The Labor Theory of Value Lacks Value

division of labor karl marx comparative advantage productivity components of prices

Isadore Johnson for AdamSmithWorks

If the labor theory of value is correct, profit is a problem rather than a solution. Since profit can only come from exploitation, and exploitation is to be avoided, most endeavors should be neutral if not ending up in the red.
Adam Smith is referred to as the father of economics because he described how specialization and the division of labor can increase the wealth of nations, why mercantilism won’t increase the wealth of nations, and how self-interest is key to economic coordination. Despite his excellent reasoning and exposition in these areas of economic thought, he struggled to explain where value comes from adequately. As a classical economist, like Karl Marx, he believed in the labor theory of value. We’ve come a long way since the LVT, and the increasing industrialization of the economy makes the case against the labor theory of value self-evident today. Those who criticize laissez-faire on the grounds of exploitation not only run up against Smith’s more fundamental insights, but also continue to rely on an outdated and incoherent view of production and value. 

The labor theory of value suggested that the value of a commodity was determined objectively by the average amount of time spent necessary to produce it. Marx details the duality of commodities- their use value and exchange value. Since people don’t obtain the same value out of objects, the real reason for differences in prices is the amount of labor that goes into it. For instance, a coat’s usage is very different from an engine. However, prices largely fluctuate around fixed exchange rates (say, three coats to one engine), and therefore the value of a good or service must be based on the amount of labor put into it. This theory is at the root of the idea that employers systematically underpay all workers by paying them less than their marginal product, creating profits for the capitalist employers. 

If the labor theory of value is correct, profit is a problem rather than a solution. Since profit can only come from exploitation, and exploitation is to be avoided, most endeavors should be neutral if not ending up in the red. Following this systemically would result in a less efficient allocation of labor, and a decrease in capital goods. For instance, the principle of comparative advantage makes it profitable for countries to produce things they are relatively better at producing while trading for things they are relatively worse at producing. A price system based mainly on the amount of labor as an input would fail to deliver these gains. Similarly, if labor were homogeneous, an increase in the amount of capital would fail to be appreciated under a LTV regime. Since there are no gains to technology, equipment, etc. under this framework, there will be a corresponding decrease in them. 

Outside of formal economics, people mostly recognize that inputs are heterogeneous. Movies cost similar amounts of money to make, yet some are blockbusters while others go belly-up. Some food takes a lot of time to produce and isn’t worth much, whereas different locations in town can affect menu prices significantly. More broadly, we recognize that plenty of jobs have varying degrees of quality. Usually, teachers have similar amounts of education and spend similar amounts of time in the classroom, but some are better at their jobs than others.

Informal capital structures and supply lines can also affect productivity. For instance, better management (which often takes a similar amount of time to produce) can lead to more output. Better equipment can lead to more products produced per hour. More specialized supply chains can lead to more division of labor. A fan of LTV may counter by talking about how capital is labor-time stored, and abstract labor can be counted (i.e., management takes time to learn). However, this isn’t a convincing reason for seeing labor as the only input. After producing the original, the cost of reproducing an MP3 is negligible. Despite this, each additional unit sold increases profit. It’s hard to imagine who is getting exploited from this transaction. Some examples of profit require no difference in labor use. For instance, whiskey aged 20 years is more valuable than that aged 10 years.  

Even assuming all of what I’ve argued previously is false, there’d still be some challenges about which labor is valuable. Take a supply chain. Is it valuable at all without someone to sell the good? If that’s the case, is the only productive labor the merchant? If not, how do you determine which labor is being used efficiently? If a team of scientists discovers fusion after many months, is the person who discovers the principle in the shower the only person with valuable labor? This seems to go against the intuitions of labor being valuable at all. With luck playing a crucial role in getting a jackpot, how would a manager ever be able to divvy up pay in anticipation of success? She wouldn’t.  

Want to Read More?
Steven Horwitz, Adam Smith on the Labor Theory of Value, AdamSmithWorks
Russ Roberts, The Power of Trade Part 1: The Seemingly Simple Story of Comparative Advantage, Econlib
David Prychitko, Marxism, Concise Encyclopedia of Economics