An argument can be made that nature and labor are the ultimate sources of all value—an argument that Karl Marx made in his Critique of the Gotha Program. An apple has value because it is nourishing (nature) and because it has been harvested and transported (labor). But Marx took this idea to unreasonable conclusions.
First, he defined labor too narrowly, including only those directly involved in producing a product, while excluding capitalists who plan, finance, and coordinate its production. On the one hand, Marx believed capitalists performed the necessary historical function of solving the problem of production—accumulating capital, advancing technology, and creating the post-scarcity world necessary for socialism. On the other hand, he routinely characterized capitalists as “parasites” and “bloodsuckers.” Which is it? If “labor” includes planning, arranging financing, and coordinating, then capitalists qualify as laborers, and Marx’s distinction collapses. If labor excludes these activities, then something beyond labor is necessary for production.
Second, Marx argued that labor was not only the source of value but also that it was its proper measure. To measure labor and therefore value, he adopted and developed the classical economics concepts of “exchange value” and “use value.” He defined the former in terms of socially-necessary labor time (SNLT), which is the amount of labor time required to produce a commodity under normal conditions, given the average level of technology and efficiency. The term “socially-necessary” does a lot of heavy lifting. If a worker is inefficient and a commodity takes more labor to produce than expected but still sells for the same price as others, the extra labor is deemed unnecessary rather than evidence against the theory. If labor is expended on goods that go unsold, that labor is retroactively declared unnecessary. In this way, the concept insulates the Labor Theory of Value from falsification.
Unlike exchange value, which Marx treated as objective and quantifiable, use value was subjective—dependent on individual needs, desires, and circumstances. Marx defined use value as the utility a commodity provides, meaning its ability to satisfy a want or fulfill a function. However, because utility varies from person to person and can’t be measured, use value—unlike exchange value—could not directly determine the price of a good in the market.
The Economic Problems of the Labor Theory of Value
Exchange value actually can’t be measured either. As Marx explained in Value, Price, and Profit (1865):
In calculating the exchangeable value of a commodity we must add to the quantity of labour previously worked up in the raw material of the commodity, and the labour bestowed on the implements, tools, machinery, and buildings, with which such labour is assisted...
But determining the labor content of a piece of production equipment requires determining the labor content of the materials and tools used to make it, the labor content of the materials and tools needed to make those tools, and so on—presumably back to the first stone hammer. This infinite regression makes SNLT indeterminate.
If either exchange value or use value (much less both) can’t be determined, then there is no way to know whether a product’s use value exceeds the value of the labor needed to make it. Without this knowledge, there is no way to tell whether production is creating or destroying value. Because Marx rejects market prices as a measure of value, he provides no alternative method to determine how much labor should be expended on a given product. In effect, Marx’s system offers no mechanism for rational economic calculation, making it impossible to allocate resources efficiently.
The Labor Theory of Value (LTV) inevitably leads to another problem: if an object’s exchange value is fixed and objectively determined, then trade is irrational. Consider two goods. There are two possibilities:
- One contains more socially-necessary labor than the other and, therefore, has a higher exchange value.
- Each contains the same amount of labor.
Exchange makes no sense in either of these cases. In the first, one party would be exploiting the other by trading a less valuable good for a more valuable one. In the second case, no one would incur the transaction costs necessary to make an exchange that leaves them no better off than before. Yet we know from experience that voluntary trade results in mutual benefit—each party to an exchange gains what he values more than what he gives up.
A possible counterargument is that trade can be mutually beneficial if it’s based on use value. If I need your shoes more than I need my corn, and you need my corn more than you need your shoes, then a trade can make us each better off. But such a response gives the game away, admitting that the ideas of exchange value and SNLT are impractical and irrelevant distractions, and that subjective value, not labor, is the driving force behind exchange.
The LTV leads to other problems as well. For example:
- Unlike market prices, the LTV offers no way to gauge demand. If value is a function of labor input only, then producing 1,000 units instead of 100 should make society ten times better off. But it could just leave “society” with a storage problem.
- If exchange value is determined by labor input, then the most labor-intensive industries should produce goods with the most value and be the most profitable, neither of which is necessarily true.
- Marx recognized that technological advancements make previously produced objects obsolete, a phenomenon he called “moral depreciation.” However, within the labor theory of value framework, there is no clear way to account for how this affects exchange value. If labor determines exchange value, then a new, more efficiently-produced good must be worth less than its predecessor. Yet, in practice, new and improved models typically have greater use value.
Marx’s Theory of Exploitation and the Falling Rate of Profit
The LTV led Marx to identify what he believed were capitalism’s fundamental flaws or “contradictions.” According to Marx, workers create value through their labor, but they receive only a fraction of that value as wages. The difference—what he called “surplus value”—is appropriated by capitalists as profit. However, if value is not derived from labor alone but is subjective, then Marx’s claim of inherent exploitation collapses.
Marx also predicted that capitalism would suffer from a falling rate of profit as machinery increasingly replaced labor. Since, according to the LTV, only labor creates new value, he argued, profit rates must decline, leading to economic crises and capitalism’s eventual collapse.
However, if capital investment generates value independently of labor—through innovation, efficiency, and economies of scale—then declines in profit rates are not inevitable. And empirical evidence shows that businesses often increase productivity and profits through technological advancements.
Conclusion
Marx’s economic theories depend on the Labor Theory of Value. His arguments about exploitation, the falling rate of profit, and class struggle all hinge on the assumption that labor is the sole source of value. This is why many Marxist thinkers continue to defend the LTV despite its inherent flaws; without it, much of Marxist theory unravels.
