Labor Theory of Value
The labor theory of
value is the bedrock basis of Marxist or socialist economic theory. Disagreements between the socialist
theory and that of the free marketeer can ultimately be traced back to the
question of the theory of value.
The labor theory of
value states that all value
is a result of human labor. The
theory has a certain initial plausibility since laboring does commonly result
in additional value. However, a
closer brief analysis reveals the obvious errors in such a theory.
If the labor theory
of value was correct then a diamond found in a diamond mine would be of no
greater value than a rock found right next to it since each would require the
same "amount" of labor-time.
A photo of a loved one would have the same value as a photo of a total
stranger or of a hated enemy--check your wallets or desktops to test this
theory. According to the labor
theory of value if you have a slice of pizza for lunch, valued because of the
labor-time required to produce it, you must necessarily value the next slice
the same. The labor theory of
value is a denial of the well-established law of diminishing marginal utility
which states that the value to the consumer falls with additional consumption
of the good in question. How a
true believer Marxist ever justifies ceasing pizza eating is still a
One has to wonder
what two Marxists attending a movie do as they leave together. Is each timid in expressing his opinion
as to the pleasure or displeasure of the experience since he may disagree with
his companion? After all, the
movie required the same amount of labor-time in its production. How in this theory can the value of
land space, a nature-given resource, ever be explained? According to the labor theory of value,
if a skilled carpenter produces a solid, comfortable chair which is useful for
decades in a mere four hours, whereas a klutz in four days produces a chair
which collapses with the first attempted use, the latter chair is more
valuable. (Marx had an escape
hatch for this last dilemma: Only
"socially necessary labor" creates value; however, Marx defines
socially necessary in terms of the competitive market itself--thus we are right
back to the market values Marx so vehemently abhorred!)
The labor theory of
value resulted from the mistake of David Ricardo, who proceeded from Adam
Smith's error in ascribing value to the total costs of production. Marx understandably built on Ricardo's
theory and concluded that these costs can be traced back to the costs of labor--capital
equipment being "frozen labor."
The alternate theory,
the correct theory of value, is that value is subjective. The subjective theory of value
concludes that goods have no inherent value, that goods are valuable only to
the degree that there is a valuer desiring the good.
Returning to the
examples above, the diamond is more valuable because people enjoy a diamond
more than a rock, a photo of someone dear is more important to the photo owner
than a photo of a stranger. People
stop eating pizza after a few slices because the (necessarily subjective)
pleasure diminishes with additional consumption; different movies appeal to
different patrons' tastes. A
working chair is preferred to a pile of chair pieces.
Marx came to his labor theory of value from searching for an equality in the
two goods which are exchanged for one another. Of course, Marx thought that the labor embodied in each good
was that equality (rather than other factors he first discarded, such as weight,
volume, etc.). But the nature of
exchange is such that trade only occurs when there is an inequality in the
subjective value of the good received and the good exchanged. If equality were indeed the basis of
exchange, and say an orange was exchanged for a fish due to the equal amount of
labor embodied in each, then logically, the two parties would immediately trade
the two goods again since they are still equal in labor. This would become a never ending
process until the two traders collapsed dead! As another example, and to test this theory, how many times
have you traded a dollar bill for a dollar bill, and then traded them back, and
In short, the whole
of socialist economic theory is derived from the mistaken labor theory of
value--it collapses for lack of a base; the whole of free market economic
theory is derived from the solid base of the valid subjective theory of value.
A Liberty Primer,
(Rochester, New York: Society for Individual Liberty, 1983)
pp. 181 - 182.
Time Will Run Back,
(Lanham, Maryland: University Press of America, 1986)
pp. 166 - 175.
Littlechild, Stephen C.
The Fallacy of the Mixed Economy ,
(San Francisco: The Cato Institute, 1979)
pp. 11 - 13.
"The Fallacy of Intrinsic Value" in Free Market Economics: A Basic Reader edited by Bettina Bien Greaves,
(Irvington-on-Hudson, New York: Foundation for Economic Education, Inc., 1975)
pp. 212 - 221.
Anarchy, State, and Utopia,
(New York: Basic Books, Inc., 1974)
pp. 259 - 260.
Rothbard, Murray N.
The Essential Ludwig von Mises,
(Auburn, Alabama: The Ludwig von Mises Institute, 1983)
pp. 6 - 13.