional to the value of the capital invested (K). This is the "simple labor
theory of price" referred to above.
3. Suppose the ratio of unpaid labor-time to paid labor-time is the same for all commodities. This assumption reflects the
tendency (when workers are not slaves or serfs and labor-power markets are competitive) for workers to move away from sectors
with more exploitation, toward those with less. Thus, the rate
of exploitation tends toward equality between sectors. This ratio is measured here by s = S/W (unpaid
labor-time/paid labor-time).
4. But there is no reason why technical conditions of production will be the same for all commodities. Different proportions
of labor and means of production are used in distinct production processes and for different commodities. To Marx, the "organic composition of capital" or OCC differs
between sectors. For any commodity, measure this as k = K/W, the ratio of the total amount invested in
"capital" to the total amount spent on paid labor. K includes raw materials and fixed capital purchased before a production process starts. An industry with high OCC is capital-intensive, i.e., is relatively roundabout.
5. If products were traded according to labor-values, different rates of profit will be received on the capital invested in
different industries. The rate of profit, r, equals the total
amount of profit divided by the capital advanced, or S/K. This implies that the profit rate equals
-
-
- r = (S/W)/(K/W) = s/k
If s is the same for all commodities, while k varies, r differs between commodities.
6. This situation makes no sense in the real world of capitalism, even as conceived by Marx, in which firms and sectors are
competing with each other, with capitalists seeking profits everywhere. Competition among industries should remove differences in
profit rates. When able to do so, capitalists earning low r move their capital out of their industries, reducing supply
and raising p there. They enter high-r sectors, raising supply and reducing p there.
7. Thus, market prices tend toward being equal to the p* which are proportional to long-term average costs and r
is equalized between sectors. Since, according to the equation above, it is high k – or a high degree of
roundaboutness – that depresses the rate of profit, the mobility of capital raises p in the high-k sectors,
assuring capitalists a r equal to that of low k sectors. To Marx, this represents a redistribution of value
and surplus-value between sectors.
This means that the commodities produced in high-k sectors command more labor than it took to produce them. This is
Marx's take on the issue of capital intensity that Böhm-Bawerk stressed (see above).
This in turn implies that the p cannot equal values. In the long run, they equal p*, but these latter differ
from values — because they reflect profit-rate equalization. That is, the simple labor theory of price cannot be
true while "equal exchange" is not the norm.
The above consequence of varying capital intensity has been central to critiques of Marx's LTV. Some see this as its
reductio ad absurdum. However, Ricardo himself
employed a "93 percent labor theory of value," believing that most of the time labor-values were a good guide for guessing
relative prices and (after correcting for inflation) the progress of prices over time.
In general, the above shows that the simple "labor theory of price" cannot work exactly (100 percent) unless
- the organic composition of capital (k) is the same in each industry;
- there is no capital invested (k = 0, as in Smith's "early and rude state of society" (http://www.online-literature.com/adam_smith/wealth_nations/6/));
- the rate of surplus-value (s) equals zero (as in Marx's hypothetical "simple commodity production");
- differences in the rate of surplus-value between sectors are perfectly correlated with those of the organic composition;
or
- there is no tendency for the rate of profit to equalize between sectors, so there is no tendency for prices to move away from
proportionality to values (again as in Marx's simple commodity production).
Even if one or more of the conditions above applies, price/value deviations will arise if monopolies exist or if land has been appropriated as private property, so that land-rent income is received (beyond "normal" profits). In either of these cases, demand plays a role
in determining long-term prices.
More complex labor theories of price (more complex mathematical relationships between values and prices of production)
have been proposed — but then most, if not all, of them have been criticized severely and rejected. In 1969, Amit Bhaduri
pointed out that the "transformation" problem of finding a mathematical relationship between individual prices and individual
values has intractable difficulties that are mathematically identical to those seen in the famous "Cambridge" critique of Robert Solow's aggregate production
function. Whereas the problem with Solow's model is aggregation from micro- to macroeconomics, one interpretation is that the
problem with Marx's theory is disaggregation: in Capital, Marx
starts from the whole of capitalism (values) and moves to the parts (prices). In neither case can one level of analysis be
explained by the other by a mathematical relationship except under unrealistic assumptions. Instead, Marx might say that there is
a dialectical connection between the two levels (whole and parts).
An alternative interpretation
Although the above interpretation dominates most discussions, there are other views. In fact, one accepts the transformation
problem's demonstration that individual prices typically deviate from individual values as its starting point. In this
alternative view, Marx rejected the centrality of price theory in
modern economics – without denying a role for supply and demand. In some ways, he returned to Locke's questions about the
nature and origin of property rights and the orgins of unequal
ownership of property under capitalism. That is, in this view, Marx was not interested in developing a labor theory of price as
much as a labor theory of social relations.
Marx argued that price phenomena (markets, competition, supply and demand) create illusions that obscure the underlying social
relations of a capitalist society. He called this distortion of appearances "commodity fetishism". If there were some easy-to-understand mathematical relationship between prices
and values, then property income would clearly correspond to unpaid labor and the class nature of capitalism would be obvious to
almost everyone. To Marx, such clarity would undermine capitalism's legitimacy.
Commodity fetishism thus helps maintain social stability.
To Marx, social relations are best understood in terms of value: who works and who doesn't? And how do incomes received
correspond to labor done? These questions can apply just as easily to non-capitalist societies as to capitalist ones: in volume
III, ch. 47, of Capital, Marx suggests that the
- "specific economic form in which unpaid surplus-labor is pumped out of direct producers" is the basis for the "entire
formation of the economic community," revealing "the innermost secret, the hidden basis of the entire social structure ... the
political form of the relation of sovereignty and dependence ... [and] the specific form of the state."
These questions form a transhistorical theory of different types of society (e.g., capitalism, feudalism, slavery, and the old U.S.S.R.). However, it is only in a
commodity-producing society that these questions are stated in terms of values.
In this view, the LTV, as used in Capital, is a method for
understanding the nature of social relationships for capitalism as a whole: the examples of workers producing value that
Marx presents in volume I are microcosms representing the totality of society instead of being microeconomic analyses.
They present the shared characteristics of a large number of different relationships between capitalists and workers.
In this view, the contrast between labor-values and prices is just as important as their unity or connection. Values
correspond to the abstract labor-time
socially necessary to produce commodities (the contributions by workers to commodity-producing society), while prices are set
by supply, demand, and market institutions.
However, on the macro level, there is a clear relationship between price and value. All commodities are produced by labor
(using means of production and technology); the commodity-producing segment of society is nothing but a community of producers
working for each other through a complex division of labor mediated by markets. Thus, the total value of the product (the total
amount of labor done) corresponds to the total price of the product (such as that measured by Gross Domestic Product). That is, labor embodied equals labor
commanded (production equals demand) on the macro level.
In addition, the total surplus-value that workers produce limits total
property income (profits, interest, and rent) that all of the individual capitalists together can receive. That is, to Marx, all
property income — income received due to property ownership rather than from one's labor — is the result of exploitation.
Thus, there is redistribution of property income within the capitalist class: given the state of class relations and thus the
amount of surplus-value produced, a capitalist who receives a high profit rate will be benefiting partly at the expense of
capitalists who receive low profit rates. In this interpretation, markets and prices redistribute surplus-value between
capitalists so some can command more labor than is embodied in the commodities they have had produced. Others can
command less labor than is embodied in their commodities. But in the end, the total amount embodied is equal to the total amount
commanded.
The contrast between the "macro" level of values and the "micro" level of prices corresponds to the contradiction that Friedrich Engels posited under capitalism, between the socialized production of wealth and the individual
appropriation of it. Although society as a whole organizes production and exploitation, individuals are able to claim and use the
individual results of this process. Engels saw this contradiction as resulting in class conflict and crises.
Even accepting this alternative understanding of Marx's LTV, a serious criticism remains: now that Marx has explained the
nature of capitalist exploitation, why do we need the LTV? Why can't we explain exploitation in other terms, as say John Roemer
does in his 1982 General Theory of Exploitation and Class (ISBN 0-67434-440-5)? Others argue that Roemer's
neoclassical general equilibrium approach hides more than it reveals and is based on dubious assumptions. The debate
continues.
External links and references
- Bhaduri, Amit. 1969. "On the Significance of Recent Controversies on Capital Theory: A Marxian View." Economic
Journal. 79(315) September: 532-9.
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