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The most fundamental question in economics is the determination of the price of any good or service, i.e., the question of value. There have been many conjectures about what is value and how is it derived. One of those inferences, popularized by Karl Marx and his disciplines is about the labor theory of value. In this article, we will understand the concept of the labor theory of value and how it applies to economics today.
The most fundamental question in economics remains unanswered. The modern economist will argue that value is a theoretical construct. There is no such thing as the intrinsic value of a product. They will say that the value of a product is whatever a willing buyer and seller decide it is. To prove their case, they will usually provide the example of branded goods. Consider an average piece of clothing that may sell for $20. The same clothing can even be sold for $150 if it has an appropriate brand label. This means that there is no intrinsic value in the piece of clothing. Whatever the seller can convince the buyer to pay is the intrinsic value of the product.
Labor theory has a very distinct and clear-cut conception of value. They believe that the value of anything is the amount of labor that has to be put into the product to produce it. All classical economists seem to agree on this conception of labor being the standard unit of value.
Adam Smith once famously said that “the value of anything, i.e., the real price of anything to the man who wants to acquire it is the toil and trouble of acquiring it”. Toil and trouble were euphemisms signifying the harsh truth of human labor. As such, the foundations of the labor theory of value were laid down by the father of modern economics, i.e., Adam Smith himself.
Karl Marx further explained the relationship between capital and labor when he propounded the labor theory of value. He stated that the price of everything has one common denominator, i.e., the number of working hours that were put into manufacturing it. The number of working hours can seemingly be reduced by the use of capital, i.e., more advanced technology. Hence, he saw the production process as being a tradeoff between labor and capital.
However, he further said that all capital is also the result of human labor. This is because like other goods, machines and other capital equipment are also goods and they have to paid for by labor. Hence, he used the term “dead labor” to denote capital.
This was a revolutionary idea explained by Karl Marx. The reason is that it does not matter, how mechanized or automated a process becomes. Due to the categorization of capital as “dead labor”, any output will strictly be the result of input of the commensurate amount of labor.
The labor theory of value, therefore, believes that human labor is the building block behind every product and service. Hence, the intrinsic value of any good or service is the amount of labor that has gone in the manufacture of such a product.
The labor theory of value does not reward inefficiency in the production process. It does not mean that if a person takes more time to create a product or service by working slowly due to negligence or inefficiency, they can charge a higher price for it. The labor theory of value does not depend on the individual time it takes to produce a good or service. Instead, it considers what it the average, socially acceptable time it takes to produce a good or service. Hence, the labor theory of value does not allow prices to be manipulated by slowing down the production process.
The labor theory of value distinguishes between the value in use and value in exchange. Adam Smith has explained that some goods like water have utmost value is use. However, since they are so abundant, they require very little value and therefore are not priced very high.
There are other goods like gold, silver, and diamonds. These goods do not have much value in use. Their value is dependent upon the value in exchange, i.e., what someone else is willing to pay for it.
Adam Smith stated that it is labor that is the determinant of price in both these cases. He simply disregarded the demand-supply theory that is believed by most modern economists today.
Since Marx and his followers believed that labor was the most important factor in production, they started viewing capitalists as parasites who extract much more than they deserve because they happen to be in control of the means of production. The result was that socialism became a reality and in many countries, the means of production came to be owned by the government. However, such societies started becoming backward in the absence of entrepreneurship. Hence, it can be said that entrepreneurship is also a form of labor.
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