THE LABOR THEORY
by Donald C. Ernsberger
edited by Jarret Wollstein
At the heart of economic theory is the concept of value. What gives
an article value? Is it something inherent in an object, or is it some other factor? Does value derive
from human effort, or something else? The two major and fundamentally opposite economic systems –
capitalism and Marxism – give completely different answers.
The Labor Theory
Karl Marx's labor theory of value asserts that the value of an object
is solely a result of the labor expended to produce it. According to this theory, the more labor or
labor time that goes into an object, the more it is worth. Marx defined value as "consumed labor time",
and stated that "all goods, considered economically, are only the product of labor and cost nothing
The labor theory of value is the fundamental premise of Marx's
economics and the basis of his analysis of the free market. If it is correct, then much of Marx's
critique of capitalism is also correct. But if it is false, virtually all of Marx's economic theory
Here is an example of how the labor theory of value works: A worker
in a factory is given $30 worth of material, and after working 3 hours producing a good, and using
$10 worth of fuel to run a machine, he creates a product which is sold for $100. According the Marx,
the labor and only the labor of the worker increased the value of the natural materials to $100. The
worker is thus justly entitled to a $60 payment, or $20 per hour.
If the worker is employed by a factory owner who pays him only $15
per hour, according to Marx the $5 per hour the factory owner receives is simply a ripoff. The factory
owner has done nothing to earn the money and the $5 per hour he receives is "surplus value",
representing exploitation of the worker. Even the tools which the factory owner provided were,
according to Marx, necessarily produced by other workers.
According to the labor theory of value, all profits are the rightful
earnings of the workers, and when they are kept from the workers by capitalists, workers are simply
being robbed. On the basis of this theory, Marx called for the elimination of profits, for workers to
seize factories and for the overthrow of the "tyranny" of capitalism. His call to action has been
heeded in many countries throughout the world.
The Origin Of Value
There are two fundamentally different answers to the question of
where economic value originates. According to intrinsic theories of value, value is inherent in
objects; remains constant despite changing demand, the passage of time, and other factors; and can be
"objectively determined" by calculations based upon some fundamental scientific principle. The labor
theory of value is clearly an intrinsic-value theory.
The other approach is the market-exchange theory. According to this
theory, value is not inherent in objects, but is a product of many different consumer judgments.
According to market-exchange theories, value depends upon people's desires: the more they esteem an
object and are willing to trade for it, the more it is worth. This theory is the basis of free-market
capitalism, which Marx bitterly opposed.
At first glance, both theories seem to make sense. It is generally
true that the more labor invested in an object, the more it is worth; but it is also true that the
more people want something regardless of how much or how little labor went into it – the more it
Which theory is correct? Both of them cannot be, since they lead to
diametrically opposite economic systems. We will argue that the labor theory of value is fundamentally
wrong and the market theory of value is correct.
Flaws In The Labor Theory
The assertion that labor is the sole determinant of value is hard to
accept just based upon common sense and experience. The assertion that only labor gives an object
value ignores the fact that many natural objects in which no labor has been invested – such as
scenic views, pure water, gems and minerals, and wild fruits and vegetables – have economic value.
Also the labor theory cannot by its nature account for the fact that people value some natural objects,
such as diamonds, tremendously more than other natural objects, such as leaves.
The labor theory of value also fails to take into account changing
consumer desires and the contextual nature of value. In a horse-and-buggy culture, horse-shoes are
tremendously valuable commodities, but in a society without horses they are virtually useless. Similarly
in a society with much leisure time, games and recreational facilities become important, but in a
subsistence economy in which people must work nearly continuously just to stay alive, such things may
actually have negative value.
The labor theory also ignores the importance of time and position.
A 20-year-old wine and properly-aged beef are far more enjoyable than one-year-old wine and unaged
beef. Oil in a desert is a potentially valuable resource, but oil in the local reservoir or in
the middle of a farmer's field is a hazard.
Perhaps the most grievous theoretical fault with the labor theory is
that it ignores what economists call time preference. Time preference is the common strong preference
for goods and services here and now, rather than later. Present consumption is more valuable than
For example, most workers prefer to be paid when their work is
completed rather than when their products are sold – which may be months later. For workers to
be paid now, rather than later, someone must advance their wages, and clearly this service has a
value. But proponents of the labor theory would have it both ways: workers are to receive the full
future value of their product now.
The final theoretical failure of the labor theory of value is the
value-effort fallacy. It is folly to assume that all effort produces value. Every day each of us
wastes time on fruitless efforts. To equate labor with the automatic creation of value is to
fallaciously imply that all human effort is infallible and constantly productive.
Absurdities Of The Labor Theory
The labor theory is even more absurd in practice. If all value is
derived from labor, and entrepreneurial effort is "parasitic", who would bother to invest the time and
money necessary to build factories, plan product development or organize a production process? If all
profits are "exploitation", what incentive does anyone have to risk money on a new and untried product
or service? Where will the money come from to finance new investment in tools?
Communist countries have not abolished profits. They have merely
transferred all profits to the state, which typically uses them to build a huge military apparatus at
the expense of consumer production.
The labor theory of value is violently anti-consumer by its nature.
Under this theory, sellers are compelled to price all goods by the amount of labor that goes into them,
rather than how much they are demanded by consumers. Thus stores could charge no more for an aged
foreign wine than for a local cheap wine (given equal labor input) or more for the work hacked out by
a beginner. This inevitably produces a surplus of unskilled and shoddy work, and a shortage of skilled
work – which is exactly the situation that exists in communist countries.
The labor theory also means the end of all economic freedom. Engels,
Marx's disciple, wrote: "For a pure Marxist society to long endure, voluntary exchange between
individuals must be abolished." In a communist society you produce what the rulers tell you and consume
what scraps they allow you. If you don't like this, you are of course free to relocate – to a
slave labor camp.
The most interesting fallacies of the labor theory of value are
methodological. Labor theory arose from two extremely poor methods of economic research. First it
attempted to establish economic laws of exchange by examining only supply – ignoring demand
Even worse, the entire labor theory is unproven. In the entire first
volume of Das Capital, where Marx proposed the labor theory, there is not one "positive proof".
Rather Marx offers a fallacious "negative proof" in which he argues:
Premise 1: Some factor in the production of a good gives it
Premise 2: Only those goods to which man has applied labor have
Procedure: Examine all the factors producing a good by discarding those which did not
create equal value in equal quantity, and end up with one factor – Labor. ARBITRARY;
Conclusion: Labor must be the source of value. FALSE.
Marx promised to provide a positive proof in the Volume 3 of Das
Capital. However, that book does not offer a positive proof, and implicitly refutes one. Marx
proclaims that two types of capital exist in production, only one of which can produce "surplus value".
Thus exchange of items of equal value can have uneven mixtures of these two types of capital, implying
that labor alone is not the sole determinant of value.
Does Capital = Exploitation
The labor theory of value is nonsense both in theory and practice. It
ignores the many non-labor factors which create economic value, is based upon unproved assertions, and
leads to economic chaos and political slavery.
The free market, in contrast, rests upon voluntary trade. If workers
choose to contract for employment in factories rather than work their own farms or produce handicrafts,
it is because they prefer the wages and conditions in factories.
An entrepreneur contributes the great value of his organizational
ability, foresight, and management skills. Because value is not solely a product of labor, these
abilities are extremely valuable. Profits are his just reward for risking capital in an uncertain
and changing world.
True free-market capitalism, capitalism free of state intervention,
prohibitions, subsidies and protectionism, means economic prosperity and freedom for all. Indeed, the
free market is the only economic system which enables consumers rather than bureaucrats to determine
what is produced and at what price.
Marx has been in his grave for over 100 years. It is time that his
theories were buried as well.
Donald C. Ernsberger is a founder of the original Society for Individual Liberty. He
teaches college-level economics and history.
This pamphlet was originally published in 1988.
It is part of ISIL's educational pamphlet series. Click here for the full index of pamphlets online.
All ISIL educational pamphlets are available in hard copy for 5¢ each. Click here for the ISIL Store.