Economic Systems

Lecture Notes


To Full Graphics






Links: X X X X X X   

Labor theory of value


down     up Labor theory of value was taken from A. Smith and D. Ricardo, elaborated and reinterpreted to give the basis for the concept of exploitation of workers by capitalists. Marxian labor theory of value postulates that the value of commodities is determined by the quantity of labor expended in their production. In dialectical interpretation the (labor) value is considered to be the ‘essence’ of price, while price is the ‘appearance’ or the ‘form of existence’ of value. The theory does not claim that the labor content is the sole determinant of prices, rather it claims that there are two factors influencing market price: value (labor) and the relation of supply to demand, however, value is thought to be the essential factor, while excess demand or excess supply is only an ephemeral factor that causes temporary deviation of prices from value. Because "appearance" is a veil disguising "essence", it seems as if price was determined exclusively by supply and demand and its essential relation to the labor value is overlooked.


Apart of value determined by labor, commodities have also use-value. However, the Marxist concept of use-value is very different then the neoclassical utility. It is not the subjective evaluation (preference) of the consumer, but rather the set of physical, chemical and other ‘objective’ properties that make the product useful. Use-value has no role in determining the value of commodity and, therefore, it is not essential for explanation of prices. It is, however, a necessary precondition for the product to become commodity. Commodity is in Marxian economics defined as a 'good that was produced for market'. Without use-value no product can be sold.

Another dissimilarity with neoclassical economics is that Marxian value is determined by average rather than by marginal conditions. Suppose that there are five bakers, all baking the same kind of bread. If three of them need 20 minutes to produce a loaf of bread, one needs 18 minutes and the fifth needs 22 minutes, then the average 20 minutes is considered to be the ‘socially necessary’ amount of labor needed to produce one loaf of bread and thus the value of the loaf is equal to 20 minutes of labor.

This example must be modified by acknowledging that the value consists not only of direct (‘live’) labor expended by the baker, but also of indirect labor which was embodied in the flour and other ingredients used as inputs to produce bread. Suppose that the labor value of the flour and other inputs that are needed to produce one loaf of bread is 40 minutes than the value of the loaf is 1 hour of which 20 minutes represent the direct (‘live’) labor (value added) and 40 minutes represent the indirect (‘embodied’) labor (cost of consumed material).


down  up If we have more commodities that mutually serve as inputs for the production of each other, then the determination of value becomes slightly more complicated and requires solution of a system of simultaneous equations.

Suppose that there are only two products in the whole economy: corn and cloth. Suppose further that to produce one pound of corn you need .1 pound of corn  .4 yards of cloth and 1 hour of labor; for the production of one yard of cloth you need .3 pounds of corn, .2 yards of cloth and 2 hours of labor. Let h1 and h2 are labor values (in hours) of corn and cloth respectively. They can be determined by solving this two simultaneous equations

(1)     h1 = .1 h1 + .4 h2 + 1


(2)      h2 = .3 h1 + .2 h2 + 2

The first two terms on the right-hand side of each equation represent 'embodied labor' or cost (in hours) of the consumed material inputs. The third term is 'live labor' or value added.

Solution of (1) and (2) for h1 and h2 gives:   

h1 = 2.67

the labor value of one pound of corn 
h2 = 3.50 the labor value of one yard of cloth

To check that this solution is correct  substitute solutions for h1 and  h2 into (1) and (2)

h1 =  (.1) 2.67  +  (.4) 3.50  +  1  =  1.67  +  1  =  2.67
h2  =  (.3) 2.67  +  (.3) 3.50  +  2   =  1.5  +  2  =  3.50
2.67 hours of labor contained in one pound of corn consists of 1.67 hours of labor 'embodied' in corn and cloth used in production and 1 hour of t 'live labor'.  Similarly 3.5 hours contained in one yard of cloth consists of   1.5 hours of  'embodied' and 2 hours of 'live' labor.

Note that there are small rounding errors in these calculations because the exact solution for h2 is 2 and 2/3 that is 2.6666.... with infinite number of 6s after the decimal point.

down  up Marx stated that when there is no separation of labor from capital, i.e. when the farmer and the weaver are owners as well as workers, labor value would determine relative prices in the long run. (Marxists call such a situation the pre-capitalist or 'simple' production of commodities.) The rational for this claim is that neither farmers nor weavers would be willing to exchange more of their own labor for less of somebody else's labor permanently - they would want to get the 'equivalent' of their own labor in exchange. In modern terminology: labor value is the long run general equilibrium price in the market economy with labor as the only factor of production.








OK Economics was designed and it is maintained by Oldrich Kyn.
To send me a message, please use one of the following addresses: ---