David R. Henderson  

Biggest Flaw in Labor Theory of Value

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On his blog today, Tyler Cowen responds to the question, "What is the biggest flaw in the labor theory of value?" Tyler does list some sophisticated flaws that have to do with capital and other inputs, but here's my candidate:

According to the labor theory of value, the value of something is determined by the amount of labor used to produce it. So consider the following case. One man goes out panning for gold and at the end of a 10-hour day has enough grains of gold to make an ounce. Another man goes walking along and in 1 minute, trips over a stone. He picks it up and it's a gold nugget. Labor input? Ten hours vs. one minute. Value: the same.

Maybe that's what Tyler meant when he said "inputs are heterogeneous." But the point is that he left out randomness.


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CATEGORIES: Political Economy



COMMENTS (33 to date)
Alex J. writes:

Processes are heterogeneous too. About the same amount of work goes into a box office hit as goes into a box office bomb.

FWIW, Hedrick Smith pointed out in The Russians, that even in the Soviet Union a bestselling author could become rich. The book binders didn't get all of the proceeds.

Randy writes:

I've been wondering if Marx misunderstood Locke, or if Marx has been misunderstood (perhaps deliberately).

Locke described what amounts to a Labor theory of Property - that is, it is the labor I put into something that makes it my property - which makes sense. If I add labor to something, the result is my property, whether or not the result has value. Marx takes the next step of simply assuming that labor itself has value - which seems easily dismissable. Except that Marx states early on in "Capital" that he is not talking about labor done on things of no value. It seems to me that Marx is not guilty of the extreme stupidity of assigning inherent value to labor, but only of the lesser stupidity of believing that value can be aggregated and then subdivided into equivalent units. That is, the same type of stupidity that is found in Keynes - and much of modern macro.

Jody writes:

I'm no fan of the LTV, but I don't see where randomness in labor is an issue as it can easily handled as value = "expected labor".

The heterogeneous inputs (and implicit demand side input) seems like a stronger counter.

In the past, I've pointed to the production of excrement as an example of why demand side matters.

Tyler Cowen writes:

I think the theory is intended as a long-run equilibrium condition, although it is fair enough to suggest that is inadequate for many real world problems.

drobviousso writes:

Isn't LTV as much wrong as the sunk cost idea is correct, as they state almost the exact opposite idea.

David R. Henderson writes:

drobviousso,
With your caveat "almost," I think you're right.
David

Ralph Warren writes:

You realize Marx discussed your flaw on page 6 of Capital, right, and explicitly said that's not what he was talking about?

Yuri writes:

http://news.bbc.co.uk/1/hi/business/1779873.stm

what if it was Australias richest man

diz writes:

This "randomness" problem can be reconciled by simply recognizing that the LTV is a tendency.

Much as "real" economists would do with supply demand equilibrium establishing prices. It's not necessarily true at any given instant, but value should tend toward the amount of labor incorporated over time.

I think Adam Smith was saying something similar with his "the price of beaver is deer, and the price of deer is beaver" example.

It's not that one hunter can't kill 2 deer in 10 minutes if he is lucky, but that if it generally takes twice as long to kill a deer versus a beaver, hunters will not go for deer until the price is twice as high.

I think the most absurd aspect of the labor theory of value is that there's no governor on the product produced having any value to anyone.

In Smith's example, it's the price of deer or beaver that tells the hunter how to allocate his labor. The price ends up reflecting the quantity of labor as an outcome, not an input. In the absence of a clean market price signal to steer allocation of labor, it's absurd to assume there will necessarily be a correlation demand between labor and value.

Marx perhaps was aware of this and simply resorted to the mother of all economic plug variables: only "Socially Necessary Labor" counts toward value.


Ezel KARA writes:

just look at this to see the empirical strength of LTV

http://homepage.newschool.edu/~AShaikh/labthvalue.pdf

Joshua Lyle writes:

Ralph Warren,
Marx is not the only promoter of a labor theory of value. David Henderson's post does apply to many others. Marx's particular version, in which value is determined by the socially necessary labor needed to produce the valued object, which has various caveats and epicycles about how labor is counted, avoids this particular objection. Of course, the only coherent standard of "social necessity" is a market price system, that is to say, Marx's labor theory of value only makes sense given the particular perversion of reducing it to a subjective theory of value (that is to say, if the equilibrium price of something is $5.00, then clearly out of whatever labor was used to produce it and its precursors and its share of the technical and social achievements necessary for its production, exactly $5.00 worth was "socially necessary").

Current writes:

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Sbard writes:

The biggest problem with Marx's Labor Theory of Value is that the whole "socially necessary labor" caveat reduces it to a meaningless tautology, essentially stating, "only labor that creates value creates value."

Ralph Warren writes:

So nobody has read Marx, I guess, because he has already raised and discussed these criticisms. Oh well. So much for classical training in economics.

(@Joshua Lyle, Henderson said 'the' labour theory of value; the failure to distinguish is his, not mine)

Joshua Lyle writes:

Ralph Warren,
I agree with you that David Henderson failed to distinguish; however, I also hold that your comment included a lesser failure of clarity.

Although I have no "classical training in economics", having undertaken no formal study since high school, I did endeavor to read Capital, but only in translation, and base my objection on Marx's third volume, in which he attempts to explain social necessity in terms of average costs, when only marginal costs suffice to do so.

kevincure writes:

As noted, Marx very clearly noted Henderson's objection, and I don't think his objection is anywhere near the real reason LTV fails.

The problem, as Tyler noted, is constant returns to scale. LTV will hold in the long run with constant returns to scale. Without constant returns to scale, only the marginal consumer matters. That is, demand will affect price, not just supply. Now, if the supply curve is flat in the long run, as we assume of quite a number of markets, then LTV does in fact hold, and this situation isn't terribly uncommon. That is, the LTV is not a terrible description of economic reality, as long as you note that a) an isomorphic argument can be made for "the land theory of value" or "capital theory of value", so labor is in no way special, and b) LTV will only apply for goods with flat long-run supply curves, whereas Marshall applies always. In any case, there's a reason all of the great economists pre-1860s used it! Smith, Ricardo, Mill, Marx, etc. were not all idiots.

Dirk writes:

@kevincure
"Smith, Ricardo, Mill, Marx, etc. were not all idiots."

Thanks. LTV holds with constant returns to scale which is not an uncommon assumption in economics. So the "LTV is so stupid as if all labor would create value"-rhetoric says more about the intellectual capacities of the person who uses it than about the validity of LTV.

I found this interesting. The Labor Theory of Value has a very dark side.
Validation by Sacrifice

Mike: What is the Marxist/Elitist theory of value?
Jim: When it costs more, it's better.

02/23/10 - Ed Driscoll quotes "The New Criterion" by Theodore Dalrymple [edited]:

These books give compelling evidence of the horrors of the Soviet Union in the 20's and 30's, all of them now accepted as true.

The Soviet Union was valued by contemporary intellectuals not for the omelette, but for the broken eggs. They thought that if nothing great could be built without sacrifice, then so great a sacrifice must be building something great.

The Soviets had the courage of their abstractions, which are often so much more important to intellectuals than living, breathing human beings.


Evan Harper writes:

Wow. This is one of the most embarrassing posts I've seen anywhere in a long time. You haven't even read a few paragraphs into Capital!

"Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and unskilful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour power, composed though it be of innumerable individual units. Each of these units is the same as any other, so far as it has the character of the average labour power of society, and takes effect as such; that is, so far as it requires for producing a commodity, no more time than is needed on an average, no more than is socially necessary. The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time."

Loof writes:

Marx scoffed at the idea that he "prove his concept of value", and he’d rightly laugh at professors pointing out flaws in the theory today. His labor theory of value was a process of becoming, not being. In Hegelian terms, (and Marx was Hegelian in methodology applied materialistically, not idealistically), his objective theory of value was about labor Becoming (Das Werden) definitive. Nothing to do with his theory Being (Sein) compelling then and there, here and now with proofs void of flaws. Labor as an ultimate value was his objective and flaws would be sublated in its movement towards Being.

Tracy W writes:

Ralph, Warren, If you have read Das Capital, it is of course obvious that Marx discusses the relevant objections to the labour theory of value. But he does not manage to answer them. Instead he leaves the problem the labour theory of value was seeking to define unresolved.

Take the last sentence from Evan's quote from Marx:

The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time.

By introducing the words "socially necessary" Marx just begs the question of how we work out what labour is "socially necessary". This reminds me of Feynman's criticism of a children's science book that simply said that energy makes dogs move and cars move and so forth, that it didn't explain anything. What makes a given piece of labour socially necessary? Marx states no way of calculating this except by reference to existing market prices. Which is what Joshua Levy was saying earlier.

It's a less-common rhetorical trick, take your opponent's objections, restate them, come up with no meaningful answer, but if anyone points out the objections, say "Oh, I answered them in x". But it's still a trick.

Joshua Lyle writes:

Loof,
regardless, there is no Being for it to Become that escapes the necessity of marginal thinking, and we rightly scoff at his scoffing.

liberty writes:

(Especially for Evan Harper and Loof)

“Marx speaks of ‘value,’ ‘exchange value,’ and ‘use value’ in the opening pages of the ‘Capital.’ He defines ‘value’ as a ‘common substance’ present in products of human labour, human labour being regarded ‘in the abstract.’

... We are then told that ‘a use value or useful article’ has ‘value only because human labour in the abstract has been embodied or materialized in it’…; so that use value is value as before defined plus utility of the product.

Having grasped this conception, the student of Marx is startled to learn, two pages later, that ‘a thing can be a use value, without having value,’ as air, &c. (but why call this Use value, when value is absent?) and that ‘lastly, nothing can have value without being an object of utility,’ because ‘if the thing is useless so is the labour contained in it; the labour does not count as labour, and therefore creates no value.’

Now as we have already been told that the ‘labour’ which ‘creates’ ‘value’ is ‘labour in the abstract,’ its utility or non-utility cannot possibly come into consideration; we are bidden to ‘put out of sight...the useful character of the various kinds of labour’…in defining value.

Although I have no pretence to be a ‘Socialist of note,’ I make bold to say that this quagmire of contradictions and bad metaphysics is no safe foundation for modern Socialism.”

- Annie Besant, in Bernard Shaw, Henry Hyndman, and Annie Besant, “Exchange of Letters on Value Theory in Marx,” 1887, at http://www.marxists.org/subject/economy/authors/fabians/earlyenglishvalue/lettersonvalue.htm

Evan Harper writes:

Yes, I agree that the constructs of "socially necessary" and "normal conditions of production" are awfully soft, and undermine the usefulness of Marx's definition. That's not the point. I'm not defending Marx or the LToV.

Henderson didn't say, "Marx's definition is awfully soft, because he doesn't really explain 'socially necessary' and 'normal conditions of production.'" He said, "According to the labor theory of value, the value of something is determined by the amount of labor used to produce it." That's just wrong, and unambiguously so. According to the labor theory of value, the value of something is determined by the amount of socially necessary abstract labor-time used to produce it. Criticizing the concept of socially necessary abstract labor-time is valid, but ignoring it isn't.

Les writes:

The widely-accepted economic factors of production are as follows:

1) Capital Investment, such as Land, Buildings, Plant & Machinery, etc;
2) Labor, such as unskilled, skilled, and supervisory;
3) Entrepreneurship, such as invention, innovation, and enterprise.

Therefore the plain defects in the Labor Theory of Value are to neglect both Capital Investment and Entrepreneurship. Both defects are enormous blunders, significant enough to entirely discredit the Labor Theory of Value.

Joshua Lyle writes:

Les,
actually, many versions of the labor theory of value do account for categories (1) and (3), but do so in terms of the labor that is required to develop them. Most often, the flaw is in the accounting rather than in the lack thereof.

Les writes:

Joshua:

I salute the ingenuity of your claim that "many versions of the labor theory of value do account for categories (1) and (3), but do so in terms of the labor that is required to develop them. Most often, the flaw is in the accounting rather than in the lack thereof."

But it fails the logic test. Capital and entrepreneurship are sui generis, and not merely products of labor.

Troy Camplin writes:

I developed an information theory of value that might solve that problem - the same amount of gold holds the same amount of information.

Joshua Lyle writes:

Lee,
but, (1) & (3) have value, by definition, so they should be able to be accounted by the same metric as (2), which means they are necessarily expressible in terms of labor-value. Theories of value just are descriptions of how those relate.

Troy Camplin writes:

1 2 and 3 can all be described using information. Increase information content, you get more value; decrease information content (increase entropy), you get less value.

Walter E. Williams writes:

All production is joint production i.e., using two or more inputs. That being the case one cannot tell what input did what. Picking up David's gold nugget required oxygen, nitrogen, vitamin D, etc., etc. So how much was produced by labor and how much produced by oxgen, etc?

If you read Marx maybe you will see that this is not him...Whatever happened to Marx's discussion of socially necessary labor? Or the development of his argument in the 3 volumes where he moves from the concrete to the abstract? Is this actually a serious post or an April Fool's joke??

Sheldon Richman writes:

I'm surprised Bohm-Bawerk's name hasn't come up in this discussion, considering how closely he analyzed Marx's labor theory. Marx wouldn't have resorted to homogeneous labor quantity, socially necessary or otherwise, had he not erred in thinking (along with Aristotle, Smith, and others) that people exchange equivalent values when they trade. If you think that, you are likely to embark on a wild goose chase to determine the respect in which the traded items are equal. But if you realize that people trade lower value for higher value things -- that is, unequal things in their subjective assessment -- the inquiry into equality never arises. Thank you, Eugen.

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