The Labor theory of value reference article from the English Wikipedia on 24-Apr-2004
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Labor theory of value

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The labor theory of value is a theory in economics which equates the value of an exchangable thing with the amount of abstract labor required to produce it.

The theory 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 capital goods used up in the production of the commodity.

For example, if twenty workers are used for a year to produce capital goods used by twenty workers in the next year to produce a consumer good, the consumer good embodies the labor of forty workers.

The amount of labour done by an average untrained worker under the prevailing conditions in a society (for instance the technology and transportation in use) will produce the same amount of value regardless of the manner of that labour. Greater value can be produced by trained workers, or by workers using leading edge technologies, the increase in value being embodied in the training process or the work required to create the technologies.

The labour theory of value does not derive the price of a commodity from its functional value to the consumer (described by Marx as a use value), but from the labour society has expended on its production (in Marxism, its socially necessary labour time). Marx concluded the third volume of Das Kapital (Capital: A Critique of Political Economy) with analysis of the transformation of values into prices. He believed he had shown that price phenomena created illusions which obscure the underlying social relations, which are nonetheless properly analyzed in terms of value.

This has been described as the "transformation problem", as it has been the focus of several critiques of the theory.

Table of contents
1 Development of the theory
2 Political implications
3 Varying capital intensity

Development of the theory

John Locke, in his Treatise on Government, 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. He answered that persons own their own labor, this ownership being bestowed on each of us by nature, and that when a person labored -- even the mere labour of picking an apple off a tree -- that labor entered into the object, and so the object became property of that person. From this Locke and others further argued that commodities have value because of the labor invested in them.

This raised questions for later students of economics. Adam Smith observed that in capitalist economies with a complex division of labor, people convert commodities into money and vice versa. He thus distinguished between "real value" (the amount of labor required to produce or acquire an object) and "nominal value" (the amount of money one would give or receive in exchange for a given commodity). In these approaches, the labor theory of value is a theory of objective value. By most interpretations, the theory of value relationships proposed by Karl Marx made similar assumptions about "labour value", "use value" and "exchange value".

Much of Western economics turned away in the 1870s from theories of objective value and towards the economic subjectivism associated with the development of neoclassical economics.

Within Marxian political economy the concept of "socially-necessary labour time" has been developed, which aims to take into account social rationalisations.

Political implications

In its original context, the theory was used to support the new notion of private property.

As capitalism developed, this theory was used by economists including Karl Marx to support a very different political argument: that the role of owners in production is exploitative, since it is only the workers that add value to the product. The price of the product is said to tend towards the sum of the value of the capital goods used up in production and the value added by direct labor.

Profit, interest, rent, etc. is only possible, according to the theory, if the wages of these direct workers do not fully compensate them for the value they add to the capital goods to produce 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 employer.

The Austrian economist, Eugen von Böhm-Bawerk argued against Marx's theory of exploitation, pointing out that workers traded in their share of the end price for the more certain and soon wages paid by the entrepreneur. In other words, he claimed that the employer "earns" their profit by exposing themselves to risks that the workers can avoid.

Varying capital intensity

Suppose the proportion of unpaid to paid labor time is the same for all workers. Further suppose that workers are paid when the product is sold.

Technology will result in different proportions of labour and capital goods being consumed within different industries. If products were traded based on labor values, prices would result in different industries earning different rates of profits on the capital invested. But competition among industries should be modeled as tending to remove differences in profitability. Thus, either the labor theory of value cannot be true, or a mysterious mechanism must exist for the transfer of profits from one industry to another.

David Ricardo presented a numerical example of this reductio ad absurdum:

Suppose I employ twenty men at an expense of 1000 pounds for a year in the production of a commodity, and at the end of the year I employ twenty men again for another year, at a further expense of 1000 pounds in finishing or perfecting the same commodity, and that I bring it to market at the end of two years, if profits be 10 per cent., my commodity must sell for 2,310 pounds.; for I have employed 1000 pounds capital for one year, and 2,100 pounds capital for one year more. Another man employs precisely the same quantity of labour, but he employs it all in the first year; he employs forty men at an expense of 2000 pounds, and at the end of the first year he sells it with 10 per cent. profit, or for 2,200 pounds. Here then are two commodities having precisely the same quantity of labour bestowed on them, one of which sells for 2,310 pounds--the other for 2,200 pounds.

The above logical consequence of varying capital intensity has been the main focus of economic critiques of Marxian value theory.

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