The Labor Theory of Value

Origins | Argument | Demise | Replacement | more

Origins

With influences from the work of the Greek philosopher Aristotle (384-322 BC), the labor theory of value became a central feature in social analyses by such writers as John Locke (August 29, 1632 – October 28, 1704), and later John Stuart Mill (May 20,1806 – May 8, 1873 ) the utilitarian who had studied economists such as the Scottish writer Adam Smith (1723-1790) and the English theorist David Ricardo (1772-1823).

Argument

They argued how the value of a commodity; its worth or economic importance was determined by the quantity of labor needed to produce it. They insisted that the effort of the labor, or the level of skill and amount of labor of others obtained in exchange was the source of the value of products or resources. The German theorist Karl Marx (1818-1883) further argued that although labor might dictate a good's value, but the existence of capitalists extracting profits meant that labor did not get to keep the surplus value.

Eclipse

Labor theory of value was superseded by the marginal productivity theory of distribution at the end of the 19th century, which emphasized that many factors determined the value of a good.

Proposed in the late 19th century by the Marginalist group of economists, such as William S. Jevons, used differential calculus to study the impact of small changes in economic quantities, marginal utility refers to the additional satisfaction a consumer derives from the consumption of one extra unit of a product.

Thus, an individual's demand for a product is determined not by the total utility of it but by its marginal utility. Therefore, the greater the supply of a product, the smaller its marginal utility. These economists rejected the labor theory of value which had previously been central to classical economics.

Source:
R D Black, A W Coats and C D W Goodwin, The Marginal Revolution in Economics (Durham, NC, 1973)

Origins | Argument | Demise | Replacement | more