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Some statistical evidence for the theory has also been advanced by Anwar Shaikh.[4]
The labor theory of value has developed over many centuries. It had no single originator, but rather many different thinkers arrived at the same conclusion independently. Some writers trace its origin to Thomas Aquinas.[10][11] In his Summa Theologiae (1265–1274) he expresses the view that "... value can, does and should increase in relation to the amount of labor which has been expended in the improvement of commodities."[12] Scholars such as Joseph Schumpeter have cited Ibn Khaldun, who in his Muqaddimah (1377), described labor as the source of value, necessary for all earnings and capital accumulation. He argued that even if earning “results from something other than a craft, the value of the resulting profit and acquired (capital) must (also) include the value of the labor by which it was obtained. Without labor, it would not have been acquired.”[13] Scholars have also pointed to Sir William Petty's Treatise of Taxes of 1662[14] and to John Locke's labor theory of property, set out in the Second Treatise on Government (1689), which sees labor as the ultimate source of economic value. Karl Marx himself credited Benjamin Franklin in his 1729 essay entitled "A Modest Enquiry into the Nature and Necessity of a Paper Currency" as being "one of the first" to advance the theory.[15]
Pioneer Scottish economist Adam Smith accepted the theory for pre-capitalist societies but saw a flaw in its application to contemporary capitalism. He pointed out that if the "labor embodied" in a product equalled the "labor commanded" (i.e. the amount of labor that could be purchased by selling it), then profit was impossible. David Ricardo (seconded by Marx) responded to this paradox by arguing that Smith had confused labor with wages. "Labor commanded", he argued, would always be more than the labor needed to sustain itself (wages). The value of labor, in this view, covered not just the value of wages (what Marx called the value of labor power), but the value of the entire product created by labor.[16]
Ricardo's theory was a predecessor of the modern theory that equilibrium prices are determined solely by production costs associated with Neo-Ricardianism.[17]
Based on the discrepancy between the wages of labor and the value of the product, the "Ricardian socialists" — Charles Hall, Thomas Hodgskin, John Gray, and John Francis Bray, and Percy Ravenstone[18] — applied Ricardo's theory to develop theories of exploitation.
Marx expanded on these ideas, arguing that workers work for a part of each day adding the value required to cover their wages, while the remainder of their labor is performed for the enrichment of the capitalist. The LTV and the accompanying theory of exploitation became central to his economic thought.
19th century American individualist anarchists based their economics on the LTV, with their particular interpretation of it being called "Cost the limit of price". They, as well as contemporary individualist anarchists in that tradition, hold that it is unethical to charge a higher price for a commodity than the amount of labor required to produce it. Hence, they propose that trade should be facilitated by using notes backed by labor.
Adam Smith held that, in a primitive society, the amount of labor put into producing a good determined its exchange value, with exchange value meaning in this case the amount of labor a good can purchase. However, according to Smith, in a more advanced society the market price is no longer proportional to labor cost since the value of the good now includes compensation for the owner of the means of production: "The whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him."[19] "Nevertheless, the 'real value' of such a commodity produced in advanced society is measured by the labor which that commodity will command in exchange. ... But [Smith] disowns what is naturally thought of as the genuine classical labor theory of value, that labor-cost regulates market-value. This theory was Ricardo’s, and really his alone."[20]
Classical economist David Ricardo's labor theory of value holds that the value of a good (how much of another good or service it exchanges for in the market) is proportional to how much labor was required to produce it, including the labor required to produce the raw materials and machinery used in the process. David Ricardo stated it as, "The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not as the greater or less compensation which is paid for that labour." (Ricardo 1817) In this heading Ricardo seeks to differentiate the quantity of labor necessary to produce a commodity from the wages paid to the laborers for its production. However, Ricardo was troubled with some deviations in prices from proportionality with the labor required to produce them. For example, he said "I cannot get over the difficulty of the wine, which is kept in the cellar for three or four years [i.e., while constantly increasing in exchange value], or that of the oak tree, which perhaps originally had not 2 s. expended on it in the way of labour, and yet comes to be worth £100."(Quoted in Whitaker) Of course, a capitalist economy stabilizes this discrepancy until the value added to aged wine is equal to the cost of storage. If anyone can hold onto a bottle for four years and become rich, that would make it hard to find freshly corked wine. There is also the theory that adding to the price of a luxury product increases its exchange-value by mere prestige.
The labor theory as an explanation for value contrasts with the subjective theory of value, which says that value of a good is not determined by how much labor was put into it but by its usefulness in satisfying a want and its scarcity. Ricardo's labor theory of value is not a normative theory, as are some later forms of the labor theory, such as claims that it is immoral for an individual to be paid less for his labor than the total revenue that comes from the sales of all the goods he produces.
It is arguable to what extent these classical theorists held the labor theory of value as it is commonly defined.[21][22][23][24] For instance, David Ricardo theorized that prices are determined by the amount of labor but found exceptions for which the labor theory could not account. In a letter, he wrote: "I am not satisfied with the explanation I have given of the principles which regulate value." Adam Smith theorized that the labor theory of value holds true only in the "early and rude state of society" but not in a modern economy where owners of capital are compensated by profit. As a result, "Smith ends up making little use of a labor theory of value."[25]
Pierre Joseph Proudhon's mutualism[26] and American individualist anarchists such as Josiah Warren, Lysander Spooner and Benjamin Tucker[27] adopted the liberal Labor Theory of Value of classical economics but used it to criticize capitalism instead favoring a non-capitalist market system.[28]
Josiah Warren is widely regarded as the first American anarchist,[29][30] and the four-page weekly paper he edited during 1833, The Peaceful Revolutionist, was the first anarchist periodical published,[31]Cost the limit of price was a maxim coined by Josiah Warren, indicating a (prescriptive) version of the labor theory of value. Warren maintained that the just compensation for labor (or for its product) could only be an equivalent amount of labor (or a product embodying an equivalent amount).[32] Thus, profit, rent, and interest were considered unjust economic arrangements[33] In keeping with the tradition of Adam Smith's The Wealth of Nations,[34] the "cost" of labor is considered to be the subjective cost; i.e., the amount of suffering involved in it.[32] He put his theories to the test by establishing an experimental "labor for labor store" called the Cincinnati Time Store at the corner of 5th and Elm Streets in what is now downtown Cincinnati, where trade was facilitated by notes backed by a promise to perform labor. "All the goods offered for sale in Warren's store were offered at the same price the merchant himself had paid for them, plus a small surcharge, in the neighborhood of 4 to 7 percent, to cover store overhead."[30] The store proved successful and operated for three years after which it was closed so that Warren could pursue establishing colonies based on mutualism. These included "Utopia" and "Modern Times." Warren said that Stephen Pearl Andrews' The Science of Society, published in 1852, was the most lucid and complete exposition of Warren's own theories.[35]
Mutualism is an economic theory and anarchist school of thought that advocates a society where each person might possess a means of production, either individually or collectively, with trade representing equivalent amounts of labor in the free market.[36] Integral to the scheme was the establishment of a mutual-credit bank that would lend to producers at a minimal interest rate, just high enough to cover administration.[37] Mutualism is based on a labor theory of value that holds that when labor or its product is sold, in exchange, it ought to receive goods or services embodying "the amount of labor necessary to produce an article of exactly similar and equal utility".[38] Mutualism originated from the writings of philosopher Pierre-Joseph Proudhon.
Collectivist anarchism as defended by Mikhail Bakunin defended a form of labor theory of value when it advocated a system where "all necessaries for production are owned in common by the labour groups and the free communes ... based on the distribution of goods according to the labour contributed".[39]
Here Marx was distinguishing between exchange value (the subject of the LTV) and use value.
Marx used the concept of "socially necessary abstract labor-time" to introduce a social perspective distinct from his predecessors and neoclassical economics. Whereas most economists start with the individual's perspective, Marx started with the perspective of society as a whole. "Social production" involves a complicated and interconnected division of labor of a wide variety of people who depend on each other for their survival and prosperity. "Abstract" labor refers to a characteristic of commodity-producing labor that is shared by all different kinds of heterogeneous (concrete) types of labor. That is, the concept abstracts from the particular characteristics of all of the labor and is akin to average labor.
"Socially necessary" labor refers to the quantity required to produce a commodity "in a given state of society, under certain social average conditions or production, with a given social average intensity, and average skill of the labour employed."[42] That is, the value of a product is determined more by societal standards than by individual conditions. This explains why technological breakthroughs lower the price of commodities and put less advanced producers out of business. Finally, it is not labor per se, which creates value, but labor power sold by free wage workers to capitalists. Another distinction to be made is that between productive and unproductive labor. Only wage workers of productive sectors of the economy produce value.[note 3]
Many liberal economists believe that the Marxist labor theory of value has been discredited.[43] The labor theory of value has been seen by some to predict that profits will be higher in labor-intensive industries than in capital-intensive industries, and empirical data contradicts this. This is sometimes referred to as the "Great Contradiction."[44] In volume 3 of Capital, Marx attempts to explain why profits are not distributed according to which industries are the most labor-intensive and why this is consistent with his theory. Whether or not this is consistent with the labor theory of value as presented in volume 1 has been a topic of debate.[44] According to Marx, surplus value is extracted by the capitalist class as a whole and then distributed according to the amount of total capital, not the just variable component. In the example given earlier, of making a cup of coffee, the constant capital involved in production is the coffee beans themselves, and the variable capital is the value added by the coffee maker. The value added by the coffee maker is dependent on its technological capabilities, and the coffee maker can only add so much total value to cups of coffee over its lifespan. The amount of value added to the product is thus the amortization of the value of the coffeemaker. We can also note that not all products have equal proportions of value added by amortized capital. Capital intensive industries such as finance may have a large contribution by capital, while labor-intensive industries like traditional agriculture would have a relatively small one.[45]
Within anarchist economics some anarchists have rejected the labour theory of value. The difference between collectivist anarchism and anarchist communism is that under the former, a wage system is retained based on the amount of labor performed. Anarchist communism, like collectivist anarchism, also advocates for the socialization of production, but the distribution of goods as well. Instead of 'to each according to his labor', in anarcho-communism the community would supply the subsistence requirements to each member free of charge according to the maxim 'to each according to his needs'.[46] Anarcho-communists believe that subsistence, productive and distributive property should be common or social possessions while personal property should be private possessions.[47]
Nonetheless, many elements of the theory are still believed to be valid, or the theory is presented in a non-Marxist tradition.[note 4] For instance mutualist anarchist theorist Kevin Carson's Studies in Mutualist Political Economy opens with an attempt to integrate marginalist critiques into the labor theory of value.[48]
Some Post-Keynesian economists have been highly critical of the labor theory of value. Joan Robinson, who herself was considered an expert on the writings of Karl Marx, wrote that the labor theory of value was largely a tautology and "a typical example of the way metaphysical ideas operate".[49]
Others have argued that the labor theory of value, especially as it arises in the work of Karl Marx, is due to a failure to recognize the fundamentally dialectical nature of how human beings attribute value to objects. Pilkington writes that value is attributed to objects based on our desire for them and that this desire is always inter-subjective and socially determined. He writes that:
[V]alue is attributed to objects due to our desire for them. This desire, in turn, is inter-subjective. We desire to gain [a] medal or to capture [an] enemy flag [in battle] because it will win recognition in the eyes of our peers. [A] medal [or an enemy] flag are not valued for their objective properties, nor are they valued for the amount of labour embodied in them, rather they are desired for the symbolic positions they occupy in the inter-subjective network of desires.
Pilkington insists that this is an entirely different conception of value than the one we find in the marginalist theory found in many economics textbooks. He writes that "actors in marginalist analysis have self-contained preferences; they do not have inter-subjective desires".[50]
David Hume, Edinburgh, Jean-Jacques Rousseau, John Locke, Karl Marx
Communism, Scientific socialism, Socialism (Marxism), Proletariat, Bourgeoisie
Libertarianism, Anarchism, Pierre-Joseph Proudhon, Libertarian socialism, Socialism
Anarchism, Libertarianism, Politics, Mikhail Bakunin, Squatting
Economics, John Maynard Keynes, Great Depression, Adam Smith, John Locke
Exchange value, Game theory, Economics, Karl Marx, Economic history
Means of production, Market socialism, Socialism, Syndicalism, Mutualism (economic theory)
Science, Psychology, Logic, Ethics, Sociology
Adam Smith, John Maynard Keynes, Capitalism, Communism, Milton Friedman