A Critique of the Labor Theory of Value
[This selection is adapted from “The Labor Theory of Value: A Critique of Carson’s Studies in Mutualist Political Economy,” Journal of Libertarian Studies 20, no. 1 (2006). Please see original for full references and footnotes.]
Before proceeding, we should be clear on what an economic theory of value is supposed to do: its task is simply to explain the exchange value of particular goods and services. That is, an economic theory of value must explain why someone selling good X can receive x berries in exchange for it, whereas someone selling good Y will only find someone willing to give up y berries in exchange for his good (where y
In the context of a money economy, of course, an economic theory of value must explain the money prices of various goods and services. In this sense, an economic theory of value is really just a theory of price formation. However, any satisfactory theory must be relevant even in a world of purely direct exchange, and (in principle) should be able to explain the exchange ratios prevailing between any two types of goods, regardless of whether one of them is a money commodity.
The Classical Cost (Labor) Theory of Value
The classical economists (by which I mean writers such as Adam Smith, David Ricardo, and John Stuart Mill, but also Fréderic Bastiat) adhered to some version of the cost theory of value, and in particular a labor theory of value. Although each writer differed in minor details and points of emphasis, at this level of generality we can take a cost theory of value to state the following: a good’s “natural” (or long-run) price is equal to its total cost1 of production. Similarly, a labor theory of value claims that a good’s natural price is proportional to the total quantity of labor required to produce it.2
At first glance, it would seem as if these two theories were incompatible, and yet one can find numerous passages from a given classical economist in which he seems to support one or the other. How to explain this apparent contradiction? The answer is that labor was viewed as the only fundamental “cost” involved in the production of a good; the costs of a given commodity could thus be ultimately reduced to a certain amount of human toil.
A numerical example will be useful. Suppose that the price of a haircut is $6, while the price of a shoeshine is $7.50. A proponent of the cost theory of value could explain this as follows:
The haircut takes thirty minutes of labor, and the scissors are depreciated by 1/20 of their full value, because (let us suppose) the scissors must be replaced after twenty haircuts. The wage rate is $10 per hour, and a new pair of barber’s scissors costs $20, and hence the total cost per haircut is $5 $1 = $6. In contrast, a shoeshine takes only fifteen minutes of labor, and uses up 1/5 of a can of shoe polish. It costs $25 for a new can of shoe polish. Therefore the price of the shoeshine must be $2.50 $5.00 = $7.50.
Now a proponent of the labo
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