The Labour Theory of Value is a theory of Objective Value. It is not, as some people have confusedly believed, an Objective Theory of Value! There is a significant difference between the two.
A theory about anything can claim to be objective, which is what the latter is asserting, but in reality, because all theories are based on the perspectives of those who advocate them – the way they see the world – they are always to one degree or another subjective. Marx never claimed that his theory was objective in this sense. He advanced it unashamedly from the perspective of the working-class. That is not the same thing as falsifying data, being dishonest etc. On the contrary, it is being all the more honest for proclaiming from the beginning that the way you see the world depends upon your position within it.
What Marx advanced was a theory that was based upon the idea that Value itself was objectively measurable, just as the length of a table, a football field etc. is objectively measurable, using some agreed upon standard measure of length. The standard measure of length in the case of Labour is Abstract Labour.
There was nothing radical in Marx's proposal of such a Labour Theory of Value, because at the time he did so, the idea that Labour was the basis of value was accepted by nearly all economists. Nor was that something that had only recently been arrived at. The notion that Labour was the basis of value went back thousands of years. At about the same time both Plato in Greece and Mang-Tsze in China attempted to theorise commodity production in the context of the division within the commodity between Use Value and Exchange Value.
Both Plato and Aristotle put forward a Labour Theory of Value. Aristotle attempted to develop a Theory of Value based on Use Value, but he found himself stuck in a dead end. In the coming centuries, it was the idea that for the commodity it was its Exchange Value not its Use Value, that was determinant, and it was on that basis that the role of Labour in determining that Value played the central role.
Nor was it anything unusual that Labour should occupy this position. For millennia around the globe it had in practice played that role as I have set out here.
As described there, it is the performance of labour that is seen as the basis of value in the ideas of a whole series of thinkers such as Thomas Aquinas , and Albertus Magnus , Duns Scotus and Ibn Khaldun. Similarly, the Physiocrats believed that Labour was the source of all wealth, but living at a time prior to the domination of Capital, they believed that it was only agricultural Labour that produced Value.
The Physiocrats were followed by the Classical economists. They put forward the idea that Value was objectively measurable according to the labour-time required for production. For example, Benjamin Franklin wrote,
“By labour may the value of silver be measured as well as other things. As, suppose one man is employed to raise corn, while another is digging and refining silver; at the year’s end, or at any other period of time, the complete produce of corn, and that of silver, are the natural price of each other; and if one be twenty bushels, and the other be twenty ounces, then an ounce of that silver is worth the labour of raising a bushel of that corn. Now if by the discovery of some nearer, more easy or more plentiful mines, a man may get forty ounces of silver as easily as formerly he did twenty, and the same labour is still required to raise twenty bushels of corn, then two ounces of silver will be worth no more than the same labour of raising one bushel of corn, and that bushel of corn will be as cheap at two ounces, as it was before at one ceteris paribus. Thus the riches of a country are to be valued by the quantity of labour its inhabitants are able to purchase.”
“trade in general being nothing else but the exchange of labour for labour, the value of all things is, as I have said before, most justly measured by labour.”
Ben Franklin, “A Modest Inquiry into the Nature and Necessity of a Paper Currency" pp 265 and 267.
And Adam Smith wrote,
“The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose on other people…. It is natural that what is usually the produce of two days’, or two hours’ labour, should be worth double of what is usually the produce of one day’s or one hour’s labour.”
(Adam Smith – The Wealth of Nations Book 1 Chapter 5)
A look at the writings of these Classical Economists shows that it was on this basis that their economic analysis was conducted. For example, David Ricardo in his theory of Comparative Advantage sets out the argument in precisely these terms of the labour-time required for production of various commodities in two different countries.
Marx studied all of these theories in considerable depth, and set about resolving the inadequacies and contradictions within them. For example, it was clear that the idea implicit in Franklin's formulation that all labour was an equal measure of Value could not hold, any more than all feet can act as an equal measure of length. Different types of Labour – the labour of a joiner, a tailor, an accountant – vary just as one person's feet vary compared to another's. In the same way that a standard “foot” was arrived at as an abstraction from real feet, to act as a measure of length so Abstract Labour had to be considered the measure of Value.
But, also Adam Smith had found himself in a contradiction, because he believed, as did Ricardo and others, that what workers sold was Labour. But, if the value of a commodity was determined by the Labour required to produce it, say 10 hours (£10), then if the worker was paid the Value of the Labour they had supplied, which also equalled 10 hours (£10), then it was impossible for the capitalist to extract a surplus value from the worker. Marx resolved this contradiction by demonstrating that the Surplus Value arises because what the worker sells is not Labour, but Labour-power.
Finally, Ricardo's followers like John Stuart Mill recognised that market prices did not tally with Exchange Value, but found themselves stuck in a contradiction trying to reconcile the fact. Ricardo argued that these prices moved around the Exchange Value, which acted as a long term pivot. But, it was clear that this could not be correct either, because if commodities, produced by different industries with different organic compositions of capital, sold at their Exchange Values, then rates of profit would diverge wildly. All economists recognised that there would be a tendency for rates of profit to equalise, because capital would automatically move from where rates were low to where they were high. Marx reconciled this contradiction too by developing the concept of prices of production, which demonstrated the way in which Exchange Value forms the basis upon which surplus value arises, but this surplus value, existing as a fund at the level of Capital in General, of the economy as a whole, the exchange value or monetary equivalent of the society's surplus product, is then shared out by Capital on the basis of the share of the total capital provided by each industry. On this basis, the Value of the economy's output is determined by the labour-time required for its production, so the sum of Value will equal its monetary equivalent, the sum of prices. That is in fact tautological, because the amount of labour-time required to produce all of the output is determined, and thereby determines the total Value produced – Value is Labour-time – whilst the Exchange Value of all of that production is nothing other than the rate at which it exchanges against money i.e. its price!
In other words, the total Value (not to be confused with Exchange Value) of the economy's production is equal to the labour-time required for its production. This Value can then be expressed using Marx's value form. Here the total Value stands in the position of relative form of value. That is the thing whose Value is being expressed relative to some other commodity. That other commodity here is the Money Commodity. It stands in the position of equivalent form of value. In other words, money expresses the Value of the economy's total output as an Exchange Value, but that Exchange Value, by definition here is also its price, because the Exchange Value of any commodity measured in terms of money is its price - again not to be confused with Price of Production or Market Price.
As a theory of Objective Value, the Labour Theory of Value stands in contrast to Theories of Subjective Value, which form the basis of orthodox economics. These theories place their emphasis not on the Exchange Value of commodities, but on their Use Value. That is they argue that Value is subjective, depending upon the utility that each consumer obtains from any commodity as opposed to all other alternatives. To use the comparison with length used earlier, these subjective theories of value derive the Exchange Value/Price of a commodity on the basis of the sum of all the individual valuations of it made by consumers. The equivalent would be measuring the length of a table not by using a standard metre, but instead asking a large number of people to rank its length in relation to everything else, and then arriving at some average length!
I've dealt with some of the basic problems of orthodox economics based on this subjective theory of Value in my series reclaiming economics.
The fact that Marx develops a theory of objective value, of course, does not mean that his overall economic theory of capitalism can be reduced to some similarly objective, and, therefore, mechanical basis. On the contrary, Marx's analysis of Capitalism has to deal with the subjective nature of the psychology of individuals, be they workers, capitalists or consumers, precisely because his theory is a theory about real people, not automatons.
So, for example, Marx states that although there is an absolute minimum of wages, determined by what is physically needed to ensure the reproduction of the working-class, there is no such minimum for the rate of profit. Yet, Marx is fully aware that below a certain level, capitalists will tend to stop investing in productive capital, and instead spend on unproductive consumption, speculation and so on. There is no objective basis for determining when that will occur, because it depends upon the subjective decisions of the capitalists themselves, about what they think is an adequate level of reward.
Similarly, although an objective theory of value can determine what the Exchange Value/Price of any commodity is, it cannot determine what the level of demand for that commodity will be at that price. That again depends upon the subjective assessments of consumers. And Marx was fully aware of the idea of diminishing marginal utility derived from commodities the more of them are consumed. In other words, he understood the principle of Price elasticity of demand. In fact, it forms a central aspect of his theory of overproduction.