Labour Produces All Value, All Value Belongs To Labour.

The labour theory of value dominated the research agenda of economics for more than two centuries, from at least the time of Sir William Petty in the 1660’s until the 1870’s when Leon Walras, Carl Menger and William Stanley Jevons established the marginal utility theory of value. One generation of economists after another struggled to explain the price of commodities by the labour required to produce them, but nearly everybody saw errors in the work of their predecessors. They wanted to keep the labour theory, because they believed in the philosophical, moral or ethical implications of it. Its powerful appeal rests on the self-evident proposition that, when production is traced back to its origin, all commodities can, in principle, be reduced to land and labour. Since land is a free gift of nature that costs no human effort to produce, it cannot explain value, though it is the source of physical things. From this perspective, capital goods are merely “past labour,” to quote, Sir William Petty. John Locke turned this conception into a theory of property rights. The “political” agenda of political economy, whether it took the form of liberalism or Marxism, rests on the moral principle that labour is entitled to the fruits of its labour. As an economic theory, however, it raised more problems than Adam Smith, David Ricardo and Karl Marx could solve when they tried to explain market prices with it.

 

Locke's Labour Theory of Value There are three possible meanings of a labor theory of value that are relevant to Locke's writings: a labor theory of value may identify labor as the source of use-value or utility (the reason people desire a good in the first place), it may attempt to explain the determination of relative prices (the exchange value of goods) based on some measure of labor inputs, or it may claim that labor provides the only justifiable claim to receiving the exchange value of the goods it produces. A labor theory of value in the first sense states that the usefulness of goods and services demanded and consumed by individuals is created either exclusively or principally by the labor that goes into produc- ing them. Almost all economists would identify labor as a contributor to the use-value of com- modities, but the idea that labor is solely responsible for this use-value is unusual and probably only found in the writings of Karl Marx." All discussions of Locke's "labor theory of value" ultimately refer to the theory of property he develops in Chapter V of the Second Treatise. It is there that Locke presents his famous justification for private ownership of goods and land on the basis of the effort or labor which individuals expend to produce goods or to cause the land to produce goods of value to human beings. The structure of Locke's defense of private property is un- doubtedly familiar to most readers. In the state of nature before governments had come into existence, men all had common access to the earth and the fruits thereof which God had pro- vided for their use. However, although God had given all men an equal right to use the earth's resources, in order to survive, individual men had to appropriate some of these resources to feed, clothe and shelter themselves. [p. 3041 It was Locke's problem, and the problem of seventeenth century political philosophers in general, to explain how these appropriated resources became legitimate private property which excluded other men from having any claim upon them. Grotius and Pufendorf had both argued that private property was establish- ed in the state of nature by the cansent of all mankind who once shared in the original com- munistic ownership of these resources.'s1 Such a theory of property implied, however, that since property only existed at the consent of society, this consent could be withdrawn or modified by the society which sanctioned it originally, a conclusion which Locke sought to avoid. Instead, he argued that private property was established in the state of nature not by the consent of mankind, but by natural law. Adam Smith had considered and rejected the idea that the exchange value of a good or service depended on its utility. Smith distinguished between value in use and value in exchange, and argued that the value in exchange could not depend on the value in use. He cited the Paradox of Diamonds and Water to show that (as he understood it) there was little predictable relationship between value in use and value in exchange. Accordingly, Smith argued that value in exchange must depend on something else. In most cases, Smith argued, that something else would be the labor used up in the production of the commodities. He was certain that would be the case in an "early and rude state of society," in which, Smith suggested, it might require the same amount of hunting time to capture two deer or two beaver. Then, Smith suggested, two deer would exchange for one beaver. Therefore, the relative price of a deer would be two beavers, the same proportion as the labor required to produce (catch) them. Adam Smith held a labor theory of value, not only in the context of an “early and rude” society, but as an explanatory theoretical tool in his examination of an advanced (for his period) capitalist organization. To be sure, he did alternate between a labor-embodied and labor-command approach. But, as he never specified anything but labor as a standard in his command theory (no oxen or any other commodity is brought forward as an alternative measuring rod), one can reasonably argue that Smith was (generally) clear as to what his general point of view was.

So the labor theory of value was not unique to Marxism. Marx did attempt, however, to turn the theory against the champions of capitalism. He pushed the theory in a direction that most classical economists hesitated to follow. Marx argued that the theory is supposed to explain the value of all commodities, including the commodity that workers sell to capitalists for a wage. Marx called this commodity "labor power."

Labor power is the worker's capacity to produce goods and services. Marx, using principles of classical economics, explained that the value of labor power must depend upon the number of labor hours it takes society, on average, to feed, clothe, and shelter a worker so that he or she has the capacity to work. In other words, the long-run wage that workers receive will depend upon the number of labor hours it takes to produce a person who is fit for work. Suppose that five hours of labor are needed to feed, clothe, and protect a worker each day so that the worker is fit for work the following morning. If one labor hour equaled one dollar, the correct wage would be five dollars per day.

Adam Smith (1723-1790) was a Scottish philosopher and political economist who wrote The Wealth of Nations, published in 1776. He is regarded as the father of political economy and Marx found several important ideas in his writings.

i. Surplus comes from Production. Smith argued that a surplus emerges from production, not from exchange. Earlier writers had often been confused concerning this issue. The French physiocrats had argued that agricultural production alone creates wealth, whereas Smith argued that both agriculture and industry create wealth.

ii. Social Labour creates Wealth. This wealth is the "necessaries and conveniences of life" that are produced, that is, the commodities made available in production. (Marx may have used this idea to help develop the notion of the importance of the commodity). But this wealth is produced by the annual labour of the nation. This can be interpreted as social labour in the sense that it is useful labour, with skill and dexterity, applied in agriculture and industry. It is not isolated, but is exercised within the division of labour. For Smith, wealth is not produced by trade or amassing gold and silver, but by social labour.

iii. Division of Labour. For Smith, the development and expansion of the division of labour is key to the creation and accumulation of wealth. The level of wealth is increased by expanding the division of labour within society as a whole, and within specific industries. Society's labour as a whole is exercised within this division of labour, and each worker's claim on society's wealth is in proportion to that worker's position within the division of labour. The view that the division of labour is a cooperative aspect of the structure and development of socity may have inspired Durkheim, whose first major work was The Division of Labour.

Smith did not have what Marx considered to be a systematic labour theory of value that would explain exchange in modern capitalism. For earlier societies, Smith claimed that products exchanged more or less in proportion to the amount of labour embodied in them. However, in capitalism, each of land, capital and labour had a return to them, so that the labour theory of value no longer explained prices.

While Marx was quite critical of Smith, he did adopt some of his ideas, although he changed or developed them in a somewhat different way than Smith. The notion of value emerging in production, and on the basis of labour, became a key aspect of Marx's model of society. The notion of the division of labour is also important for Marx and other sociologists. Marx thought Smith too uncritical in his acceptance of the division of labour. While Marx recognized the cooperative character of the division of labour under capitalism, and on the other hand he viewed it as a source of alienation and argued that a social system eliminating much of the division of labour would ultimately develop. Marx was also critical of Smith's invisible hand, the unseen force that Smith claims guides individual self interest to promote the general good of society. (The invisible hand might be considered an economic counterpart of Durkheim's solidarity and order).

Marx inherited the labour theory of value from the classical school. Here the continuity is even more pronounced; but there is also a radical break, For Ricardo, labour is essentially a numeraire, which enables a common computation of labour and capital as basic elements of production costs. For Marx, labour is value. Value is nothing but that fragment of the total labour potential existing in a given society in a certain period (e.g. a year or a month) which is used for the output of a given commodity, at the average social productivity of labour existing then and there, divided by the total number of these commodities produced. and expressed in hours (or minutes), days, weeks, months of labour.

Value is therefore essentially a social, objective and historically relative category, It is social because it is determined by the overall result of the fluctuating efforts of each individual producer (under capitalism: of each individual firm or factory). It is objective because it is given, once the production of a given commodity is finished, and is thus independent from personal (or collective) valuations of customers on the market place; and it is historically relative because it changes with each important change (progress or regression) of the average productivity of labour in a given branch of output, including in agriculture and transportation.

This does not imply that Marx’s concept of value is in any way completely detached from consumption. It only means that the feedback of consumers’ behaviour and wishes upon value is always mediated through changes in the allocation of labour inputs in production, labour being seen as subdivided into living labour and dead (dated) labour, i.e. tools and raw materials. The market emits signals to which the producing units react. Value changes after these reactions, not before them. Market price changes can of course occur prior to changes in value. In fact, changes in market prices are among the key signals which can lead to changes in labour allocation between different branches of production, i.e. to changes in labour quantities necessary to produce given commodities. But then, for Marx, values determine prices only basically and in the medium-term sense of the word. This determination only appears clearly as an explication of medium and long-term price movements. In the shorter run, prices fluctuate around values as axes. Marx never intended to negate the operation of market laws, of the law of supply and demand, in determining these short-term fluctuations.

The ’law of value’ is but Marx’s version of Adam Smith’s ’invisible hand’. In a society dominated by private labour, private producers and private ownership of productive inputs, it is this ’law of value’, an objective economic law operating behind the backs of all people, all ’agents’ involved in production and consumption, which, in the final analysis, regulates the economy, determines what is produced and how it is produced (and therefore also what can be consumed). The ’law of value’ regulates the exchange between commodities, according to the quantities of socially necessary abstract labour they embody (the quantity of such labour spent in their production). Through regulating the exchange between commodities, the ’law of value’ also regulates, after some interval, the distribution of society’s labour potential and of society’s non-living productive resources between different branches of production. Again, the analogy with Smith’s ’invisible hand’ is striking.

Marx’s critique of the ’invisible hand’ concept does not dwell essentially on the analysis of how a market economy actually operates. It would above all insist that this operation is not eternal, not immanent in ’human nature’, but created by specific historical circumstances, a product of a special way of social organisation, and due to disappear at some stage of historical evolution as it appeared during a previous stage. And it would also stress that this ’invisible hand’ leads neither to the maximum of economic growth nor to the optimum of human wellbeing for the greatest number of individuals, i.e. it would stress the heavy economic and social price humankind had to pay, and is still currently paying, for the undeniable progress the market economy produced at a given stage of historical evolution.

Theory of Value

Before Adam Smith, the political economic concept of labour was defined by reference to a feudal system in which all grades and classes of labour and all other forms of property were, ultimately, subject to a Monarch while the soul of the labourer was entrusted to the tender care and mercies of a Church with a monopoly on revelation. The resulting ‘caste system’ also embraced a more ancient division of labour between the Liberal and Mechanical Arts. From the time of the ancient Greeks when slavery was first introduced through the Roman Empire into the Christian Middle Ages and up to the Renaissance, those who worked with their heads practiced the Liberal Arts; those who worked with their hands, the Mechanical. In essence, the first were considered ‘ennobling’; the second, ‘demeaning’. It is interesting to note that writing was considered a mechanical art in the ancient and medieval worlds. It was something a ‘gentle’ person did not do; it was for scribes (Fuller 2000, 46).

It took the 15th century artist/engineer/humanist/scientist genius of Da Vinci, Dürer, Michelangelo and their kin to begin bridging this ancient chasm. An additional span was laid by their successors in the 16th and 17th centuries – high artisans and instrument makers - whose ‘experimental method’ inspired Francis Bacon and fuelled the ‘Scientific Revolution’ (Zilsel 1945).

With Smith, and the republican ethos of the American and then the French Revolutions, the labourer (Liberal and Mechanical) became free of feudal ownership and religious intolerance. In economic theory or moral philosophy as it was then called, the value of goods and services was rooted by Smith, among others, in a ‘labour theory of value’. Smith’s theory quickly eclipsed older exchange, scarcity and use value theories. It was the time, effort and skill of labour (and wages – the higher the better according to Smith for the wealth of nations) that determined the ‘just price’ of a good or service in the marketplace.

Even Capital, as physical plant and equipment, was subsumed under the labour theory by Bohm-Baverk and the Austrian School. In essence, capital was historically embodied labour using ‘round-about’ methods of production (Blaug 1968, 510-11). How to measure labour content of a good as well as historically embodied labour in capital was not, however, convincingly answered (Dooley 2002).

The labour theory of value maintained theoretical dominance for nearly a century until the Marginalist Revolution of the 1870s and innovation of the Marshallian Scissors of supply and demand. Marshall rejected the labour theory in favour of what can be called a modified theory of exchange involving equilibrium between:

• the constrained utility maximization of the consumer (subject to price and income constraints) measuring ‘willingness’ to buy, a.k.a., demand; and,

• the constrained profit maximization of the entrepreneur (subject to cost and technical constraints) measuring ‘willingness’ to produce, a.k.a., supply.

The labour theory of value continued, however, as the foundation stone of Marxist economic thought and fueled the Communist Revolutions of the 20th century. To appreciate the importance of the theory, one may look at the ‘Cold War’ that geopolitically divided the planet into two armed camps threatening global ‘mutually assured destruction’, or MAD, for nearly half a century. One camp believed that capital, as private property, was the foundation stone upon which ‘hired’ labour - through its division and specialization – transformed natural resources (or ‘dumb nature’) into commodities of use and value to a ‘sovereign’ consuming public. The other believed that ‘sovereign’ labour was the only productive asset and ‘capital was theft’. On this dispute the life and death of human civilization, as well as the biosphere of the planet, lay beneath a nuclear sword of Damocles dangling on an elliptical trajectory with a fifteen minute warning.

The triumph of market price over Marx as a ‘theory of value’ – equating the ‘willingness’ of consumers to buy and producers to sell – occurred at a time, however, when the ancient distinction between the Liberal and Mechanical Arts resurfaced in a new strain – management versus labour. In effect, labour worked with its hands; management worked with its head.

While a satisfactory theory of capital never emerged from the Classical School of Adam Smith or the Neoclassical School, the idea of a single owner of capital directing production was, and remains, an elementary assumption of the economic theory of the firm. Growth and development of the limited liability corporation, however, spread capital ownership wider and wider (contra Marx) to embrace more and more ‘shareholder’ owners. This, in turn, led to a separation of ownership and control first formally noted by Berle & Means (1932) with the concomitant emergence of a new class of labour called ‘management’. This new class exercised the prerogatives of ownership as hired agents (employees) of shareholders. That the ‘agency problem’ in economics has not been solved is evident in the recent wave of corporate scandals, e.g., Anderson, Enron, Tycho, Worldcom, et al.

But why should one class of labour ‘work’ and another ‘manage’? This was the subject of Richard Bendix’s historically exhaustive Work and Authority in Industry: Ideologies of Management in the Course of Industrialization (1956; 1976; 2001). Bendix traces the conceptual history of modern management back to feudal times. He finds, in effect, a theory of positive thinking: managers have a positive self-image and can defer gratification while workers do not and cannot do the same. Bendix captures, perhaps, the last embers of the Classical ‘Iron Law of Wages’. Classical economics viewed, with relative equanimity, the starvation of the labourer who must then accept lower real wages and who, alternatively, with higher real wages simply bred increasing the labour supply thereby lowering real wages through competition. Full employment, under the Classical model, was assured on the backs of labour, or what Marx called “the surplus army of the unemployed”.

John Kenneth Galbraith in his New Industrial State (1967) went further and described the modern corporation as governed by a self-replicating technostructure of managers (produced by and selectively chosen from among graduates of so-called ‘B’ or business schools) who then direct ‘workers’ on behalf of an ever increasingly and diffuse pool of shareholder-owners. Galbraith also explored the relationship between large corporations and a newly emerging class of labour - creative talent, specifically artists (Economics & The Public Purpose, 1973). While the classless genius may have emerged with the Renaissance’s artist/engineer/humanist/scientist, by definition, it is exceptional and has not, historically, constituted a distinct class of labour.

By the late1960s, however, as a result of mass post-war, post-secondary education, an historically large demographic cohort of talent became available to both arts and science-based industries. By the 1980s and 1990s observers such as Robert Reich in The Work of Nations (1992) recognized that the displacement of manual workers by automation and computerization (together with increasing Third World ‘off-shore’ production) was creating a new class of American symbolic workers, i.e., those who manipulate words, numbers, visual and other recorded images and sounds. The most recent wave of talent include so-called ‘biotech stars’ responsible for the emergence of a whole new sector of the economy – biotechnology (Zucker et al, 1998).

The mainstream economic concept of labour holds one additional and inherent bias. Other traditional factors of production – capital, entrepreneurship and natural resources – can reasonably be assumed fixed in the short-run; labour is the variable factor to be adjusted to maximize profits. Calculation of the Newtonian equilibrium for constrained profit maximization, however, becomes problematic when the variable is volitional.

In his 1998 article “Beyond the Information Revolution”, Peter Drucker captures the dilemma of shareholders and management in dealing with the new knowledge worker. Bribes in the form of stock options will not suffice, Drucker concludes. The old schism between management and labour, between the Liberal and Mechanical Arts, between geeks and suits, according to Drucker, must be healed through respect based on mutual need:

Increasingly, performance in these new knowledge-based industries will come to depend on running the institution so as to attract, hold, and motivate knowledge workers. When this can no longer be done by satisfying knowledge workers’ greed, as we are now trying to do, it will have to be done by satisfying their values, and by giving them social recognition and social power. It will have to be done by turning them from subordinates into fellow executives, and from employees, however well paid, into partners. (Drucker 1998, 57)

Henry George, the 19th century American economist and social philosopher, saw the problem of protecting the working peoples' wages and Jobs one of distributive justice. He attacked as fallacious the idea that equality of opportunity to work was a "privilege" accorded to labor. The protectionist system, he held, was based on the antidemocratic notion that "the many are called to serve and the few to rule." The paternalism of protection, whether in the domestic or the world economy, is "the pretense of tyranny," he argued. He holds that labor, including workers and entrepreneurs, and not landholders, or owners of capital, is the source of all economic value. Labor, he reasoned, "employs capital," and not the reverse. George's theory of value was an improvement on Adam Smith's, putting into it a greater emphasis on the importance of land in the analysis of the distribution of wealth. But it was a production cost theory, with all its problems and advantages.

DID MARX HOLD A LABOR THEORY OF VALUE?

One popular apologetic view has it that Marx began by accepting the labor theory of value he inherited from Smith and Ricardo when he wrote the first part of Capital, but abandoning it after getting bogged down in the details of its application. This view does not stand up well to historical scrutiny; Marx had drafted all three volumes of Capital before Volume I went to the printer.

A more plausible view is that the labor theory of value served two purposes: to emphasize the fact that the worker sells labor-power to the capitalist, who then owns the product of that laborpower, and to account for the antagonism between worker and capitalist, with the resulting struggle over the length of the working day—both of which needed simple explanations for a non-specialist audience.

Marx’s rejection of the labor theory of value in Volume III was prefigured in a much discussed but little understood part of the first section of the first volume of Capital, the section on “Commodity Fetishism.” Marx points out that it is a peculiar feature of capitalist economies that the social relations involved in production assume in the eyes of the producers “the fantastic form of a relation between things.” Exchange ratios confront producers as a natural force, independent of human will. “Value converts every product into a social hieroglyphic.” The discussion of fetishism appears immediately following Marx’s introduction of the labor theory of value. Yet if the labor theory of value were true, it is hard to see why commodity fetishism would be a problem; exchange ratios really would be a natural form, the reflection of objective features of the world, rather than of social relations between persons.

In the labor theory presented at the beginning of Capital, exchange is explained in terms of a natural feature of commodities, the amount of laborpower required for their replacement. Exploitation is also conceived of in terms of a natural feature, the difference between the value of labor-power and the value it produces. Only appropriation is treated as the outcome of a social process. By the end of the final volume of Capital, though, both exchange and exploitation are recognized for the social processes that they are. Each depends on the capitalist’s ability to appropriate surplus, rather than on any objective feature of the labor process or the commodities produced. It is because exchange is a social process that its confrontation of those involved as a natural process is a fetish. All commodities are made commensurable by capitalist appropriation, not vice-versa. The subtitle of Capital is ‘a critique of political economy’: as critique, it investigates the conditions and limits of exchange. It turns out that exchange is conditioned not by prior exchangeability, but by the appropriation of surplus by those who control the means of production. That is why “the products of labor acquire a uniform social status.”27 It is also the answer to the question that “political economy has never thought to ask,” i. e. “why labor is represented by the value of its product and labor time by the magnitude of that value.” Labor is measured by the value of its product because the capitalist buys it for what it can produce. Labor-power is the source of surplus value because it is purchased on the basis of its ability to produce not physical surplus, but surplus value. Labor, initially the shared feature of commodities, turns out to be ‘abstract’ in capitalist production not because it is all interchangeable, but because capitalist social relations make it so.

Marx’s labor theory of value is one of the most misunderstood elements of his work, and this is partly a result of its historical context. Marx was not the first economist to recognize that commodities exchange at a value equivalent to the labor used in their production. Adam Smith accepted this, along with most other early capitalist sholars. However, Marx extended the idea at a time when it was losing favor among classical economists. While capitalist thought on economic value turned in the direction of price theory, Marx formulated a theory of value that, like most of his thought, was founded in the study of the underlying social relations of production. What this means is that the labor theory of value is not necessarily incompatible with capitalist price theory. For, the labor theory is the result of a fundamental concern with the ways in which economic value is constructed in capitalist societies, not with the particular numerical form it takes. By asserting that the value of a good bears a direct relationship with labor, Marx is not claiming that labor value can be equated with price. Quite the opposite. If surplus value is defined as the difference between the value of work performed and the wages earned for that work, and wages bear a direct relationship to price, then the difference in labor value and price is actually a component of labor exploitation under capitalism. Therefore, labor value and price are, by definition, not identical within the framework of Marx’s theory.

From the preceding discussion, we can draw the following conclusions: 1) Smith rejected the universal validity of the labor theory of value on the ground that the existence of profit implies that capital creates value in addition to labor, and, therefore, that labor is not the only determinant of value. Such a view is inconsistent with Smith’s own theory of profit of book I, chapter 6, paragraph 5. Against Smith, Ricardo and Marx are right to point out that, on the basis of Smith’s own theory of profit, the presence of profit does reveal any creation of value by capital, because this theory conceives profit as the part of the product of labor that does not accrue to the working class, but to the capitalist class. The same can be said about the existence of rent: it does not imply that land creates value, and, therefore, that not only labor determines value. For a labor theory of value, the presence of profit and rent does not involve any refutation; precisely, they are the object that require explanation, and they are explained as shares in the product of labor in virtue of certain property rights. The presence of profit in the price of commodities does not imply that capital creates value, nor does the presence of rent imply that land creates value. But neither does the presence of wages imply that labor creates value. The distributive parts of price reveal nothing about the nature of exchange value, but about the structure of property rights over a value determined independently of these rights to appropriate it. 2) Smith rejected the validity of the labor theory of value under capitalism because he was not coherent with his theory of profit and thought, mistakenly, that the fact that the product of labor is to be shared between the workmen and the capitalist implies that labor does not determine the whole value of the commodity. Since wages do not exhaust the whole value of the commodity, something else than labor is causing value, thinks Smith in book I, chapter 6, paragraph 7. He draws the wrong conclusion from his own premises. Once the confusion of “wages” and “labor” is removed and the text rewritten so as to make sense, we can see that Smith, contrary to what he believed, had found nothing against the validity of the labor theory of value under capitalism, but, rather, against some “wages” theory of value. 3) Ricardo and Marx did not invent a false legend when they held that Smith had not been consistent with his distinction between “labor” and the “value of labor”. They did not hold that Smith had confused the two concepts: they held that though he had correctly distinguished them in his theory of profit, he failed to be coherent with himself when he rejected the labor theory of value under capitalism.