A long one here.
This might not be the greatest of debates, rather more of a crash course into the history of economic thought, specifically the inquiry into value in economic circles into the 19th century. But the discussion has been over for more than a century. The marginalist notion of value won definitively. However, there are naturally still people who show up on the boards on rare occasion to defend the idea of the LTV, and it’s at least somewhat possible that one of them might surface to contest the details of the story I’m about to tell. So… might be fun? At very least, it could be educational to those without much prior exposure to these sorts of ideas.
So what the hell is the Labor Theory of Value anyway?
Backing up to Adam Smith
Karl Marx wasn’t the first to tackle this issue. He was working in the tradition of the classical economists, most notably Adam Smith and David Ricardo. In order to understand what Marx was trying to accomplish, it’s helpful to investigate the thoughts and failures of his predecessors. Let’s back up to [The Wealth of Nations](http://geolib.com/smith.adam/won1-04.html\). To steal the pithy quote from philosophy, all of economics can be seen as footnotes to this book. From the beginning, one of the key questions of economics was trying to discover where prices come from.
We can rework the vocab here into more familiar terms.
Value-in-use we tend to call today utility. Value-in-exchange is price, or more specifically, the price ratio between different objects. How many boxes of condoms trade for one Ferrari? How does the price of an Ikea table compare to an hour’s of billing by an expert lawyer? The apparent disconnect between utility and price puzzled people well into the 19th century. Water is the most useful stuff on the planet. Without it, we would die. Major league utility there. And yet its price is extremely low compared to something like a shiny piece of carbon. This is the diamond-water paradox and Smith took a crack at trying to unravel it. And while The Wealth of Nations is a remarkable book, well worth reading and thinking through for anyone who has the patience for the language (anyone who settles exclusively with Das Kapital without also engaging with Smith is doing themselves a major disservice), this is one issue that Smith didn’t get right.
Is there a connection between value-in-use and value-in-exchange? Between the utility of an object and the relative price it fetches on the markets compared to other items? Today we would say yes, obviously so, but previously it had been less than obvious. Smith denied the connection. Along with Ricardo, he believed he needed a theory of relative prices independent of the usefulness of objects.
Marx was part of the selfsame tradition.
Again from Smith:
This is his explanation of price, an intro-version of the Labor Theory of Value. He wasn’t the first to create it but he might’ve been the clearest classical writer on what the problem was. Smith labels the explanation just above “natural”, but even so, he still had some problems with it, and tried to distinguish between the “labor embodied” in a product (how much the workers had been paid who produced it) and the “labor commanded” (how much new work could be hired with the final sales price of the item). The difference between these two numbers would be a key feature of Marx’s economics.
Following Smith, Ricardo also tangled with the notion of value. Ricardo tried to be more consistent, less loose than Smith with his terminology, and subsequently ran into his own problems trying to develop a Labor Theory of Value that could actually hang together. So this was the view into value in the 18th century and then into the 19th. To jump forward a moment to Marx:
“Totally independent”, he claims. No connection at all between utility and relative prices.
Oh really?
For fairness, we should put in some caveats here. First, we’re not talking about any object under the sun. A unique work of art isn’t subject to mass production. None of the early advocates of any version of the LTV would have claimed that the price of The Last Supper was determined by the relative number of hours that went into producing it. The idea as developed under Ricardo was that for mass-produced objects, the relative prices would in time reflect the relative amounts of labor that went into the goods, which would include the labor that went into the goods that were used as tools to help make more goods. If bushels of wheat take roughly half the labor time for the average worker to produce than tables, then over time the ratio of market prices of a bushel of wheat to a table would eventually settle to 1:2.
We could throw all sorts of criticisms against Ricardo’s idea. Many people did, loudly and publicly. Writing at a later date, Marx was an observer of these criticisms and tried to learn from the previous failures. He wanted to build up a new form of the LTV that acknowledged the previous attacks, and had specific arguments in response. In a certain sense, he was victorious in his defense.
This is in the same sense that King Pyrrhus was victorious against the Romans.
**Necessary vs Sufficient **
Without the sweat and toil of workers, there would be no economy. This is plainly and obviously true.
It is also true that without energy from the sun, there would be no economy. It is also true that without the atoms we use for production, both as inputs and as tools to rearrange the inputs, there would be no economy. It is also true that without someone taking a risk in allocating resources to devise new tools, our economy would not grow.
Human minds have a tough time assigning praise or blame. Let’s say there’s a light bulb that needs three separate switches to be flipped in order for it to light up. Three different people are responsible for these switches, one person per switch. One day the light inspector arrives and sees that the light is not on. Problem. After further investigation, she notices that only one of the three necessary switches has been flipped. Mr Bee and Mr Cee both failed to flip theirs.
How is blame to be apportioned?
In a natural language like English (or German), there’s no nice, pithy way to describe culpability, not with full precision in a way that everyone would naturally agree with. We can express the idea, but we have to waste a lot of words on it. Let’s do that: There is no way for the light to shine if Mr Bee forgets his task. We might say then that Mr Bee is 100% responsible for the failure. But even if he had remembered, that would not have been enough by itself for the light to shine. There was another switch, too, that wasn’t flipped.
Mathematicians distinguish between necessary and sufficient conditions. It is a necessary condition that each switch must be flipped for the light to shine, but each switch by itself is not sufficient.
Moral matters are built on top of this logical structure, which makes things even uglier. Who’s to blame? Are they both 100% responsible? Is it 50% responsibility for each? I guess there are arguments to be made either way. But there’s even more complications. What if one switch is harder to flip than the other? What if Mr Cee knew for a fact that Mr Bee was home sick with the flu that day, and Mr Cee’s switch sometimes gives him a mildly painful shock when he flips it? Is Mr Cee still to blame? Or what if Mr Cee is kind of an asshole? Human nature being what it is, we might blame one person disproportionately more for an offense if he insulted us at a party last week. Or if he belongs to the wrong political party.
We can think about the reverse case, and the assignment of praise instead of blame.
What if the light is shining, and Mr Bee is someone we like, and Mr Cee someone we detest. Say, for example, Mr Bee is called the proletariat, and Mr Cee the bourgeoisie. Upon whom do we heap our praise when more than one agent is responsible for making the machine work? For the most viciously tribal minds among us, it might be tempting to heap all available praise on members of our favored ingroup, while ignoring any contribution from members of the outgroup.
This might be especially tempting when the stereotypical member of the outgroup is a total jerk.
Approaching Marx
We’re getting closer.
Marx isn’t a moron. He realizes that there is more than one switch that needs to be flipped in order for things to be produced.
(Penguin translation.)
He’s aware that there is more than one necessary condition here. But as far as assigning praise for the creation of new goods, he just doesn’t care. He has effectively decided in advance that he wants value to come from labor, so he makes a judgment call. The moment labor enters the picture, he decides we’re talking about a different kind of value that is separate from the value that existed before. He’s distinguishing his notion of “value” from the notion of “use-value” (with the latter term being essentially the same as value-in-use from Adam Smith). He’s using the existence of labor as justification for this distinction between different kinds of value.
Already this is getting messy. Well, that’s not a sin by itself. Sometimes that’s unavoidable. What he’s doing here is setting out his definitions. Utility is different from value? Okay then. How? Through labor. This is how he’s defining his words. From slightly earlier in the chapter:
We might quibble that there are plenty of properties that remain after we ignore the particular (“qualitative”) uses of objects, but we can posit this step as true for the sake of argument. Again: he’s using labor as the dividing line that separates the underlying value of goods from the utility that they provide. This isn’t new. He’s angling at the same paradox that puzzled people before him. He’s stuck with the same puzzle Adam Smith was captured by. If relative prices aren’t determined by utility, then what’s going on? He posits labor as the source of value, since utility did not seem to be doing the job.
(Marx was writing contemporaneously with Walras, Jevons, and Menger, who independently described the direct connection between value-in-use and value-in-exchange. One of my great “historical regrets” is that he didn’t encounter the idea earlier in his life. But let’s skip all that and try to see where he’s going with all this.)
The problem here is falling into the necessary vs sufficient trap.
It’s true that these goods only exist because workers toiled to bring them into existence. Without the labor, they do not exist. But the are many other reasons why these goods exist beyond the labor of the workers. The labor is absolutely necessary for the existence of a productive industrial economy, but it is not sufficient. We require more conditions. One thing in particular that industrial economies need is the cleverly-made equipment that makes the toil of those workers more efficient in producing items.
That equipment is called “capital”.
We haven’t run out of necessary conditions. We could list dozens of other things that are absolutely required for production to exist. We need the dirt to grow plants. We need the sunlight and the rain. We need enough foresight and cleverness to realize that planting now will result in crops in a later season. In the quote above, Marx dismisses many of these extra conditions as mere “use-value” and not “value”. He ignores, too, that equipment must not only exist but be actively assigned to producing good A instead of good B. There are large-scale decisions involved. That is not “labor” as he has defined it, but it’s still a necessary condition. There are lots and lots and lots of necessary conditions here, but Marx is positing that “value” stems only from the labor. All those other necessary conditions are swept away without any further consideration for value. Labor is necessary, therefore we measure value with labor and only with labor.
Well… okay? I guess?
This is a potentially big problem. But let’s just swallow this objection for now and see where he’s going with it.
Victory by Definition
As mentioned above, lots of criticisms were leveled at previous versions of the LTV, and Marx observed and reflected on those criticisms when devising his own version of it. One previously offered criticism against the LTV is that people are different. An hour of labor from an industrious worker might not be equivalent to an hour of labor from someone lazy.
Marx’s solution is to even out all these human differences with averages. From a practical perspective, this makes a helluva lot of sense.
We can’t measure the amount and quality of effort person by person, but we can look at averages and judge labor as an input from that perspective. This means we can start talking about a uniform, standardized unit of labor time, measured by the average. This is no longer direct reality, of course. We’re abstracting away from actual human beings here and introducing a higher-level measure that irons out the wrinkles of individual differences.
Fair enough then. This is perfectly reasonable.
Now let’s add one more sentence.
Here is his petard. Watch as he hoists it.