Labor Theory of Value, a Simple Explanation

We will start this explanation of the labor theory of value with an analogy from outside the sphere of economics.

A teenage boy is arguing with his mother about borrowing the car. A shrink watches their interaction and he doesn’t really pay attention to the specifics of the argument. To the therapist, it isn’t important if the boy did his chores, or whether the mother promised him he could borrow the car—he sees all these unconscious motivations at play: a struggle over control, the son wanting to leave the nest but not doing it, perhaps a good Oedipus Complex. These motives are the motor and context of the entire interaction even though they don’t enter into the surface substance of the interaction. The specific words of the conversation are important if we want to know about cars and chores, but if we want to know about their relationship, their egos or their behavior then we have to ask deeper questions that penetrate beneath the surface froth of words.

Similarly, the substance of bourgeois theory, supply and demand, is important for understanding some things about the economy: price fluctuations, inflation, etc. But if we want to understand deeper issues about the economy we need other tools that are able to pierce through this surface substance to the underlying meanings. That is what the labor theory of value is all about.

Means and Modes of Production

All societies coordinate human labor in order to produce things. The total social product is divided about society. The organization of this production and distribution is the subject of economics. When societies began producing a surplus of this social product a new aspect of distribution and production entered the equation: who controls what is left?

Under feudalism the social surplus was extracted from peasants by landlords; in a slave system the social surplus is extracted from slaves by slave owners. In these examples the economic act in which the surplus is passed from worker to exploiter is easy to see. Under feudalism the peasants gathered up a portion of all the food they had made, physically took it over to the landlords house, and under slavery a slave works all day harvesting cane, cotton or diamonds and then watches the slaver owner take away all of those goods without compensating them. In both of these modes of production it is clear that human labor is producing these goods and that it is the products of labor that are being appropriated by the dominant class.

Under capitalism the process of exchange makes it harder to see the passing of surplus from exploited to exploiter, but it’s still there. Workers are still producing the entire social product and another class, this time the capitalist class, is taking the surplus from them, selling it back to them and getting rich off of it.

Under capitalism, the worker sells his labor power and is paid a wage for it. The capitalist sells the commodities the worker made and he gets money for it. We don’t see the exploitation, but it’s still there, albeit in a different form. Workers aren’t forced to work for a slave owner or pay a tax to a feudal landlord, but are compelled by necessity to eek out a living in a capitalist society. Most of the time this means selling your labor to a capitalist.

In this way, money—or the process of exchanging goods and services in a “free” market—obscures the underlying reality that what is really going on at a basic, societal level is that a dominant class is extracting the social surplus from a subordinate class. This is basically what the labor theory of value is saying. When people make things in a capitalist society, it is the labor that goes into them that gives them their value. Though money obscures and distorts this underlying value, this collective human labor is still the basic driving force of our collective economic activity.

The concept that the labor that goes into a commodity is the underlying essence of its value has been around for awhile. It even predates Marx, though he gave the theory new life. Economists going all the way back to Ben Franklin realized that this theory helped answer a perplexing question in economic theory: why do heterogeneous commodities exchange? By heterogeneous, I mean that commodities are really different from each other. They have different physical properties, different uses. Why is it that they can all be exchanged in the free market? What explains the ratios of their exchange? Why are some commodities worth more than others?

The theory went on to postulate: all these commodities must be made up of a common substance, something that they all have to a greater or lesser degree, something that gives them value. This thing is their “embodied labor time,” that is, the amount of labor that went into creating them.

Thus a 2008 convertible with custom leather seats and an audio system is worth more than a dozen eggs. This is because it requires the combined labor of many people all working over a long period of time to make all the parts of a car and put them together, whereas to get eggs you throw stale bread at chickens. At today’s price of 55 grand, it would take about 660,000 eggs to equal one 2008 convertible—this is their exchange ratio. The labor theory of value helps us to explain their exchange ratio.

Money & Value

Now, I’ve already said that the act of exchange, the act of buying and selling commodities in the market via money, obscures the underlying labor value of commodities. Let’s explore this point further.

I’ll start by referring back to my opening example of a mother and son having an argument. Even though there may be underlying psychological motives behind their conversation, the words they are using and the topic of the argument still have relevance. Though the topic may not have long-term relevance to their relationship, in the present the topic and words are important to them. As we move between these different perspectives, we see two distinct layers of meaning. Both are important.

So to with money and value. Though the labor value of a commodity may be the underlying substance to an economic interaction, it is the way this value is expressed through a money price that really effects the economic decisions people make. When you go to a store to buy something, you want to know how much money it costs, not how much labor went into it. But the act of buying something with money implies the existence of value, whether or not you are aware of it.

So to with money and value. Though the labor value of a commodity may be the underlying substance to an economic interaction, it is the way this value is expressed through a money price that really effects the economic decisions people make. When you go to a store to buy something, you want to know how much money it costs, not how much labor went into it. But the act of buying something with money implies the existence of value, whether or not you are aware of it.

Specific money prices are determined by supply and demand. Money prices fluctuate—clothes and entertainment commodities come in and out of style, supplies of food temporarily change due to droughts, etc. But underneath this day-to-day fluctuation lies a general equilibrium price related to the amount of labor embodied in commodities.

Money prices are mathematical, quantifiable, observable things. We see dollar signs hanging off of price tags and they have a real effect on us. Not so with labor value: we don’t see the people who make those commodities. Even if we could see them, quantifying the amount of labor time in a commodity is next to impossible; we’d have to figure out not just how much work went into a specific commodity in each stage of its making (and some commodities go through a lot of stages, through many firms, contain parts from all over the world, etc.) but also the labor behind each tool and machine used in the making of the commodity. We could, however, measure the total number of hours worked by society, which is a better measure of labor time anyway, since value is a social concept.

Though there have been countless attempts to quantify this theory, labor value will never be as quantifiable as price is. This is because labor value only really find its expression in money. It would be impossible to have a capitalist economy where goods were traded according to exact measurements of labor time. Capitalist economies require flexibility, and they require liquidity. Money provides this. But in providing this flexibility money also deviates from being an exact measurement of labor time. It is, at best, an approximation.

Money fundamentally acts as a measure of value. It represents work people have done. When you work you are paid money and are more or less frugal with this money depending on how much of it you have and how hard it would be to get more of it. The commodities you buy all cost money because someone had to be paid to make them. If a commodity didn’t take any labor to make, it would be free. This is what I mean when I say that the act of exchange “implies” labor value.

But commodities are constantly fluctuating in price as capitalists find cheaper ways to make commodities, better ways to exploit workers, etc. The supply of money is changing too—money itself is a commodity related to labor time. It has a supply and a demand. Money is also called upon to perform other social functions other than measure value: it lubricates exchange, it can become credit, etc. So money is needed to be much more flexible—to be sensitive to rapid economic changes. We say, though its fundamental role in society is a measure of value, its relationship to this value is a loose one as supply and demand force it to fluctuate above and below the equilibrium values of embodied labor time.

Is All Work Equal?

Here’s another important angle: we said that commodities appear heterogeneous until we see that they have a common substance: labor. But isn’t labor heterogeneous? People work at different speeds, with different skills, with more or less competency. How can these heterogeneous acts be a common substance?

This question makes important the concept of “socially necessary labor time.” Just as in a capitalist society the process of exchange and competition tends to bring prices to a general equilibrium for certain products, so too the process of exchange and competition create a social average of how much labor it takes to complete a task. Remember—value is a concept that only makes sense from a macro level. It doesn’t matter if you go into work drunk and work really slow and sloppy at making cars, since that doesn’t destroy value. The labor value of a car corresponds to the socially necessary time that it takes to make it. In this way we say that exchange exerts a homogenizing influence on labor.

This homogenizing influence is very strong in society. Capitalist want work to be standardized and reliable so that workers can be as productive as possible. Capitalists are constantly seeking ways to mechanize work in order to make it unskilled and uniform. Perhaps you can think of many examples of this in your own life. The service industry and the industrial sector are almost entirely made up of this uniform, low-skilled work. This increases the potential supply of labor, because anyone could do the job, thus driving down wages.

But how strong is this homogenizing influence? We still have a lot of skilled labor which fetches a much higher price than unskilled labor, and we have union jobs which pay better than non-union jobs even though both groups of workers may do the same type of work. We could dismiss this as supply and demand casting its usual distorting influence over the law of value, and we would be justified to some degree. But we also might say that the need for skilled labor in society is indeed a countervailing influence against the homogenizing influence of capitalism on the labor process. We might even say that capitalism has a tendency to “de-skill” homogenize most work, while making other work highly skilled.

Again, the homogenization of labor time (or the “simplification” of labor) is not a quantifiable phenomena. We can observe it qualitatively as a tendency under capitalism but there really isn’t an objective way of measuring it.

But how strong is this homogenizing influence? We still have a lot of skilled labor which fetches a much higher price than unskilled labor, and we have union jobs which pay better than non-union jobs even though both groups of workers may do the same type of work. We could dismiss this as supply and demand casting its usual distorting influence over the law of value, and we would be justified to some degree. But we also might say that the need for skilled labor in society is indeed a countervailing influence against the homogenizing influence of capitalism on the labor process. We might even say that capitalism has a tendency to “de-skill” homogenize most work, while making other work highly skilled.

Again, the homogenization of labor time (or the “simplification” of labor) is not a quantifiable phenomena. We can observe it qualitatively as a tendency under capitalism but there really isn’t an objective way of measuring it.

Source: http://kapitalism101.wordpress.com/the-labor-theory-of-value/



Categories: Economic Exploitation, Economics, Economy, Labor, Theory

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