The Labor Theory of Value

For the past year or two, I’ve been trying to define why I’m so bothered by much of the economic thinking on the leftward side of the aisle. In particular, I revolt at the concept of the economy as simply a great pie—that is, if my slice is bigger, then yours must necessarily be smaller. For a while now, I have championed the concept that an economy is more like an ecology. Activity begets activity, creates more niches and opportunities, and expands the base of wealth, in the same way that the canopy of a rain forest is more productive—creates a bigger pie—than the sandy floor of a desert.¹

The driver of the rain forest—the foundation for all biological activity, there and in the desert as well—is sunlight, which is captured through photosynthesis in green plants as carbohydrates and then spread throughout the ecology as food energy. In this analogy, the driver of the economy is human energy, which is captured both as the direct effort of making products and offering services, as well as through subtler channels such as delayed gratification and future mindfulness. By delaying the immediate spend of his or her earned energy, a person may invest for greater productivity in the future, or make loans through savings accounts, bond purchases, and other instruments to share in the productivity of others. As carbohydrates are the solid form of captured sunlight, so money is the solidified form of human energy.

However, this treads awfully close to the “labor theory of value,” most often attributed to Marx. The theory says that the value of a commodity can only be objectively measured by the number of hours of human labor needed to produce it. If shoes take twice as long to make as gloves, then shoes are more valuable than gloves. This aspect of the analogy to a rain forest troubles me.

Shoes and gloves aside, the labor theory of value is easy enough to refute on the face of it. Let’s say our village has two cobblers. One is skilled and can make a pair of shoes in about three hours, with precise cuts and strong stitches. One is less skilled and needs six hours to make a pair of shoes, with sloppy cuts and weak stitches. The first cobbler's shoes will last you several years. The second's will fall apart in six months. But according to the labor theory of value, the second cobbler's shoes should be worth twice as much as the first's. Uh-huh!

A Marxist might reply that I’m confusing the particular with the general, that on the whole, or on average, or by some other leveling device, we should look at the output of cobblers as a class and not the skill, effort, and manual inputs of individual cobblers. This is certainly the claim of a unionized labor force, that only time in the job classification—which is supposed to equate to greater experience and skill—has any meaning, and that in all other respects one worker’s output is equivalent to any other’s of the same classification.

But I adhere to market principles. The value of a commodity or service is related, not to what the provider put into it, but what the consumer appreciates about it. In a free market, if people like what they’re buying—for any reason, frivolous or not—they will pay more for it. The reason can be based on real perception, like shoes with good cuts and tight stitching, or on imagined qualities, like the cachet that comes with a stylish brand or label. If they don’t like what they’re buying—for any reason, such as wrong fit, wrong function, wrong color … wrong smell—they will pay less, or only pay the asking price under duress, or refuse to buy at all.²

In dealing with commodities that cannot be as easily differentiated by individual elements of style and quality as shoes or gloves—here we’re talking about graded and fungible commodities like oil or wheat³—or commodities that people must have to survive, then issues of supply and demand dictate value. If a large supply of oil or wheat comes on the market, no matter its quality as a particular product, the people will value it less and the price will go down, even if they desperately need it. If oil or wheat is scarce in the market, then people will value it more and the price will go up, even if they complain that they’re paying too much.

This is not just a nice theory about economics, created by a wise man sitting in a cozy library, but simply the way human beings in large masses with no reason to love or trust one another actually work. What you can get for your effort in making a pair of shoes—or gloves, or finding oil, or growing wheat … or writing a novel—depends on the needs and wants of the consumer. In the transaction, it’s irrelevant how hard you worked on getting or making the product, or in offering the service, except in your willingness to let it go and do the work at the market price. If your needs as a producer cannot be met at that price, then there is no sale, you take your wares and go home. You cannot force the consumer to pay more for your labor.⁴

So, does the rain forest analogy still stand up? I believe it does.

In the forest canopy, not all carbohydrates are created equal. Some plants put intense effort into creating fruits with interesting flavors and high sugar content, which then attract birds and animals that will eat the fruit, consume the seeds, and spread them far and wide. On the other hand, some plants don’t taste very good and will only be eaten in extreme need or by voracious and unpicky eaters.⁵ But the effort the plant puts into manufacturing the flavorful sugar is not the driver of the transaction; the bird or animal must be genuinely attracted. The value placed upon the carbohydrate comes from the consumer, not the producer. And in fashion similar to a free market, if it’s been a good year, with much sun and rain bringing forth lots of berries, the birds will be picky about which ones they eat, taking only the fattest and juiciest. If it’s been a poor year, they will eat even the smallest, most shriveled fruits. Value is related to scarcity as much as to taste, but still not to the production cost.

Value, utility, and necessity—like beauty—are in the eye of the beholder and consumer. And this is so in terms of both the ecology and the economy.

1. See The Economy as an Ecology from November 14, 2011.

2. I once met a man who had spent twenty years writing an epic poem about the Spanish conquest of Latin America. It was 700 pages of iambic quadrameter rhyming couplets. “For they had come upon this shore/To see what fate had put in store.” All those years of labor had not made his great poem either readable or publishable.

3. “Fungible” is a fancy word for “all the same and nothing to choose from.” When a commodity or service is fungible, you don’t care which quart of oil out of a barrel, peck of wheat out of a bushel, kilowatthour out of a generator—or fry cook at McDonald’s out of a low-skill labor force—you get in the transaction. One’s as good as another.

4. Well, not at the point of sale anyway. Of course, producers can work on people’s needs, wants, and desires through their belief systems. This is branding, and it can make a Louis Vuitton handbag worth, not just a few dollars but hundreds or thousands more than a bag of similar capacity made with similar materials. The same goes for cars and other luxury goods, and even for products as ephemeral as food prepared by a famous chef or at a popular restaurant. But the underlying quality must still exist in some measure. If a Louis Vuitton handbag had sloppy seams and smelled like rotting fish, it still wouldn’t sell.

5. Like the deer in your garden.