What is the Labour Theory of Value? - Australian Fabians

What is the Labour Theory of Value?


Chris Warren
21 February 2020
by: Chris Warren
Wages and Wealth

The Labour Theory of Value (LTV) claims that only labour creates value.  Most economists cringe at the thought of having to deal with it and controversy abounds.  For many economists, labour value stops at the point where the wage is set[1].  This fixed “wage” share of production is all that workers are entitled to.  The LTV contradicts this assumption and suggests that such wage fixing is a political device that underpins capital accumulation.  Wage-fixation contradicts LTV which leads to almost all of the structural problems we have today.

Capitalists require that the market value of commodities exceeds the cost of production.  This gap is their source of profits.  Two commercial practices serve to maintain this gap.  Firstly, a range of trade restrictions prevent so-called ‘free competition’ and secondly, wages are fixed (by different political processes) while prices are free to rise to whatever levels a market will bear.  Under these conditions, workers never get the value equivalent of their labour, neither when receiving wages nor when they purchase commodities on the market.  This means that production ends up with two valuations in terms of money.  Firstly, all the funds necessary to produce commodities and bring them to market and secondly, a different amount of cash received when each item is sold (for so-called ‘cost-plus’).  Labour value theory claims that these two different money valuations are artificial – they result only from political interferences in a market economy (which then leads to all manner of social and economic problems). 

Labour theory has particular relevance now because of a new context.  The ILO and ACTU have noted that the labour share of wealth is falling and the share of wealth going to capital is increasing.  Global debt has exploded, and interest rates have collapsed.  Inequality is spreading and riots against austerity are breaking-out across the globe.  According to two Nobel economists (Joseph Stiglitz[2] and Paul Krugman) capitalism is ‘increasingly dysfunctional’ or suffers from a vague ‘magneto problem’[3].  OECD economists have noted that instability has increased since the Second World War.  Unfortunately, so far, few activists have analysed these trends which, clearly, are the products of capitalist commercial practices, most of which contradict the LTV.  

So, what is the labour theory of value?

Labour theory only applies to commodities produced for markets and not to items produced for hobbies, charities, or from other forms of non-commercial activities.  The essential insight is very simple.  In 1726 Benjamin Franklin wrote:

By Labour may the Value of Silver be measured as well as other Things. As, Suppose one Man employed to raise Corn, while another is digging and refining Silver; at the Year’s End, or at any other Period of Time, the complete Produce of Corn, and that of Silver, are the natural Price of each other...[4]

This says nothing about the share allowed to producers.  If corn and silver are produced by slaves or serfs who receive a pittance, their product still has the same value should it be produced by workers on wages.  The amount of labour is key – not the price paid for that labour.

The amount of labour is an abstract concept that often confounds skeptics.  It only operates where markets are competitive, without any degree of monopolisation.  Any degree of monopoly disrupts the relationship between labour values and prices.  Assuming suitable laws, private owners of monopolies can grow rich by selling goods and services well beyond labour values.  This deprives others of their just deserts.

Economists often claim that capital produces value independently of labour.  This only applies where there is a ‘degree of monopolisation’.  Different workers using different technology may well have different productivities but, while this subsists, this can be resolved into different earnings of labour.   Labour productivity varies according to the tools and techniques workers use but, once workers are trapped into fixed wages, any improvement serves to inflate the earnings of other factors of production.  Where there is some degree of monopolisation of tools or technique and blockage on wage increases, the appearance of capital productivity emerges, but this is merely a competitive advantage that otherwise would have been competed away.


[1]          By politics, aka ‘class struggle’.

[2]          Stiglitz, J. E., The Price of Inequality, (Penguin Books, London, 2012), pg. 1.

[3]          www.tinyurl.com/krugman-2008

[4]          Franklin, B., A Modest Enquiry into the Nature and Necessity of a Paper-Currency

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