Labor theory of value
The labor theory of value is an economic theory that argues that the economic value of a good or service is determined by the total amount of socially necessary labor required to produce it. The LTV is usually associated with Marxian economics, although it also appears in the theories of earlier classical economists such as Adam Smith and David Ricardo.
Smith saw the price of a commodity in terms of the labor that the purchaser must expend to buy it, which embodies the concept of labor commanded. Ricardo, building on Smith, developed a more consistent labor theory of value, arguing that the value of commodities is determined by the quantity of labor embodied in their production. Karl Marx's theory, which is the most elaborate and influential, holds that value is a social relation specific to commodity-producing societies. Marx distinguished between concrete useful labor, which creates use value, and abstract labor, the substance of exchange value. He argued that the magnitude of value is determined by the average labor-time required for production under normal conditions.
The development of the LTV from the late 17th century reflected the rise of capitalism and the increasing focus on the sphere of production rather than exchange. Classical economists used the theory to explain the "natural price" around which market prices fluctuate, and to analyze the distribution of the social product between different classes in the form of wages, profit, and rent. Marx extended this analysis to explain the origin of surplus value and exploitation under capitalism, arguing that profit originates from the unpaid surplus labor of workers.
From the late 19th century, the labor theory of value was largely supplanted in mainstream neoclassical economics by the theory of marginal utility. It has been the subject of extensive critique, including the charge that it is unable to account for the effects of capital intensity on prices, that it is logically inconsistent when applied to complex production processes such as joint production, and that its reliance on value as a metric is redundant because prices can be derived directly from physical production data. Despite these critiques, the LTV remains a central concept in most schools of Marxian economics. Modern debates often center on whether it should be understood as a direct theory of price determination or as a framework for understanding the contradictory social form of labor under capitalism, with different schools of thought offering varying interpretations of its purpose and validity.
Definition and variations
The main purpose of value theory for classical economists was to explain the "power of purchasing other goods" that a commodity normally conferred on its owner. The "normal" or "natural" price of a commodity, established in the long run under competitive conditions, was considered the monetary expression of its value. The labor theory of value posits that this value is determined by labor.There are two main versions of the theory regarding how labor determines value. The first, associated with Adam Smith, suggests value is determined by the amount of labor a commodity can command in exchange. The second, and more influential version, developed by David Ricardo and Karl Marx, argues that value is determined by the quantity of labor embodied in the production of the commodity.
In Marx's formulation, the value of a commodity is not determined by the actual amount of labor an individual worker puts into it, but by the socially necessary labor time—the average time required to produce the commodity under normal technical conditions and with the average degree of skill and intensity of labor prevalent at the time. Marx's theory rests on two core postulates: first, that living human labor is the sole source of all new value, and second, that value exists as a definite quantitative magnitude that limits prices, profits, and wages at the level of the whole economy. Marx argued that value is a social relation, not a natural property of a good. It exists only in societies where production is oriented towards exchange in a market. The substance of this value is abstract labor, or undifferentiated human labor in general, which is distinct from the specific, concrete labor that produces the commodity's usefulness, or use value. Some interpreters argue this abstraction is not simply a mental generalization but a "real abstraction" that occurs as a practical social process at the heart of commodity exchange, where different concrete labors are rendered equivalent. Other interpretations emphasize that value is not "embodied" in production but is "created at the articulation of production and circulation" and cannot exist independently of money, which serves as its necessary form of appearance. Marx saw this "dual character of labour" as the "central element" of his theory of value, reflecting the difference between the material-technical process of production and its specific social form under capitalism.
Some interpretations, often termed "traditional Marxism" or "Ricardian Marxism", view Marx's theory as an extension of Ricardo's, with labor seen as a transhistorical principle that constitutes the social world and is the source of all wealth. In this view, Marx's critique is aimed at the market-mediated mode of distribution under capitalism that obscures the "true" source of wealth and allows for exploitation. In contrast, the value-form approach, which gained prominence in the 1970s, argues that Marx's theory is not a transhistorical theory of wealth but a critique of the historically specific role of labor under capitalism. This school differentiates the traditional "labour theory of value" from what Diane Elson calls Marx's "value theory of labour", arguing that the object of the theory is not price determination but an analysis of the contradictory forms of labor itself. According to this interpretation, which emphasizes the sharp distinction between Marx's and Ricardo's theories, Marx's method is to analyze the necessary relationship between an "essence" and its "form of appearance". For these theorists, labor in capitalism is a unique social practice that acts as a social mediation, constituting a new, impersonal, and objective form of social domination. The object of Marx's critique is this form of labor itself, and its overcoming would mean the abolition, not the full realization, of labor as the central organizing principle of society.
Historical development
Precursors to Adam Smith
While the labor theory of value is most closely associated with the classical economists, its intellectual antecedents can be traced to earlier economic thought. These early theories reflected the prevailing economic systems and evolved as commodity production became more widespread.Canonist and Mercantilist approaches
Early Canonist writers, such as Thomas Aquinas, were concerned with the ethical problem of the "just price" in a society of small independent producers. They generally approached value from the perspective of the producer. The just price was seen as being based on the producer's costs, which included labor expended, risk, and transport costs. The goal was to ensure a price that was ethically just to both seller and buyer, with remuneration proportionate to outlay and effort. This focus on the "common good" of a hierarchical social order gave way to a new paradigm with the rise of commerce and the Protestant Reformation. Thinkers like John Calvin provided a religious rationale for the accumulation of capital, linking economic success to divine grace and shifting the focus from communal ethics to individual responsibility.With the expansion of commerce, the Mercantilist school shifted the focus from production to exchange. Mercantilist writers tended to identify a commodity's value with its market price, which they saw as determined by the forces of supply and demand. Writers like Nicholas Barbon in his A Discourse of Trade articulated this view, stating that "The Price of Wares is the present Value... The Market is the best Judge of Value". Barbon also emphasized utility as the source of value: "The Value of all Wares arise from their Use; Things of no Use, have no Value". This perspective reflected the concerns of merchants, whose profits were largely dependent on market fluctuations and "profit upon alienation"—buying cheap and selling dear.
Transition to classical value theory
In the late 17th and early 18th centuries, particularly in Britain, the producer's cost approach to value was revived. This shift mirrored the rise of industrial capitalism and a growing concern with production costs. Writers began to analyze the relationship between market price and production costs, laying the groundwork for the classical concept of "natural price". This period saw the gradual recognition of profit on capital as a general category of class income, distinct from interest on money or rent of land. Profit came to be seen not as originating in exchange but as an income associated with the use of capital in the employment of wage-labor.William Petty was a key transitional figure who came remarkably close to the idea that exchange value is determined by the labor time required for production. In a well-known passage, he stated: "If a man can bring to London an ounce of Silver out of the Earth in Peru, in the same time that he can produce a bushel of Corn, then one is the natural price of the other". Thinkers like John Locke argued that labor "puts the difference of value on everything," although his analysis primarily concerned labor's role in creating use value rather than exchange value. The concept of social labor as the determinant of value grew alongside the idea of the social division of labor, with writers like Bernard Mandeville and Benjamin Franklin arguing that commerce was essentially an exchange of labor for labor. The author of an anonymous 1738 pamphlet, Some Thoughts on the Interest of Money in General, provided a clear statement anticipating Smith: in early societies, the only rule for exchange was "the Quantity of Labour severally imployed in producing them".