Labor Theory Of Value

Labor Theory Of Value

What is the theory of work on value?

The Labor Value Theory (LTV) was one of the first attempts by economists to explain why goods were traded for certain relative prices in the market. She suggested that the value of a product was determined by the average number of hours of work required to produce it and could be measured objectively. In the theory of work on value, the quantity of work which is used to produce an economic good is the source of the value of this good. The best known defenders of labor theory were Adam Smith, David Ricardo and Karl Marx. Since the 19th century, the theory of work on value has fallen out of favor with most traditional economists.

Key points to remember

  • The theory of the value of labor (LTV) states that the value of economic goods derives from the amount of labor required to produce them.
  • In the theory of labor on value, the relative prices between goods are explained and should tend towards a “natural price”, which reflects the relative quantity of labor which is used to produce them.
  • In economics, the theory of work on value became dominant over the subjective theory of value during the 18th and 19th centuries, but was later replaced by it during the subjectivist revolution.

Understanding the theory of work on value

The theory of the value of work suggests that two products will be negotiated at the same price if they represent the same working time, or else they will be exchanged according to a ratio fixed by the relative differences between the two working times. For example, if it takes 10 hours to hunt a deer and 20 hours to trap a beaver, then the exchange ratio would be two beavers for a deer.

The theory of the work of value was first conceived by the ancient Greek and medieval philosophers. Later, in developing their theory of the value of work, Smith (in The wealth of nations) and Ricardo began by imagining a hypothetical “gross and precocious state” of humanity consisting of a simple production of goods. It was not supposed to be an exact or historical reality; it was a thought experiment to derive the most developed version of the theory. In this first state, there are only autoproducers in the economy who all have their own materials, equipment and tools necessary to produce. There is no class distinction between capitalist, worker and owner, so the concept of capital as we know it has not yet come into play.

They took the simplified example of a two-product world of beavers and deer. If it is more profitable to produce deer than beaver, there would be a migration of people to deer production and out of beaver production. The supply of deer will increase in kind, leading to a decrease in income from deer production, with a simultaneous increase in income for beavers, as fewer people choose this job. It is important to understand that the income of autoproducers is regulated by the amount of work incorporated into production, often expressed in working time. Smith wrote that labor was the original currency for all products, and therefore the more labor employed in production, the greater the value of this article in exchange for other articles. relative.

While Smith described the concept and underlying principle of the LTV, Ricardo was interested in how these relative prices between commodities were governed. Let’s take the example of beaver and deer production again. If it takes 20 hours of work to produce a beaver and 10 hours of work to produce a deer, then a beaver would trade for two deer, both equal to 20 units of work time. The cost of production involves not only the direct costs of going out and hunting, but also the indirect costs of producing the necessary tools – the trap to catch the beaver or the bow and arrow to hunt the deer. The total amount of working time is vertically integrated, including direct and indirect working time. So if it takes 12 hours to make a beaver trap and eight hours to catch the beaver, it is equivalent to 20 hours of work.

Here is an example where beaver production is more profitable than deer at the start:

Working time required Income / h. ($) Income for 20 hours. of work Production cost
Deer Trap (12) + Hunting (8) = 20 $ 11 / hour $ 220 $ 220.00
beavers Bow and arrow (4) + hunting (6) = 10 $ 9 / hour $ 180 $ 90.00

Because it is more profitable to produce beaver, people will give up deer production and instead choose to produce beaver, creating a process of equilibration. Working time incorporated indicates that there should be an equilibrium ratio of 2: 1. So now the income of beaver producers will tend to drop to $ 10 an hour while the income of deer producers will tend increase to $ 10 as the cost of production decreases in beaver and increases in deer, bringing the ratio 2: 1 so that the new production costs would be $ 200 and $ 100. It is the natural price of goods; it was brought online because of the arbitrage opportunity that arose by having the income of beaver producers at $ 11, resulting in a profit rate greater than the natural exchange ratio of 2: 1.

Although the market price can fluctuate often due to supply and demand at any given time, the natural price acts as a center of gravity, constantly attracting prices to it – if the market price exceeds the natural price , people will be encouraged to sell more of it, while if the market price underestimates the natural price, the incentive is to buy more. Over time, this competition will tend to bring prices relative to the natural price. This means that the labor that is used to produce economic goods is what determines their value and their market prices because it determines the natural price.

Work theory and Marxism

The theory of value work has intertwined almost all aspects of Marxian analysis. Marx’s economic work, Das Kapital, was almost entirely based on the tension between the capitalist owners of the means of production and the labor power of the proletarian working class.

Marx was drawn to the theory of work because he believed that human labor was the only common characteristic shared by all the goods and services traded on the market. For Marx, however, it was not enough for two commodities to have an equivalent amount of labor; instead, the two goods must have the same amount of “socially necessary” work.

Marx used labor theory to criticize classical free market economists in the tradition of Adam Smith. If, he asked, all the goods and services of a capitalist system are sold at prices that reflect their true value, and all values ​​are measured in hours of work, how can capitalists ever profit from profits unless they pay their workers less than the real value of their labor? It was on this basis that Marx developed the theory of the exploitation of capitalism.

Problems with the labor theory of value

The theory of the value of work leads to problems which are evident in theory and in practice. First, it is clearly possible to devote a large amount of working time to the production of a good that ends up having little or no value, such as mud pies or funny jokes. Marx’s concept of socially necessary working time was an attempt to get around this problem. Second, goods that require the same amount of labor time to produce often have very different market prices on a regular basis. According to the theory of the value of work, this should be impossible, but it is an easily observable daily norm. Third, the observed relative prices of goods fluctuate considerably over time, regardless of the amount of working time devoted to their production, and often do not maintain or tend towards any stable ratio (or natural price).

Subjectivist theory takes over

The problems of labor theory were ultimately resolved by the subjective theory of value. This theory states that exchange value is based on individual assessments of the subjects of the use value of economic goods. Value emerges from human perceptions of utility. People produce economic goods because they value them.

This discovery also reversed the relationship between input costs and market prices. While labor theory held that input costs determined final prices, subjectivist theory showed that the value of inputs was based on the potential market price of final products. The subjective theory of value says that the reason people are willing to devote working time to the production of economic goods is the usefulness of goods. In a sense, this theory is exactly the opposite of the theory of the value of work. In the theory of work on value, the time spent working makes economic goods precious; in the subjective theory of value, the use value that people derive from goods pushes them to devote work to produce them.

The subjective theory of value was developed in the Middle Ages by priests and monks known as scholastics, including St. Thomas Aquinas and others. Later, three economists independently and almost simultaneously rediscovered and extended the subjective theory of value in the 1870s: William Stanley Jevons, Léon Walras and Carl Menger. This decisive change in the economy is known as the subjectivist revolution.

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