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              THE LABOR THEORY OF VALUE -- A CRITIQUE
         By Don Ernsberger  / Edited by Jarret Wollstein

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At the heart of economic theory is the concept of value. What gives an
article value? Is it something inherent in an object, or is it some
other factor? Does value derive from human effort, or something else?
The two major and fundamentally opposite economic systems --capitalism
and Marxism -- give completely different answers.


THE LABOR THEORY
Karl Marx's labor theory of value asserts that the value of an object is
solely a result of the labor expended to produce it. According to this
theory, the more labor or labor time that goes into an object, the more
it is worth. Marx defined value as ``consumed labor time'', and stated
that ``all goods, considered economically, are only the product of labor
and cost nothing except labor''.

The labor theory of value is the fundamental premise of Marx's economics
and the basis of his analysis of the free market. If it is correct, then
much of Marx's critique of capitalism is also correct. But if it is
false, virtually all of Marx's economic theory is wrong.

Here is an example of how the labor theory of value works: A worker in a
factory is given $30 worth of material, and after working 3 hours
producing a good, and using $10 worth of fuel to run a machine, he
creates a product which is sold for $100. According the Marx, the labor
and only the labor of the worker increased the value of the natural
materials to $100. The worker is thus justly entitled to a $60 payment,
or $20 per hour.

If the worker is employed by a factory owner who pays him only $15 per
hour, according to Marx the $5 per hour the factory owner receives is
simply a ripoff. The factory owner has done nothing to earn the money
and the $5 per hour he receives is ``surplus value'', representing
exploitation of the worker. Even the tools which the factory owner
provided were, according to Marx, necessarily produced by other workers.

According to the labor theory of value, all profits are the rightful
earnings of the workers and when they are kept from the workers by
capitalists, workers are simply being robbed. On the basis of this
theory, Marx called for the elimination of profits, for workers to seize
factories and for the overthrow of the ``tyranny'' of capitalism. His
call to action has been heeded in many countries throughout the world.


THE ORIGIN OF VALUE
There are two fundamentally different answers to the question of where
economic value originates. According to intrinsic theories of value,
value is inherent in objects; remains constant despite changing demand,
the passage of time, and other factors; and can be ``objectively
determined'' by calculations based upon some fundamental scientific
principle. The labor theory of value is clearly an intrinsic value
theory.

The other approach is the market-exchange theory. According to this
theory, value is not inherent in objects, but is a product of many
different consumer judgments. According to market-exchange theories,
value depends upon people's desires: the more they esteem an object and
are willing to trade for it, the more it is worth. This theory is the
basis of free market capitalism, which Marx bitterly opposed.

At first glance, both theories seem to make sense. It is generally true
that the more labor invested in an object the more it is worth, but it
is also true that the more people want something regardless of how much
or how little labor went into it -- the more it is worth.

Which theory is correct? Both of them cannot be since they lead to
diametrically opposite economic systems. We will argue that the labor
theory of value is fundamentally wrong and the market theory of value is
correct.


FLAWS IN THE LABOR THEORY
The assertion that labor is the sole determinant of value is hard to
accept just based upon common sense and experience. The assertion that
only labor gives an object value ignores the fact that many natural
objects in which no labor has been invested -- such as scenic views,
pure water, gems and minerals, and wild fruits and vegetables -- have
economic value. Also the labor theory cannot by its nature account for
the fact that people value some natural objects, such as diamonds,
tremendously more than othe r natural objects, such as leaves.

The labor theory of value also fails to take into account changing
consumer desires and the contextual nature of value. In a
horse-and-buggy culture, horse-shoes are tremendously valuable
commodities, but in a society without horses they are virtually useless.
Similarly in a society with much leisure time, games and recreational
facilities become important, but in a subsistence economy in which
people must work nearly continuously just to stay alive, such things may
actually have negative value.

The labor theory also ignores the importance of time and position. A
20-year-old wine and properly-aged beef are far more enjoyable than
one-year-old wine and unaged beef. Oil in a desert is a potentially
valuable resource, but oil in the local reservoir or in the middle of a
farmer's field is a hazard.

Perhaps the most grievous theoretical fault with the labor theory is
that it ignores what economists call time preference. Time preference is
the common strong preference for goods and services here and now, rather
than later. Present consumption is more valuable than future
consumption.

For example, most workers prefer to be paid when their work is completed
rather than when their products are sold -- which may be months later.
For workers to be paid now, rather than later, someone must advance
their wages, and clearly this service has a value. But proponents of the
labor theory would have it both ways: workers are to receive the full
future value of their product now.

The final theoretical failure of the labor theory of value is the
value-effort fallacy. It is folly to assume that all effort produces
value. Every day each of us wastes time on fruitless efforts. To equate
labor with the automatic creation of value is to fallaciously imply that
all human effort is infallible and constantly productive.


ABSURDITIES OF THE LABOR THEORY
The labor theory is even more absurd in practice. If all value is
derived from labor, and entrepreneurial effort is ``parasitic'', who
would bother to invest the time and money necessary to build factories,
plan product development or organize a production process? If all
profits are''exploitation'', what incentive does anyone have to risk
money on a new and untried product or service? Where will the money come
from to finance new investment in tools?

Communist countries have not abolished profits. They have merely
transferred all profits to the state, which typically uses them to build
a huge military apparatus at the expense of consumer production.

The labor theory of value is violently anti-consumer by its nature.
Under this theory, sellers are compelled to price all goods by the
amount of labor that goes into them, rather than how much they are
demanded by consumers. Thus stores could charge no more for an aged
foreign wine than for a local cheap wine (given equal labor input) or
more for the work hacked out by a beginner. This inevitably produces a
surplus of unskilled and shoddy work, and a shortage of skilled work --
which is exactly the situatio n that exists in communist countries.

The labor theory also means the end of all economic freedom. Engels,
Marx's disciple, wrote: ``For a pure Marxist society to long endure,
voluntary exchange between individuals must be abolished.'' In a
communist society you produce what the rulers tell you and consume what
scraps they allow you. If you don't like this you are of course free to
relocate -- to a slave labor camp.


METHODOLOGICAL FALLACIES
The most interesting fallacies of the labor theory of value are
methodological. Labor theory arose from two extremely poor methods of
economic research. First it attempted to establish economic laws of
exchange by examining only supply -- ignoring demand entirely.

Even worse, the entire labor thoery is unproven. In the entire first
volune of DAS CAPITAL, where Marx proposed the labor theory, there is
not one ``positive proof''. Rather Marx offers a fallacious ``negative
proof'' in which he argues:

Premise 1 -- some factor in the production of a good gives it value
[true];

Premise 2 -- only those goods to which man has applied labor have value
[false];

Procedure -- Examine all the factors producing a good by discarding
those which did not create equal value in equal quantity, and end up
with one factor -- Labor. [Arbitrary].

Conclusion: Labor must be the source of value [False].

Marx promised to provide a positive proof in the Volume 3 of DAS
CAPITAL. However, that book does not offer a positive proof, and
implicitly refutes one. Marx proclaims that two types of capital exist
in production, only one of which can produce ``surplus value''. Thus
exchange of items of equal value can have uneven mixtures of these two
types of capital -- implying that labor alone is not the sole
determinant of value.


DOES CAPITALISM = EXPLOITATION?
The labor theory of value is nonsense both in theory and practice. It
ignores the many non-labor factors which create economic value, is based
upon unproved assertions, and leads to economic chaos and political
slavery.

The free market, in contrast, rests upon voluntary trade. If workers
choose to contract for employment in factories rather than work their
own farms or produce handicrafts, it is because they prefer the wages
and conditions in factories.

An entrepreneur contributes the great value of his organizational
ability, foresight, and management skills. Because value is not solely a
product of labor, these abilities are extremely valuable. Profits are
his just reward for risking capital in an uncertain and changing world.

True free-market capitalism, capitalism free of state intervention,
prohibitions, subsidies and protectionism, means economic prosperity and
freedom for all. Indeed, the free market is the only economic system
which enables consumers rather than bureaucrats to determine what is
produced and at what price.

Marx has been in his grave for over 100 years. It is time that his
theories were buried as well.

Don Ernsberger and Jarret Wollstein are founders of the original Society
for Individual Liberty. Dr. Ernsberger teaches college-level economics
and history.


                     RECOMMENDED READING LIST

A Farewell to Marx (David Conway) .........................  $6.95
Socialism (Ludwig von Mises) .............................. $10.00
Economic Calculation in the Socialist Society (Hoff) ....... $5.95
The Poverty of Communism (Nick Everstadt) ................. $14.95


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