Criticisms of the labour theory of value
Adherents of neoclassical economics, the currently predominant school, employ the theory of marginalism, which holds that the value of any good or service is determined by its marginal utility, the utility of the "last" bought consumption good measured by its price, in satisfying a specific consumer's wants. While Marx emphasises profit maximisation, neoclassical economists view the maximisation of utility at the individual or societal level as the driving force of the economy.
Proponents of the labor theory of value (LTV) would reply that as capitalism only recognises demand backed by money—the price of a good is not simply measured by its usefulness but by the amount of money consumers own. It depends on a pre-existing set of relations of distribution. These relations of distribution in turn rest on a set of relations of production, which determine how consumers "earn" money, capitalists "earn" profits, workers wages, landlords rent, and so on. Consequently the price of an object depends not only on its usefulness but on the amount of money different consumers have - their different effective demands. It is unclear how if at all this differs from a wealth effect on demand that results directly from the individual's utility maximization problem.
In microeconomics, this utility maximisation takes place under certain constraints, these are the available amounts of factors of production, for instance, labor (as with Marx profit maximisation takes place under the constraint of available production techniques and the wage rate). In fact, the ultimate restriction is time. Households divide their time (24 hours a day) into leisure time and time for work. Time for work is to make money to buy goods for consumption. The household chooses that amount of leisure time and (via working time) that amount of consumption goods that maximises its utility level. With Marx, working time is not based on a free decision of households, but the outcome of a class struggle between workers and capitalists, the former trying to decrease, the latter to increase working time.
Further, all this does not take account of effects of the accumulation process. With Marx, there is a tendency of equalisation of rates of profit in the accumulation process, which leads to prices of production. If the price of a commodity is above its price of production, then capitalists in that sector earn a super profit (a rate of profit above the average rate of profit of the economy as a whole). As a result, capital is attracted to that sector, production increases, and prices fall until the super profit has been competed away. The resulting prices of production are via transformation from labor values into prices based on labor times.
According to marginalism, value is subjective (since the same item—leisure time, consumption goods—have a different marginal utility to different consumers, or even to the same consumer under different circumstances) and therefore cannot be determined simply by measuring how much labor went into the production of an item. In the Pareto optimum, on the other hand, the exchange relations between commodities are not only determined by their marginal utility, but also by the marginal productivity of the factors of production available.
This means that, in marginalism, commodities exchange at the marginal amount of labor necessary to produce them. In this sense, an LTV, or, more precisely, a value theory of marginal labor inputs, holds. However, this applies to all factors of production and also to marginal utility. labor is nothing special. That these several value theories can hold all at the same time is made possible by marginal analysis. The Pareto optimum is defined as a situation where utility is maximised and at the same time all factors of production are employed most efficiently, leading to a situation, where all commodities exchange at their marginal utilities and at their - marginal - amounts of the different factors of production necessary to produce them.
In other words, if empirically it was found out, that commodities exchange according to their marginally necessary labor inputs, this would confirm marginal theory. It would contradict Marx’s theory, because according to Marx these exchange ratios are determined by prices of production, which are generally different from the necessary labor inputs, the labor values. Implicitly, Marx is thus denying, that capitalism is in a state of Pareto optimality.
Supply and demand
One of the most widely used economic models popularised by Alfred Marshall purposes that under a competitive framework, the price (and hence value) cannot be determined considering only the processes and individuals involved in producing the commodities, but also on account of those who end up buying it, and the related phenomena of its consumption. In other words, the Law of Supply & Demand asserts that prices of goods are an interaction and resulting measure of how hard it is for society to supply such goods, and how useful and in demand are they for the consuming portion of society.
A close reading of Jevons' chapter on "labor" in his "Theory of Political Economy" reveals that he considered his marginal analysis quite consistent with the labor theory of value as he established that in equilibrium marginal utility equals marginal labor value. It is indeed Jevons' revolutionary discovery that labor must be measured in terms of marginal labor value (δL/δX).
Opponents of Marxist economics argue that the labor Theory of Value is dis-proven as commodities may diverge from the average price of production. In his 1871 work Principles of Economics, Austrian Economist Carl Menger writes:
There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production. A non-economic good (a quantity of timber in a virgin forest, for example) does not attain value for men since large quantities of labor or other economic goods were not applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command...The quantities of labor or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good. Comparison of the value of a good with the value of the means of production employed in its production does, of course, show whether and to what extent its production, an act of past human activity, was appropriate or economic. But the quantities of goods employed in the production of a good have neither a necessary nor a directly determining influence on its value.
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, which necessarily involves the passage of time. A steel ladder, for example, is 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.
Roundabout processes, Böhm-Bawerk maintained, lead to a price that pays for more than labor value, and this makes it unnecessary to postulate exploitation to understand the return on capital.
In contrast, Marx argued that Capital, it is not demand that creates, but labor that preserves the value of the commodities obtained prior to the actual process of production - in this case, the iron, steel and machines necessary to make the ladder:
- The worker is unable to add new labor, to create new value, without at the same time preserving old values, because the labor he adds must be of a specific useful kind, and he cannot do work of a useful kind without employing products as the means of production of a new product, and thereby transferring their value to the new product. [This] is a gift of nature which costs the worker nothing, but is very advantageous to the capitalist since it preserves the existing value of his capital.
Thus, proponents of the LTV argue, without the necessary addition of human labor-power, the ore, steel and machines would not create any new value on their own, but would in fact gradually depreciate what value they originally possessed through the ravages of time and neglect. Once these materials are activated in the labor process, their values are simply transferred from one commodity to another with no increase. They claim that it is not the materials, but the labor-time present in a commodity that represents its mark-up in value over the course of its production.
Böhm-Bawerk's positive theory of interest also argued that workers trade in their share of the end price for the more certain wages paid by the entrepreneur. Entrepreneurs, he claimed, have given up a safer wage-earning job to take on the role of entrepreneur. In other words, he claimed that profits compensated the entrepreneur for the willingness to bear risk and to wait to receive income.
Böhm-Bawerk's essential argument that employers are compensated for shouldering some risk in paying their employees ahead of time, however, appears unable to explain how profit can be accumulated in cases where workers are reliant on commissions, tips, etc. for their income, which are received only after they sell their services. However, Böhm-Bawerk's does provide such an explanation. In the context of a waiter earning tips, the waiter himself is not a wage-earner. The restaurant owner does not make of profit from the tips earned by the waiter. The waiter is essentially an entrepreneur, taking the risk that customers will sufficiently compensate him for the labor he provides, while the customers are under no legal obligation to do so. The waiter is making an investment of services in anticipation of future return from the customers. The waiter is compensated by an aggregate amount of earnings from tips that exceeds that labor value provided to the customers, thereby including a return on the waiter's investment. If the tips were not sufficient to provide this return on investment, then the waiter would rationally seek other employment, such as a wage-earning job with similar compensation that does not include the risk element or an entrepreneurial job with similar risk that provides a better return.
Regarding other situations where the employer-entrepreneur does receive a profit from after the labor has been rendered (e.g., a salesperson who works on commission), the employer-entrepreneur may take risks other than paying a wage to the salesman, including: providing a salesperson with an office, cell phone and/or computer; paying for product training and marketing materials; paying for travel and lodging expenses; producing inventory in reliance upon future sales that may or may not be made by the salesperson. All of this comprises a potential for loss that accounts for the return on investment realised by the employer-entrepreneur.
The Austrian school, led by Eugen von Böhm-Bawerk, argues against the whole tradition of the LTV (see above) and prefers methodological individualism. Neoclassical economics also follows this lead — and that of Jevons, Menger, and Walras — from the 1870s and discards the LTV in favour of general equilibrium theory, which determines prices based on the interaction of preferences, technology and endowments through supply and demand.
- Some people might think that if the value of a commodity is determined by the quantity of labor spent on it, the more idle and un-skilful the laborer, the more valuable would his commodity be, because more time would be required in its production. The labor, however, that forms the substance of value, is homogeneous human labor, expenditure of one uniform labor power. The total labor power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labor power, composed though it be of innumerable individual units...The labor time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time.
Thus, according to Marx, any labor power squandered during the production of a commodity, i.e., labor that is socially unnecessary, does not add value, as value is determined by the average social labor.
Robert Nozick has criticised the qualifier "socially necessary" in the labor theory of value as not well-defined and concealing a subjective judgement of necessity. For example, Nozick posits a laborer who spends his time tying knots in a piece of cord. The laborer does his job as efficiently as is humanly possible, but Marx would likely agree that simply tying knots in cords is not a socially necessary use of labor. The problem is that what is "socially necessary" depends entirely on whether or not there is demand for the finished product, i.e., the knotted cord. In this way, introducing the "socially necessary" qualifier into the labor theory of value simply converts the theory into a roundabout and imprecise description of supply and demand.
It is often assumed that the LTV would apply in a socialist (or post-capitalist) society, though (purportedly at least) without the corresponding exploitation.
However, Marx argued in his Critique of the Gotha Programme:
- Within the co-operative society based on common ownership of the means of production, the producers do not exchange their products; just as little does the labor employed on the products appear here as the value of these products, as a material quality possessed by them, since now, in contrast to capitalist society, individual labor no longer exists in an indirect fashion but directly as a component part of the social labor.
David Ramsay Steele expands on this:
- Numerous Marxist writers, from Marx and Engels down to Charles Bettelheim, have favoured employing units of labor-time for planning production under socialism. This proposal is often referred to as an application of the labor theory of value, though that usage is not in conformity with Marx's. The Marxian labor theory of value (LTV) is intended to explain the determination of prices under commodity production (this is occasionally denied, but see Steele 1986). In Marxian terminology, there can be no 'value' in post-capitalist society. Both the LTV and communist planning conceive of resource allocation being guided by quantities of labor-time. Yet the LTV as an explanation of market prices and the labor-time planning proposal are two distinct theories, which may stand or fall independently. If the LTV were the correct explanation of market prices, this in itself would not show that units of labor-time could be of any practical use in administration of communist industry. And if units of labor-time could effectively be employed for communist planning, this would not require that the LTV be the correct explanation of market prices...
- According to Marx's theory, actual prices virtually always diverge from 'values' defined as units of labor-time. In Marx's thinking, after 1860, the relationship between 'value' and observed market prices is somewhat analogous to the relationship between 'mass' and 'heaviness', or between 'heat' and everyday awareness of temperature. Marx's 'value' is purportedly necessary to explain price, but it does not correspond to price or equilibrium price (often not even roughly) and therefore obvious disparities between value and price are not seen by Marx as refutations of his theory, though they are seen as contradicting the simple models employed in the early stages of expounding his theory in Volumes I and II of "Capital".
The inapplicability of the LTV
The LTV is a theory of capitalist production, or generalised commodity production. There are however, commodities bought and sold under capitalism that have an 'imaginary' price even though they do not have a value.
"Objects that in themselves are no commodities, such as conscience, honour, &c., are capable of being offered for sale by their holders, and of thus acquiring, through their price, the form of commodities. Hence an object may have a price without having value. The price in that case is imaginary, like certain quantities in mathematics. On the other hand, the imaginary price-form may sometimes conceal either a direct or indirect real value-relation; for instance, the price of uncultivated land, which is without value, because no human labor has been incorporated in it." (Capital Volume 1, Chapter 3, section 1)
However the socially necessary labor theory of value only becomes inapplicable for uncultivated land when that land can never be productive no matter how much commercial labor is expended on it. Desert sand, gibber plains and icy wastes have very small land values because no commercial labor can be diverted from other uses to be usefully employed. In other cases, the price-form represents the indirect socially necessary labor that could be usefully employed.
- Pieces of art could be explained as instances of monopoly.
- Uncultivated land has a price, even if there is no labor involved. The price of land is explained by the theory of rent. Both Ricardo and Marx developed theories of land-rent based on the LTV.
- Paper money—according to Marx "The function of gold as coin becomes completely independent of the metallic value of that gold. Therefore things that are relatively without value, such as paper notes, can serve as coins in its place." (Capital, Vol 1, Part 1) Section 2 
- Value of shares is explained similarly like the value of land.
The importance of labor
Marx stated that only labor could cause an increase in exchange value. Assuming that all labor is equal, this suggests that labor-intensive industries ought to realize a higher profit than those that use less labor. This contradicts the tendency, accepted by Marx, that rates of profit between industries should become equal. Marx explained this contradiction by the fact that in real economic life prices vary not randomly, but in a systematic way from values. The mathematics applied to the transformation problem—transformation of labor values into production prices—attempt to describe this (albeit with the unwelcome side consequences described above).
Critics (following, for instance, studies of Piero Sraffa) respond that this makes the once intuitively appealing theory very complicated; and that there is no justification for asserting that only labor and not for example grain can increase value. Any commodity can be picked instead of labor for being the commodity with the unique power of creating value, and with equal justification one could set out a corn theory of value, identical to the labor theory of value. Anarchist Robert Paul Wolff, despite identifying as a Marxist on economic matters, nevertheless offers such a critique, saying "By reproducing for corn [grain] or iron or coal, all the striking results that Marx derived concerning for labor, we have, it seems to me, raised questions about the foundations of Marx's critique of capitalism and classical political economy."
However, there may be several problems with this criticism. The starting point for Marx's argument was: "What is the common social substance of all commodities? It is labor." It is not possible to view grain, iron etc. as common to all commodities, whereas the production of commodities is impossible without labor (while it can also be said that other commodities such as tools are required, they cannot be properly aggregated by value because they are specialised and disparate in nature and their values, relative to each other and to labor, depend on prices that in turn depend on their values; Sraffa (1960), for instance, aggregates them according to the labor required for their production). Marx identifies the substance of value as labor, which in his view is not a commodity (though "labor power" is). This was a necessary aspect for the substance of value Marx elaborates upon in Capital and Theories of Surplus Value.
Some supporters of the LTV, however, accept the thrust of the "corn theory of value" critique, but emphasise the social aspect of what Marx calls the "common social substance", arguing that labor power is unique as it is the only commodity not sold by capitalists but rather sold by the workers themselves, whose income tends to a minimum, because they have nothing else to sell. The surplus product is appropriated by the capitalists. Alan Freeman argues: "This is of course true of other commodities [than labor power] also; but other commodities do not walk around the market disposing of their income on an equal basis with their owners. The cost of labor power is determined independently of its capacity to make money for its purchaser. This, and no other reason, is why profit exists. If laborers were hired directly as slaves, robots, beasts of burden or servants, then whether or not labor time were the measure of value, surplus labor would not be extracted in the form of money profits but directly, like domestic labor." Albert Einstein, in his description of the LTV, argues similarly: "It is important to understand that even in theory the payment of the worker is not determined by the value of his product." Marx writes on this: “In the slave system, the money-capital invested in the purchase of labor-power plays the role of the money-form of the fixed capital, which is but gradually replaced as the active period of the slave’s life expires.”
The Post-Keynesian economist Joan Robinson, who was otherwise sympathetic to Marx's writings, was strongly critical of the labor theory of value. She wrote that it was essentially a "metaphysical doctrine" and "logically a mere rigmarole of words". She writes that in the labor theory of value:
Value is something different from price, which accounts for prices, and which in turn has to be accounted for. And to account for it by labour-time is mere assertion... This theory of prices is not a myth... Nor was it intended to be an original contribution to science. It was simply an orthodox dogma.
Others have pointed out that the labor theory of value is based on a failure to recognize the properly dialectical component of human desire. Pilkington writes that:
[V]alue is attributed to objects due to our desire for them. This desire, in turn, is inter-subjective. We desire to gain [a] medal or to capture [an] enemy flag [in battle] because it will win recognition in the eyes of our peers. [A] medal [or an enemy] flag are not valued for their objective properties, nor are they valued for the amount of labour embodied in them, rather they are desired for the symbolic positions they occupy in the inter-subjective network of desires.
Pilkington says that this is a different theory of value than the one we find in many economics textbooks. He writes that in mainstream marginalist theory consumers are viewed in an atomistic manner, unaffected by the desires of their peers. He writes that "actors in marginalist analysis have self-contained preferences; they do not have inter-subjective desires". He says that dialectical analyses of value can be found in the work of Thorstein Veblen and James Duesenberry.
- Whether the aggregation of utility functions of individuals to utility functions of whole societies is possible, is disputed.
- Details are explained by microeconomics, for a text book see Henderson, Quandt 1971.
- Gary S. Becker (1965) “A Theory of the Allocation of Time,” The Economic Journal 75 (299), pp. 493-517.
- The conditions under which relative prices of commodities, if determined by marginal utilities, are proportional to amounts of labor necessary to produce these commodities, are discussed in L. Johansen: labor Theory of Value and Marginal Utilities. Economics of Planning 1963/3, p. 89-103.
- And whether the underlying mathematical functions are “well-behaved”, as the term is. Otherwise no optimum solution exists.
- Capital, volume 1, chapter 8.
- Nikolai Bukharin, (1927) The Economic Theory of the Leisure Classes , ch. 4, part 3 .
- Capital, Volume 1, section 1
- Robert Nozick, Anarchy, State and Utopia
- Critique of the Gotha Program ch 1
- David Ramsay Steele, "From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation", La Salle: Open Court, 1992
- Karl Marx§ 3
- Self-description of Robert Paul Wolff
- Robert Paul Wolff, quoted in Ellerman's Property and Contract in Economics: the case for economic democracy ch 4
- Value, Price and Profit ch 6
- see ch1 of Capital
- See Marx's discussion of measures such length and the area of triangles in ch 20 p 312
- Freeman, Alan: Price, value and profit - a continuous, general treatment. In: Alan Freeman, Guglielmo Carchedi (editors): Marx and non-equilibrium economics. Edward Elgar. Cheltenham, UK, Brookfield, US 1996.
- For the difference between wage workers and working animals or slaves confer: John R. Bell: Capitalism and the Dialectic - The Uno-Sekine Approach to Marxian Political Economy, p. 45. London, Pluto Press 2009
- Albert Einstein: "Why Socialism?". Originally published 1949 in Monthly Review
- Karl Marx Capital, volume II, chapter XX. www.marxists.org
- Joan Robinson, "Economic Philosophy" p39
- Joan Robinson, "Economic Philosophy" p38
- Philip Pilkington, Marx, Hegel, The Labour Theory of Value and Human Desire