What is the Labor Theory of Value?
Labor Theory of Value is a Marxism theory which states that the relative price or economic value of a good or service is determined by the amount of labor required to produce it where it means majorly socially necessary labor.
This was designed by early economists to determine the pattern of exchange of goods and serviced based on the relative price of it. Thus, it was decided that the economic value of a good or service is associated with the relative man-hours put behind it. This is a key pillar to Marxism economics. So it means if producing a shirt requires twice more time than producing a pair of trousers than shirts were considered to be more valuable than trousers and like the chances of future price rise for shirts were double that of the trouser.
Labor Theory of Value Example
- Let us assume a factory worker is working every day for 8 hours to produce an item worth $500. He uses raw material inventoryRaw Material InventoryRaw materials inventory is the cost of products in the inventory of the company which has not been used for finished products and work in progress inventory. Raw material inventory is part of inventory cost which is reported under current assets on the balance sheet. worth $100 for producing the same. According to labor theory, it means the price of $500 of the material is sole because of the labor put towards producing it where the worker of the factory is eligible for $50 an hour. To earn profit by selling the produce the factory owner should pay the worker anything less than $50/hour. The amount the owner pays less to the worker than $50 is the profit earned straight as surplus.
- According to Marx, any profit kept away from workers was an act of capitalism and considered workers from being robbed by the owners. He also had a concept that even the tools used in production were actually the product of other workers. Thus based on the labor theory of value, Marx announced the elimination of profits which was criticized highly across the world.
Criticisms of Labor Theory of Value
#1 – Natural Occurring Important Goods
- There are so many goods which are produced by nature itself like spring water, gems, fruits, and vegetables, etc. which do not require any labor. Thus according to the labor theory of value these goods had no economic value because there was no labor required to produce this.
- This also created a parity in the prices where suppose for example one person simply collected water in a bottle and tried selling it. The labor involved here is negligible but he/she charges an exorbitant price to another customer based on the labor applied just to collect the water in a bottle that doesn’t do justice to what the actual price of the water should have been.
#2 – Useless Labor
At times there can be loopholes associated with this theory as lengthy man-hours associated with the product can simply increase its prices even though the time was spent on an inefficient basis. It means drilling a hole and filling it again needs a lot of effort but the net produce is zero.
#3 – Non-Exertion
At times without any important effort, one can charge more or earn more profits than required. Suppose I provide a very basic idea to another friend of mine who is a businessman and simply charge him on his sales made on the basis of the idea which was provided. Although I have applied no labor as such because the idea was provided by me, the businessman has to shell money for applying the same idea.
#4 – Excessive Exertion
At times labor theory can downgrade the labor too. An example can be I have worked for years to develop an idea and patent it. Thus, a lot of effort and time goes behind it but when the idea is launched in the market I only get paid a relative price that is available in the market at that point in time. It may happen that even the idea may be replaced by then by newer versions of the technology. So even though I have spent so much time and effort on the idea I may not be right compensated with.
#5 – Incentives
Here there was no scope of incentives as the production by the worker was equal to the disutility brought about by the worker.
#6 – Disproportionate Ability
There was no demand for the skill set but the focus was more placed over the quantity of produce. An example to support this can be two workers X & Y producing chairs. While X produces one chair in one hour, Y produces two chairs in one hour and thus Y will be paid twice than X even if there are some defects with the product.
Labor Theory of Value vs Subjective Theory of Value
- The subjective theory takes over labor theory stating that the object or service is priced not based on the number of man-hours spent on producing it but it is based more on how scarce, useful and necessary the object or service is. It replaced labor theory based on the fact that value can be generated by the perception of usefulness to the consumer or customer. The introduction of it also altered the linkage between raw material or impost cost and price in the market.
- The labor theory stated that input cost was the driving force behind the economic value of the product whereas the subjectivity theory stated that the economic value of a product is determined by potential use and potential price it can derive from the market. In labor theory more the labor time required more the price of the product whereas in subjectivity theory more the potential need or use of the product more the economic value.
Labor theory was dominant in the 18th and 19th centuries but later was taken over by the subjectivist revolution. It was important because it was more related to the hardship faced by the labor and how it drew attention towards them. It was mainly implemented to save laborers from getting cheated by the capitalists. Marx implemented this theory to understand more about capitalismCapitalismCapitalism is an economic system consisting of businesses, resources, capital goods, and labour. Private entities own it, and the income is derived by the level of production of these factors. Because of the private hands, these entities can be operated efficiently and maximize their production activity also. rather than about economic value
Labor theory though implemented with a mind-set of protecting workers from the hands of capitalist faced a lot of backlashes too. It ignored the role of demand which played a key role in the pricing of any product or services. Also, it was not able to determine the value of non-reproducible goods. Thus, this theory was finally taken over by subjectivity theory but it was prevalent for a long period of time during the 18th-19th century.
This has been a guide to What is the Labor Theory of Value & its Definition. Here we discuss the criticisms of the labor theory of value and example and its differences from subjective theory of value. You can learn more about from the following articles –