Labor Theory of Value

The labor theory of value has long been one of the central pillars of political economy, particularly Marxism. Contrary to popular opinion, Karl Marx did not invent this notion—it was also used by Adam Smith and David Ricardo—but he gave it its most famous and thorough exposition.

This view privileges labor analytically above all other forms of human activity. To meet their needs, people must work, that is, engage in collective labor. Thus, through labor, people enter into social relations, reproduce society, materialize abstract ideas, and change nature. No good or service has value without labor time embodied in it. Thus, the labor theory of value is transhistorical; it applies to all societies. The organization of labor, however, varies from society to society (or among modes of production); in capitalism, it occurs primarily through the labor market.

The labor theory of value begins with the distinction between use values and exchange values. Use values refer to the qualitative, non-market-based qualities of a good (e.g., a house shelters someone, a drink quenches someone's thirst), whereas exchange values refer to the quantitative market price of the good. Marx argued that value was produced in the workplace and not in the market, where values were only realized. Thus, value was a reflection of the physical social process of labor and not the ethereal mental world of utility maximization. Marx maintained that the value of a good to a society reflected the socially necessary labor time that went into its production; for example, if one individual spends 20 years making a pair of shoes, they are not worth much because the labor time embodied in them would be far above the socially necessary amount. Over time, prices reflect the labor time embodied in the production of goods. Machinery and equipment, or organic capital in Marx's terms, represent embodied labor time of previous rounds of labor.

The centerpiece of the labor theory of value is the manner in which surplus value is extracted. Labor, like everything else in capitalism, is a commodity, and the cost of producing laborers reflects the amount of socially necessary labor time that goes into socializing them and keeping them able to produce. In the labor market, the employer (or capitalist) will seek to pay a worker only the amount necessary to reproduce the worker, which is less than the amount of output that the worker generates in a workday. Thus, a certain share of the worker's output is appropriated by the capitalist as surplus value; the worker's use value to the capitalist is greater than worker's exchange value (and so he or she is alienated from the production[Page 269] process). Far from being an exchange of equals (between labor time and wages) as in neoclassical economics, this view holds that all labor markets, by definition, are inherently exploitative. The contentious politics of this relation is manifested in struggles over wage rates, the length of the workday, the pace of work, and so on. This view also underpins Marx's claim that all profits are thefts from the workers. Viewing labor in this way is necessary to get behind the fetishization of commodities, revealing them as social products and not as isolated things.

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