The labor theory of value (also spelled labour theory of value) is the theory that the value of a good or service is determined by the quantity of labor required to produce it. In its classical form it tries to explain why goods exchange at the ratios they do: if one item takes twice as much work to make as another, it should, over time, sell for about twice as much. It was the dominant theory of value in classical economics and is the foundation of Marxian economics.
Since the 1870s, mainstream neoclassical economics has replaced it with a subjective theory in which prices reflect marginal utility, scarcity and the interaction of supply and demand. The labor theory of value remains influential in heterodox economics, political philosophy and debates about capitalism, exploitation and the distribution of income.
The labor theory of value in plain terms
Suppose a hand-made chair takes a carpenter two days and a hand-woven rug takes a weaver four days. The theory says that, as a rule, the rug should trade for about two chairs. If it traded for less, weavers would switch to making chairs; if it traded for more, carpenters would take up weaving. Over time, prices are pulled towards the work each item takes.
The theory's critics ask a simple question back: what if nobody wants the rug? Hours of work put into something nobody values do not make it valuable. That disagreement, between value coming from the cost of making things and value coming from how much people want them, runs through much of the history of economic thought.
From Locke to Ricardo
John Locke argued in 1689 that people acquire property by mixing their labor with natural resources, a moral rather than a price theory. Adam Smith, in 1776, suggested that in a primitive society without capital or landowners, goods would exchange according to the labor needed to produce them, but that in an advanced economy prices also included profit on capital and rent on land. He also distinguished between labor "embodied" in a good and labor it could "command" in exchange.
David Ricardo, in On the Principles of Political Economy and Taxation (1817), built the most rigorous classical version. He held that the relative value of goods depends on the labor directly and indirectly embodied in them, including labor used to make the tools and capital goods involved, while acknowledging exceptions caused by differences in capital intensity and time. His analysis of comparative advantage was framed in labor terms.
Marx's version and surplus value
Karl Marx, in Capital (volume one, 1867), argued that value is set by "socially necessary labor time", the time needed with average skill and technology. He then asked how profit arises if goods exchange at their values. His answer was that workers sell their capacity to work, labor power, for a wage equal to the value of what they need to live, but produce more value than that during the working day. The difference is surplus value, which Marx saw as the source of profit, interest and rent, and as evidence of exploitation. In his notation:
- is the total value of the output.
- is "constant capital", the value of machinery and materials used up.
- is "variable capital", the wages paid to workers.
- is surplus value.
The rate of surplus value is , and the rate of profit is . Example: if a workshop uses up 60 in materials and machinery, pays 20 in wages and produces output worth 100, then . The rate of surplus value is and the rate of profit is .
Criticisms
The theory has faced objections from several directions:
- The marginalist critique. In the early 1870s William Stanley Jevons, Carl Menger and Léon Walras independently argued that value comes from the usefulness of the last unit consumed. This resolved the old puzzle of why water, essential to life, is cheap while diamonds are expensive, and became the basis of neoclassical and Austrian economics.
- The transformation problem. Because industries use different ratios of capital to labor, competition that equalizes profit rates means prices cannot equal labor values. Marx proposed a method of converting values into "prices of production" in volume three of Capital; Eugen von Böhm-Bawerk argued in 1896 that this contradicted volume one, and the debate over whether the transformation works has continued since.
- Heterogeneous labor. An hour of a surgeon's work and an hour of unskilled work are not equal; converting skilled labor into units of simple labor requires using wage differences, which critics call circular.
- Non-labor inputs. Land, natural resources, risk-taking by the entrepreneur and the opportunity cost of waiting all affect prices.
Defenders reply that the theory is meant to explain long-run average prices and the social relations behind them, not daily price changes. Piero Sraffa's 1960 work revived a classical, cost-of-production approach without relying on marginal utility. Some empirical studies by Marxian economists, such as Anwar Shaikh, report a close correlation between industry prices and estimated labor values, though critics argue this partly reflects how those values are constructed.
Influence today
The labor theory of value no longer guides mainstream price theory, but its questions remain live: how income is split between labor and capital, whether workers receive the full value of what they produce, and how productivity gains are shared. It shaped the programs of socialist and communist movements, and echoes appear in modern debates on the falling labor share of income, the division of labor and economic inequality.