Labour Theory of Value | Economics

In this article we will discuss about the importance and criticism of labour theory of value.

According to the labour theory of value, developed by David Ricardo and refined and modified by Karl Marx theory, the value of a thing depends on the amount of labour required to produce it. Thus, in the opinion of Adam Smith, if one thing requires twice as much labour to produce as another thing, it would be twice as valuable.

The labour theory was employed by the classical economists, e.g., Ricardo and especially Marx, to explain the determination of relative prices on the basis of quantities of labour, immediate and accumulated, embodied in goods. By immediate labour is meant the current effort of a worker and by accumulated labour is meant the services of capital which represent the past input of labour.

It was argued that prices would be proportional to the quantities of embodied labour in goods. It was recognised, for example, by Ricardo, that the theory broke down when production of different goods required different time periods or capital to labour ratios differed among them. If two goods had identical labour inputs but one was produced with more capital, then the producer of the capital-intensive good would need to be compensated for the large volume of capital out of the market price of the commodity.

If the prices were the same his rate of profit must be lower; if he is to earn an equal rate of profit, his price must be higher. Embodied labour then fails to explain prices. A similar argument holds for different periods of production, if rates of profit are to be equalised.

Importance of Labour Theory of Value:

The labour theory of value is important inasmuch as it draws attention to the grievances of labour and to the exploitation which they suffer at the hands of the capitalists.

For Marx the labour theory was more than just a theory of relative prices and was in effect the key to understanding capitalism. In his system, only labour can create value, but it is unable to keep to itself all the value created, for the capitalist is able to extract a surplus value, or economic profit, which is then reinvested in machinery, which leads to growth of the capitalist economic system and its eventual collapse.

Marx did modify the labour theory by introducing the qualifications that different grades of labour should be reduced to simple labour, i.e., a unit of standard efficiency, and that the labour should be socially necessary one labour.

Socially necessary labour is that required by the average technology of the time (to prevent labour operating with a backward technology being credited with the creation of unjustified value) and which makes a product for which there is a demand. Without demand labour is not treated as socially necessary and so no value can be created. This latter qualification substantially weakens the claim of the labour theory that it can explain prices.

Criticisms of Labour Theory of Value:

But the labour theory of value is not accepted by the modern writers on the following grounds:

(1) Labour alone does not create a product and its value. The other factors like risk-taking, capital, etc., are as much indispensable as labour.

(2) It cannot explain the values of non-reproducible goods.

(3) Owing to the existence of various kinds of labour and owing to the differences in the ability and skill of different categories of labour, the term ‘labour’ cannot be properly defined and so cannot be reduced to a common measure.

(4) Finally, it ignores the role of demand or utility which plays an important part in determining the value of an article in the very short period.