Leaving behind the Labor Theory of Value
The labor theory of value has long undermined people’s understanding of the miracles created by markets and rationalized various incarnations of socialism which mangle those miracles. Leonard Read understood why undoing that misunderstanding by all who hold to it, as well as those who just use it as an excuse for what they want government to impose on unwilling citizens, is of immense value to each of us. And in his December 1956 Freeman article, “Unearned Riches,” he offered a very insightful look at the issues. That look is worth taking again.
Understanding the fallacy of the labor theory of value is a first step toward respect for privately owned and controlled property, without which there can be neither voluntary exchange nor freedom.
Many people sincerely believe that the value of anything is determined by the labor used in producing it…. [but] Day-to-day experiences reveal its error … the same labor could be used to make mud pies as to make mince pies, yet the value in the marketplace would differ. A service or a product of little value at one time or in one place may [also] be highly valued at another time and place.
Individuals have varying value judgments. Value in the market sense, therefore, is a subjective rather than an objective determination. Value, as beauty, cannot be objectively determined.
Why did the labor theory of value undermine understanding of market economies?
Until the latter part of the nineteenth century … economists … were stymied in their development of economic theory because they accepted the cost-of-production or labor theory of value. They simply could not explain what they otherwise knew to be the great advantages of the free market process of voluntary exchange. They knew full well that both parties must gain when each traded what he wanted less for what he wanted more, yet they could not show that such gain had been “earned,” for they were unable to explain it in terms of labor costs.
Marx, as distinguished from Adam Smith, followed the labor theory of value to its logical conclusion: socialism … [because] any … return on capital … would be exploitation.
Only if one understands the marginal utility or subjective theory of value based upon the judgments of countless individuals acting freely and voluntarily in the market may he proceed logically to a belief in private ownership and co
Article from Mises Wire