Criticisms of the labour theory of value

Criticisms of the labour theory of value often arise from an economic criticism of Marxism.

Microeconomic theory

Adherents of neoclassical economics, the currently predominant school, employ the theory of marginalism, which holds that the value of any good or service is determined by its marginal utility, the utility of the "last" bought consumption good measured by its price, in satisfying a specific consumer's wants. While Marx emphasises profit maximisation, neoclassical economists view the maximisation of utility at the individual or societal level^[1] as the driving force of the economy.

Proponents of the LTV^[who?] would reply that as capitalism only recognises demand backed by money - then the price of a good is not simply measured by its usefulness but by the amount of money consumers own - it depends on a pre-existing set of relations of distribution. These relations of distribution in turn rest on a set of relations of production, which determine how consumers "earn" their money, capitalists "earn" profits, workers wages, landlords rent and so on. Consequently the price of an object depends not only on its usefulness but on the amount of money different consumers have - their different effective demands.

In microeconomics, this utility maximisation takes place under certain constraints, these are the available amounts of factors of production, for instance, labour (as with Marx profit maximisation takes place under the constraint of available production techniques and the wage rate).^[2] In fact, the ultimate restriction is time.^[3] Households divide their time (24 hours a day) into leisure time and time for work. Time for work is to make money to buy goods for consumption. The household chooses that amount of leisure time and (via working time) that amount of consumption goods which maximises its utility level. With Marx, working time is not based on a free decision of households, but the outcome of a class struggle between workers and capitalists, the former trying to decrease, the latter to increase working time.

Further, all this does not take account of effects of the accumulation process. With Marx, there is a tendency of equalisation of rates of profit in the accumulation process, which leads to prices of production. If the price of a commodity is above its price of production, then capitalists in that sector will earn a super profit (a rate of profit above the average rate of profit of the economy as a whole). As a result capital will be attracted to that sector, production will increase, prices fall until the super profit has been competed away. The resulting prices of production are via transformation from labour values into prices based on labour times.

According to marginalism, value is subjective (since the same item - leisure time, consumption goods - will have a different marginal utility to different consumers, or even to the same consumer under different circumstances) and therefore cannot be determined simply by measuring how much labour went into the production of an item. In the Pareto optimum, on the other hand, the exchange relations between commodities are not only determined by their marginal utility, but also by the marginal productivity of the factors of production available.

This means that, in marginalism, commodities exchange at the marginal amount of labour necessary to produce them. In this sense, an LTV, or, more precisely, a value theory of marginal labour inputs, holds.^[4] However, this applies to all factors of production and also to marginal utility. Labour is nothing special. That these several value theories can hold all at the same time is made possible by marginal analysis.^[5] The Pareto optimum is defined as a situation where utility is maximised and at the same time all factors of production are employed most efficiently, leading to a situation, where all commodities exchange at their marginal utilities and at their - marginal - amounts of the different factors of production necessary to produce them.

In other words, if empirically it was found out, that commodities exchange according to their marginally necessary labour inputs, this would confirm marginal theory. It would contradict Marx’s theory, because according to Marx these exchange ratios are determined by prices of production, which are generally different from the necessary labour inputs, the labour values. Implicitly, Marx is thus denying, that capitalism is in a state of Pareto optimality.

Supply and demand

One of the most widely used economic models popularised by Alfred Marshall purposes that under a competitive framework, the price (and hence value) cannot be determined considering only the processes and individuals involved in producing the commodities, but also in account of those who will end up buying it, and the related phenomena of its consumption. In other words, the Law of Supply & Demand asserts that prices of goods are an interaction and resulting measure of how hard it is for society to supply such goods, and how useful and in demand are they for the consuming portion of society.

Such a theory is known to be imperfect due to the non-existence of perfectly competitive markets, though this approximation holds very close to reality under almost every non monopolistic scenario. Under this point of view, forcefully one must either abandon the Labour Theory of Value, or make a very specific distinction within price and value, and furthermore, the nature of that value and to whom is it worth, rendering it usually inapplicable under an economic context (see Inapplicability of LTV).^{[citation needed]}

Jevons

A close reading of Jevons' chapter on "Labour" in his "Theory of Political Economy" reveals that he considered his marginal analysis quite consistent with the labour theory of value as he established that in equilibrium marginal utility equals marginal labour value. It is indeed Jevons' revolutionary discovery that labour must be measured in terms of marginal labour value (δL/δX).^{[citation needed]}

Menger's critique

Opponents of Marxist economics argue that the Labour Theory of Value is dis-proven as commodities may diverge from the average price of production. In his 1871 work Principles of Economics, Austrian Economist Carl Menger writes:

There is no necessary and direct connection between the value of a good and whether, or in what quantities, labour and other goods of higher order were applied to its production. A non-economic good (a quantity of timber in a virgin forest, for example) does not attain value for men since large quantities of labour or other economic goods were not applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labour is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command...The quantities of labour or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good. Comparison of the value of a good with the value of the means of production employed in its production does, of course, show whether and to what extent its production, an act of past human activity, was appropriate or economic. But the quantities of goods employed in the production of a good have neither a necessary nor a directly determining influence on its value.

LTV proponents would argue that Menger's critique rests on a confusion between production in general and capitalist production. In the capitalist mode of production, a diamond found under a rock or produced in ancient times, is worth as much as a similar diamond mined at great expense from the earth as the price of the diamond will be the average cost of production, i.e. the socially necessary labour time a diamond normally costs to produce; this average includes whatever diamonds are discovered with negligible labour cost, but such cases being rare, the average is hardly altered by them.

As Marx states in Capital: "Diamonds are of very rare occurrence on the earth's surface, and hence their discovery costs, on an average, a great deal of labour-time.....If we could succeed at a small expenditure of labour, in converting carbon into diamonds, their value might fall below that of bricks." [2] Capital Volume 1 Part 1 Chapter 1

Böhm-Bawerk’s criticism

The Austrian economist Eugen von Böhm-Bawerk argued against both the Ricardian labour theory of price and Marx's theory of exploitation. On the former, he contended that return on capital arises from the roundabout nature of production which necessarily involves the passage of time. A steel ladder, for example, will be produced and brought to market only if the demand supports the digging of iron ore, the smelting of steel, the machines that press that steel into ladder shape, the machines that make and help maintain those machines, etc.

Roundabout processes, Böhm-Bawerk maintained, lead to a price that pays for more than labour value and this makes it unnecessary to postulate exploitation in order to understand the return on capital.

However, as Marx explains in Capital, it is not demand that creates, but labour that preserves the value of the commodities obtained prior to the actual process of production - in this case, the iron, steel and machines necessary to make the ladder:

The worker is unable to add new labour, to create new value, without at the same time preserving old values, because the labour he adds must be of a specific useful kind, and he cannot do work of a useful kind without employing products as the means of production of a new product, and thereby transferring their value to the new product. [This] is a gift of nature which costs the worker nothing, but is very advantageous to the capitalist since it preserves the existing value of his capital.^[6]

Thus, without the necessary addition of human labour-power, the ore, steel and machines would not create any new value on their own, but would in fact gradually depreciate what value they originally possessed through the ravages of time and neglect. Once these materials are activated in the labour process, their values are simply transferred from one commodity to another with no increase. As the LTV contends, it is not the materials, but the labour-time present in a commodity that represents its mark-up in value over the course of its production.

Böhm-Bawerk's positive theory of interest also argued that workers trade in their share of the end price for the more certain wages paid by the entrepreneur. Entrepreneurs, he claimed, have given up a safer wage-earning job to take on the role of entrepreneur. In other words, he claimed that profits compensated the entrepreneur for the willingness to bear risk and to wait to receive income.

Böhm-Bawerk's essential argument that employers are compensated for shouldering some risk in paying their employees ahead of time, however, appears unable to explain how profit can be accumulated in cases where workers are reliant on commissions, tips, etc. for their income, which are received only after they sell their services. However, Böhm-Bawerk's does provide such an explanation. In the context of a waiter earning tips, the waiter himself is not a wage-earner. The restaurant owner does not make of profit from the tips earned by the waiter. The waiter is essentially an entrepreneur, taking the risk that customers will sufficiently compensate him for the labour he provides while the customers are under no legal obligation to do so. The waiter is making an investment of services in anticipation of future return from the customers. The waiter is compensated by an aggregate amount of earnings from tips that exceeds that labour value provided to the customers, thereby including a return on the waiter's investment. If the tips were not sufficient to provide this return on investment, then the waiter would rationally seek other employment, such as a wage-earning job with similar compensation that does not include the risk element or an entrepreneurial job with similar risk that provides a better return.

Regarding other situations where the employer-entrepreneur does receive a profit from after the labour has been rendered (e.g., a salesperson who works on commission), the employer-entrepreneur may take risks other than paying a wage to the salesman, including: providing a salesperson with an office, cell phone and/or computer; paying for product training and marketing materials; paying for travel and lodging expenses; producing inventory in reliance upon future sales that may or may not be made by the salesperson. All of this comprises a potential for loss that accounts for the return on investment realised by the employer-entrepreneur.

Nikolai Bukharin argued that Böhm-Bawerk's concept of roundaboutness was untenable in the context of the continuous, simultaneous production of a modern economy.^[7]

Methodological individualism

The Austrian school, led by Eugen von Böhm-Bawerk, argues against the whole tradition of the LTV (see above). Neoclassical economics also follows this lead  — and that of Jevons, Menger, and Walras — from the 1870s and discards the LTV in favour of general equilibrium theory, which determines prices based on the interaction of preferences, technology and endowments through supply and demand. Some Marxists (see analytical Marxism) have adapted to this neoclassical general equilibrium theory with a new emphasis on individual exchange and markets through what they call methodological individualism.

What is "socially necessary"?

Marx argues in Capital:

Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and un-skilful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour power, composed though it be of innumerable individual units...The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time.^[8]

Thus, according to Marx, any labour power squandered during the production of a commodity, i.e. labour which is socially unnecessary, will not add value, as value is determined by the average social labour.

Robert Nozick has criticised the qualifier "socially necessary" in the labour theory of value as not well-defined and concealing a subjective judgement of necessity.^{[citation needed]}

The LTV in a socialist society

It is often assumed that the LTV would apply in a socialist (or post-capitalist) society, though (purportedly at least) without the corresponding exploitation.

However, Marx argued in his Critique of the Gotha Programme:

Within the co-operative society based on common ownership of the means of production, the producers do not exchange their products; just as little does the labour employed on the products appear here as the value of these products, as a material quality possessed by them, since now, in contrast to capitalist society, individual labour no longer exists in an indirect fashion but directly as a component part of the social labour.^[9]

David Ramsay Steele expands on this:

Numerous Marxist writers, from Marx and Engels down to Charles Bettelheim, have favoured employing units of labour-time for planning production under socialism. This proposal is often referred to as an application of the labour theory of value, though that usage is not in conformity with Marx's. The Marxian labour theory of value (LTV) is intended to explain the determination of prices under commodity production (this is occasionally denied, but see Steele 1986). In Marxian terminology, there can be no 'value' in post-capitalist society. Both the LTV and communist planning conceive of resource allocation being guided by quantities of labour-time. Yet the LTV as an explanation of market prices and the labour-time planning proposal are two distinct theories, which may stand or fall independently. If the LTV were the correct explanation of market prices, this in itself would not show that units of labour-time could be of any practical use in administration of communist industry. And if units of labour-time could effectively be employed for communist planning, this would not require that the LTV be the correct explanation of market prices...

According to Marx's theory, actual prices will virtually always diverge from 'values' defined as units of labour-time. In Marx's thinking, after 1860, the relationship between 'value' and observed market prices is somewhat analogous to the relationship between 'mass' and 'heaviness', or between 'heat' and everyday awareness of temperature. Marx's 'value' is purportedly necessary to explain price, but it does not correspond to price or equilibrium price (often not even roughly) and therefore obvious disparities between value and price are not seen by Marx as refutations of his theory, though they are seen as contradicting the simple models employed in the early stages of expounding his theory in Volumes I and II of "Capital".^[10]

The inapplicability of the LTV

The LTV is a theory of capitalist production, or generalised commodity production. There are however, commodities bought and sold under capitalism which have a price even though they do not have a value.

"Objects that in themselves are no commodities, such as conscience, honour, &c., are capable of being offered for sale by their holders, and of thus acquiring, through their price, the form of commodities. Hence an object may have a price without having value. The price in that case is imaginary, like certain quantities in mathematics. On the other hand, the imaginary price-form may sometimes conceal either a direct or indirect real value-relation; for instance, the price of uncultivated land, which is without value, because no human labour has been incorporated in it." (Capital Volume 1, Chapter 3, section 1)[3]

However the socially necessary labour theory of value only becomes inapplicable for uncultivated land when that land can never be productive no matter how much commercial labour is expended on it. Desert sand, gibber plains and icy wastes have very small land values because no commercial labour can be diverted from other uses to be usefully employed. In other cases the price-form will represent the indirect socially necessary labour that could be usefully employed.

• pieces of art which could be explained as instances of monopoly
• uncultivated land which has price, even if there is no labour involved. The price of land is explained by the theory of rent. Both Ricardo and Marx developed theories of land-rent based on the LTV.
• paper money. According to Marx "The function of gold as coin becomes completely independent of the metallic value of that gold. Therefore things that are relatively without value, such as paper notes, can serve as coins in its place." (Capital, Vol 1, Part 1) Section 2 [4]
• value of shares which is explained similarly like the value of land.

The importance of labour

Marx stated that only labour could cause an increase in value. Assuming that all labour is equal, this suggests that labour intensive industries ought to have a higher rate of profit than those which use less labour. This would contradict the tendency, accepted by Marx, that rates of profit between industries should become equal. Marx explained this contradiction by the fact that in real economic life prices vary not randomly, but in a systematic way from values. The mathematics applied to the transformation problem - transformation of labour values into production prices - attempt to describe this (albeit with the unwelcome side consequences described above).

Critics (following, for instance, studies of Piero Sraffa) respond that this makes the once intuitively appealing theory very complicated; and that there is no justification for asserting that only labour and not for example grain can increase value. Any commodity can be picked instead of labour for being the commodity with the unique power of creating value, and with equal justification one could set out a corn theory of value, identical to the labour theory of value.^[11] Anarchist Robert Paul Wolff, despite identifying as a Marxist on economic matters,^[12] nevertheless offers such a critique, saying "By reproducing for corn [grain] or iron or coal, all the striking results that Marx derived concerning for labour, we have, it seems to me, raised questions about the foundations of Marx's critique of capitalism and classical political economy."^[13]

However, there may be several problems with this criticism. The starting point for Marx's argument was: "What is the common social substance of all commodities? It is labor."^[14] It is not possible to view grain, iron etc. as common to all commodities, whereas the production of commodities is impossible without labour (while it can also be said that other commodities such as tools are required, they cannot be properly aggregated by value because they are specialised and disparate in nature and their values, relative to each other and to labour, depend on prices that in turn depend on their values; Sraffa (1960), for instance, aggregates them according to the labour required for their production). Marx identifies the substance of value as labour, which in his view is not a commodity (though "labour power" is). This was a necessary aspect for the substance of value Marx elaborates upon in Capital^[15] and Theories of Surplus Value.^[16]

Some supporters of the LTV, however, accept the thrust of the "corn theory of value" critique, but emphasise the social aspect of what Marx calls the "common social substance", arguing that labour power is unique as it is the only commodity not sold by capitalists but rather sold by the workers themselves, whose income tends to a minimum, because they have nothing else to sell. The surplus product is appropriated by the capitalists. Alan Freeman argues: "This is of course true of other commodities [than labour power] also; but other commodities do not walk around the market disposing of their income on an equal basis with their owners. The cost of labour power is determined independently of its capacity to make money for its purchaser. This, and no other reason, is why profit exists. If labourers were hired directly as slaves, robots, beasts of burden or servants, then whether or not labour time were the measure of value, surplus labour would not be extracted in the form of money profits but directly, like domestic labour."^[17][18] Albert Einstein, in his description of the LTV, argues similarly: "It is important to understand that even in theory the payment of the worker is not determined by the value of his product."^[19]

References

1. ^ Whether the aggregation of utility functions of individuals to utility functions of whole societies is possible, is in dispute.
2. ^ Details are explained by microeconomics, for a text book see Henderson, Quandt 1971.
3. ^ Gary S. Becker (1965) “A Theory of the Allocation of Time,” The Economic Journal 75 (299), pp. 493-517.
4. ^ The conditions under which relative prices of commodities, if determined by marginal utilities, are proportional to amounts of labour necessary to produce these commodities, are discussed in L. Johansen: Labour Theory of Value and Marginal Utilities. Economics of Planning 1963/3, p. 89-103.
5. ^ And whether the underlying mathematical functions are “well-behaved”, as the term is. Otherwise no optimum solution exists.
6. ^ Capital, volume 1, chapter 8.
7. ^ Nikolai Bukharin, (1927) The Economic Theory of the Leisure Classes , ch. 4, part 3 [1].
8. ^ Captial, Volume 1, section 1
9. ^ Critique of the Gotha Program ch 1
10. ^ David Ramsay Steele, "From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation", La Salle: Open Court, 1992
11. ^ Karl Marx§ 3
12. ^ Self-description of Robert Paul Wolff
13. ^ Robert Paul Wolff, quoted in Ellerman's Property and Contract in Economics: the case for economic democracy ch 4
14. ^ Value, Price and Profit ch 6
15. ^ see ch1 of Capital
16. ^ See Marx's discussion of measures such length and the area of triangles in ch 20 p 312
17. ^ Freeman, Alan: Price, value and profit - a continuous, general treatment. In: Alan Freeman, Guglielmo Carchedi (editors): Marx and non-equilibrium economics. Edward Elgar. Cheltenham, UK, Brookfield, US 1996.
18. ^ For the difference between wage workers and working animals or slaves confer: John R. Bell: Capitalism and the Dialectic - The Uno-Sekine Approach to Marxian Political Economy, p. 45. London, Pluto Press 2009
19. ^ Albert Einstein: "Why Socialism?". Originally published 1949 in Monthly Review