What’s the Labor Theory of Value? | Marxism 101 | Briefing #4

“The Boss Needs You, You Don’t Need Him. Labor is Entitled to All it Creates”

NOTE: This is part of our series of briefings on Marxism 101. Check out the Introduction if you haven’t already.

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THE QUICK AND DIRTY

Labor is an essential part of every civilization, and every product or service you enjoy.  Marx believed that labor meant more than just producing things to buy and sell. It meant creative and artistic pursuits, not just “useful” products and services.

Capitalism alienates us from the fruits of our labor. Through it, workers are not paid for the full value of what they make.  Appropriating that value is how capitalists gain profit.     

Labor is the common “social substance” of all commodities.  Commodities that embody the same amount of labor are equal in value. The amount of socially necessary labor time drives the exchange-value (price) of commodities.

All labor isn’t worth the same, though, and many generations of labor can go into making a product.  The tools we use to produce goods embody labor within them. They also pass on their value when used in production. Supply and demand influence prices, but do not determine value by themselves.  

Workers have to sell their labor to employers under capitalism. Labor is capital, too, and labor power is a commodity that we can buy and sell.  In exchange for selling it, workers get a wage, the price of their labor power.  That wage only tends to cover the cost of reproducing their labor.

Workers create more value through their labor than what it costs the capitalists to pay them.  Employers take that surplus value as profit.  Workers make this bargain in exchange for subsistence. They do it so they can survive, and their families can grow and create new workers for another day.  You can leave a bad job, or a bad boss, but you can’t easily escape the capitalist system itself.

The more surplus value (or profit) goes to a worker, the less goes to a capitalist, and vice versa.  Capitalists push to reap more of that value so they can profit. They try to get as much labor out of their workers as possible.

Meanwhile workers push for higher wages so they can stay ahead of the cost of living. Marx argues that workers are right to advocate for higher wages. They also face the constant onslaught of more tech and automation. This threatens their livelihoods and, eventually, the entire capitalist system.

KEYWORDS

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INTRODUCTION

Labor is an essential part of every civilization, and every product or service you enjoy.  Labor, along with nature itself, is a prime source of value according to philosopher Karl Marx. Socialism and communism are ideologies that center the role of the working class. They propose worker control of capital instead of by a smaller group of wealthy people.

Many people misunderstand why Marxists think we should redesign our economy.  False or misleading ideas about them include:

• Communists believe in a equal distribution of goods to everyone.
• Socialists believe no one should have to work.
• Socialism is about claiming the right to what you haven’t earned.
• Marx wanted people to be able to claim the fruits of other people’s labor.

This briefing will help you understand Marx’s view of labor. It will describe how Marxists believe labor creates value. It will also discuss what happens to that value once it’s created. The goal is to understand how labor power becomes a commodity, creates value, and leads to profit.  You will be able to better grasp the basics of Marxist economics. Then you can apply this briefing to the current public debate about unions, profits and wages. The list of sources below lists some of the work I studied while working on this:

BACKGROUND

Marx believed that labor meant more than just producing things to buy and sell. It meant creative and artistic pursuits, not just “useful” products and services. Human beings can be very much fulfilled through production, and not just on the factory line. Art and creativity are productive practices, too. I don’t mean just studio paintings or written words.  Music, a delicious meal, an amusing game, a dance or a well-planned party all count as production, too. Author Terry Eagleton points out in his book Why Marx Was Right that labor can be an “alienated” form of praxis. That’s a Greek word that usually refers to actions that can be used to transform our world.  When we engage in praxis, we are remaking the world for our benefit and in a way that makes us freer and more fulfilled.  When we say it’s “alienated” we mean that the results are removed from the people that produced them. They’re separated from their natural purpose: to be enjoyed by those who produced them. We could create things to sustain us, and to help us fulfill our potential.  Instead, under capitalism, they’re often put to use for some other purpose.

Capitalism alienates us from the fruits of our labor.  When we perform labor in a capitalist system, we’re often encouraged to feel good about what we do. Who doesn’t like to think that their work has the kind of value that makes the world a better and richer place?  But Marx concludes that working in this system separates us from what we produce. Production occurs for the sake of some other, almost ethereal concept. That concept is profit. A key vehicle for turning labor into profit is the commodity. Remember: by commodity, I mean any product we make to be bought and sold. The capitalist system revolves around producing commodities and selling them to generate profits.  We discussed commodities in the previous briefing on Marxism 101.

Marxism sees a deep relationship between labor, commodity production, profit and capitalists themselves.  By learning more about any of these ideas, we’re in a way learning more about all of them. Each affects the other, and are affected in turn by the others.  Understanding them helps clarify a core Marxist argument. That argument is that workers are not getting paid for the full value of what they make. Appropriating that value is how capitalists obtain profit.     

LABOR AND COMMODITIES

Labor is the common “social substance” of all commodities. Every commodity requires work, or labor, to make it happen.  Strawberries and microchips, feature films and yachts – all involved labor in their production. Marx calls labor the “common denominator” we can use to figure out how to exchange all these unlike things.  

Not everything is a commodity just because labor is involved in producing it. This is true for both useful and non-useful products of labor.  For instance, a product created by us for our own personal use, not to be bought or sold, is not a commodity. If I make a pie for my family to eat, I certainly perform labor by doing it.  But I didn’t make it to be bought and sold, and as a result, I haven’t created any commodities in the kitchen that day.  Household labor is real work, and it’s really useful (in fact it’s essential). But it’s not commodity production. 

Commodities that embody the same amount of labor are equal in value. Marxists inherit and build upon the classical economic idea that labor creates value. They believe we can measure the value of a commodity by how much labor goes into producing it. But when they say this, a very important question arises: how exactly do we measure labor? The answer is by time – by measuring how long the labor lasts.  Marx said we can treat different kinds of labor as equal to each other. We can equate hours of plumbing to an equal number of hours spent nursing, writing, welding, or what have you.  Here, we are treating them as generic, abstract labor.  Still, this only works if we are measuring socially necessary labor.  

The amount of socially necessary labor time drives the exchange-value (price) of commodities. Marx developed this notion to acknowledge that all labor-time spent making a product or performing a service isn’t equal. Socially necessary labor measures how long you need to produce something under average conditions in a given place and time. It measures work performed by an average-skilled person in that field, working with average intensity.   Say I have a modern printing system for making quality comic books, and you decide to compete by hand-drawing them instead. If it takes you ten times as long to make a product of similar quality, your product is not ten times more valuable. You weren’t using state of the art tools or methods to do the job.  My work was socially necessary labor. Yours isn’t.  It doesn’t take that long to make a comic book anymore.

What counts as “socially necessary” is a moving target through history and across the world.  How do we determine how much labor-time is “socially necessary” for a good or service? It depends on when and where in history we’re talking about.  The amount of labor it takes to build a car in 1920’s Detroit might be very different from 1980’s Japan.  That doesn’t mean you can just take more time to create the same product and make it more valuable as a result.  Every producer in that given market is going to try to make or break the socially determined average.  Say it takes 100 hours to build that car for the average competitor, but in your factory, it takes 150. You’re behind the curve, and you’ll lose out if you don’t find a way to increase efficiency. You’ll go out of business. Why? The costs you incur in making your product are higher than everyone you compete with in that market.

All labor isn’t worth the same, though.  I was slinging coffee at cafes in college and grad school. My labor didn’t create as much value as a programmer who puts the same amount of time into building a piece of software. Same for a mechanic who is fixing a car.  This is, in part, because it didn’t take as long to train me to create a skim caramel latte.  It takes longer to train someone to program software or fix cars.  Their training was the result of labor performed by teachers, trainers and textbook writers. All that prior labor is carried forward and reflected in the value of that finished product. That helps make the product more valuable (and expensive).

Generations of labor go into making a product.  Think about all the labor that goes into determining the value of a commodity. But think past the latest round of living labor that produced the finished product.  Pretend you’re at a vehicle assembly plant.  Determining the value of that car means more than counting the labor of assembling it there in the plant. You’ve also got to consider all the materials and parts that went into that car.  Each of them had their own labor performed to produce them.  Marx believed the value from those parts pass their value into the new commodity.  Then count the labor required to train the people who extracted resources or made these parts and materials. All this is dead labor, and passes on its value into the commodity.  It is more proof, at least to Marx, that labor is a principal source of the value in anything you’d sell on the market.

More labor performed doesn’t always mean more wages.  The reward for labor (wages) and the quantity of labor performed don’t always match in capitalism.  Wages given will never exceed a product’s value (there’d be no point in this for a capitalist – how would they make money?).  However, wages can be as far below a product’s value as the capitalist can get away with.  Think of Chris Rock’s joke about what it means to be paid minimum wage. Your boss is really saying “Hey if I could pay you less, I would, but it’s against the law”.

The tools of production embody labor, too, and pass its value on to what we create with them.  Whether it’s computers or a wrench, complex robotics or a printing press, these tools pass on their value as they’re used.  As that value gets transferred to the commodities, our tools and machines depreciate over time. We call this process “wear and tear”.  Marxists say owners buy production machinery at its value. The machine then imparts its full value to commodities over its useful life. When that value is spent as the machine finally breaks down or becomes obsolete, no surplus value is created.  Compare this to a capitalist that purchases labor power, and gets more value back than they pay in wages. The capitalist who purchases a machine or tool for production gets what they paid for – no more, no less.

Supply and demand matter when determining the price of an item, as well.  The “market price” of an item tends to center around the average amount of socially necessary labor needed to produce an item.  Still, this can and often does rise or fall due to supply and demand.  If supply and demand are in relative balance, the market price and what Marx calls the “natural” price will align, more or less.  

Commodities sell at their real value, according to Marx. That is, once you account for the fluctuations caused by supply or demand spikes.  Demand can spike when a product shortage occurs (like toilet paper during a pandemic). A supply glut occurs when someone makes, say, too many millions of Furbies after the craze hits its peak. But if you average out the price of a product over time, accounting for these highs and lows, things should even out. You should reach a central price around which the fluctuations gravitate. Marxists conclude that this is what the item is worth – its real value.

This means that profit can be derived, on average, from selling things at their real values, as well.  This might raise a red flag for folks familiar with conventional capitalist economics.  We tend to think that profits come from selling a product for more than it cost to produce.  That’s true, but it’s not the same as saying that it’s sold for more than its value – in Marxist terms, it isn’t.  Products that get sold tend to be more valuable than what it costs to produce them.  So how is this value derived, and how do profits come from it?

THE VALUE OF LABOR

Workers sell their labor power to employers.  What does this mean, exactly? You sell them the right to use your labor power for a set period of time. That’s your shift. In exchange, you get a set amount of compensation. That’s your wage.  

The price of labor power is the cost of reproducing it.  In other words, your means of subsistence (and that of your family, if you are supporting them).  Employers tend to pay us what it takes to go home, feed, clothe and shelter our families, then wake up and do it all again.  No more, and (hopefully) no less.

Workers create more value through their labor. The cost of that labor power you’re selling may be your means of subsistence, but the value of your labor is much more.  This is because when you work, you create more value in working than it takes to reproduce your labor.  How do we know this?  For one thing, if you didn’t create any value besides the value of your wage, there’d be no point in hiring you!  Your boss wouldn’t make any profit off of having you as an employee. Capitalism itself would fall apart if that held for the entire economy.  That extra value you create when working more than it takes to make up the value of your wage? That is called surplus value.

That surplus value is taken by employers as profit.  Marx figures that in your given workday, you spend a portion of your day making up the value of your wage.  The other portion of your workday, however, is unpaid. You’ve already worked up to the point that you’ve created value equal to your wage.  The unpaid labor you do afterward creates surplus value. Your employer takes that surplus value as their profits (after expenses).    

The wage system only makes it appear that all labor is paid.  After all, our bosses don’t tell us we are getting $15 per hours for half the day and nothing for the back half.  Marx’s contention is that this is just the appearance of things, not reality.  

Because labor adds value beyond what it costs to produce them, products tend to sell at their value. You add value to a product by performing labor on it. You are transforming it into something more valuable than the raw materials you had at the start. This is why Marx can say that when capitalists sell a product, they don’t tend to actually inflate the price.  They’re selling it for something more than what it cost them because workers created extra value in the product. It’s surplus value, for which they’re not actually getting compensated.  Now I’d argue, and Marx would probably agree, that this is a tendency he’s talking about, not a law.  We all know cases of straight-up gouging and cases of rock-bottom clearance sales.  But those are changes brought about by fluctuations in supply and demand. All things being equal, Marx sees companies selling items for what they’re worth.

THE LABOR THEORY OF VALUE

Labor power is a commodity, a product bought and sold. Prices of commodities fluctuate constantly, and not always for clear reasons.  The forces of “supply and demand” don’t always explain this variation in price.  Per classical economists Adam Smith and David Ricardo, a commodity is priced based on how much labor goes into it.  

The problem with this, of course, is how you determine what the value of labor actually is.

As Engels says, “we keep on moving in a circle.”

So what can you measure?  Marx and Engels’ answer is that you can measure how much it costs to produce (and reproduce) a worker.  

What Marx means here is the cost of subsistence, how much money it takes for a worker to survive. The working class no longer has control over the capital they use to produce goods and services. They have to sell their labor power to survive, or to make up that cost of subsistence.

How does all of this lead to the Labor Theory of Value?

aside: The iPhone Plant

$40 of that value was already there in the parts, power and plant’s machines before I started working.  When I worked, and assembled that product, I added my $10 wage to the total value.  But then it sold for another $10 above that. How does that happen?

The Marxist answer is that my labor created value; in this case, $10 worth of value that wasn’t there before.  That’s how you get that $60 selling price.  In other words, labor added value to the product. 

$10 was my wage as a worker.  $10  more was the surplus value that my work added to the product.  So, the value of that labor is a total of $20.

Half of that value gets paid back to the worker – me, in my example – for a $10 wage.  The other half, another $10, gets added to the price. Then the capitalist, Tim Cook, sells the phone for a $10 profit, since it cost $50 for us to make but sells for $60.

With me so far?  Because here is the problem Marx and Engels see: I worked ten hours to make that phone, and added $20 to its value by doing it. BUT, that means I added $10 to its value in 5 hours, working half the day, and $10 is also the value of my wage. 

So I paid back what I owed him for my wage by working just half the day!  But I don’t get to leave, go home and play Xbox after just half the day, do I? 

I gotta keep working the rest of the day, and add $10 more to the value of that phone while getting paid nothing more.  I was working for my own benefit when I was reproducing my wage – now, I’m working for my boss alone.  

The value I added the rest of the day is surplus value, and it all goes to the boss even though I did the work.

Because the boss gets all the surplus value I create, he has incentive to keep my wages as low as possible.  How low?  Down to my cost of subsistence – the minimum he needs to pay to keep me housed, clothed, fed, and able to work again.

New technology and techniques allow him to squeeze more surplus value out of me. With better tech, I can make more products faster (and reproduce the value of my low wage even quicker).  Meanwhile, my wages get ever lower. This continues until those in the working class with me can’t even afford to buy the products we make.  

Marx explains how the prices of goods fluctuate based on the producer’s costs and supply and demand.  When demand rises enough, a new cycle begins. Investment capital from banks and the wealthy flow toward that industry. They know that that’s where the money is.  They keep producing greater amounts of that commodity. Eventually they can no longer sell it at the inflated, or even normal price. They’ve made too much of the commodity, and now supply is greater than demand.  

The opposite happens if prices dip below the normal price.  Capital will flee until production matches reduced demand.  Supply and demand cause fluctuations in price. But in the long run, prices are moving around a single center of gravity – the cost of production.

TONIGHT’S ENTERTAINMENT: WAGE LABOR VS CAPITAL – FIGHT!

Labor power, to a capitalist, is an expense among many others.  We get paid for our labor in money, which represents all the other potential products we can buy with that money.  But our wages don’t represent our share of a product we create that is then sold.  We usually get our money before that sale ever takes place, Marx points out.  Our labor is just a commodity that the capitalist buys like the raw material and machinery they need.  They spend money on it now in hopes that they can sell the product or service for more money than they spent later on.  

You can leave a bad boss, but you can’t leave the system so easily. When workers complain about unfair treatment or wages, detractors say “leave that job. Find another.”  In a certain sense, that’s true.  If my boss or their policies suck, I get to quit (assuming I can find another job or another way to get by).  So yes, you can usually ditch a particular capitalist.  But you can’t ditch the whole capitalist class, can you?  Sooner or later, you’ll need to find another willing to sell your labor.  You’ll only find a better deal if there is another capitalist in your job market offering that better deal.  So is the refrain “just find a better job” a piece of valid advice?  A crock of shit?  Maybe a little of both?

The more surplus value or profit goes to the worker, the less goes to the capitalist, and vice versa. Marx’s perspective on allocating profits is zero sum.   If wages are falling, profits are likely rising, and often the reverse is also true.  This doesn’t mean the value of the goods being sold has changed, though, just that the ratio of how the sales proceeds are distributed has changed.

Worker demands for wage increases are usually driven by the cost of living, not greed or laziness. So what are we asking for when we’re asking for a wage increase?  It’s usually not greed – workers aren’t really in a position to seek “greed” according to Marx.  They are almost always paid an amount trending toward their means of subsistence. So if they’re demanding a wage increase, it’s because they want their pay to reflect their increased cost of living.  You can only shop at bargain outlets and Wal-Marts and cut your cable bill so much before you can’t scrimp anymore. Then, you need that pay raise to make you “square”. Only then can a relative peace return between you and your employer.

A stagnant wage, or one that doesn’t account for inflation and the cost of living, is really a wage cut.  We’re in an era of increasing inflation once again as I write this. Wage increases are even more important now, since any wage that isn’t rising with the cost of living is a pay cut.  The lesson? Don’t let your employer claim that they’re not cutting your wages by keeping you at the same dollar amount.  Any time there’s any inflation, a stagnant wage is really a wage cut.  In this environment of high inflation, it can be a severe one.

Employers tend to push workers as hard as possible to get more profit – but this approach has limits. This doesn’t stop employers from trying this or other dirty tricks.  They’ll stretch the workday as long as possible to maximize profits, and work you as hard as they can. They will put off raises as long as possible.  But workers know their own bodies. If they don’t respect their own limits, sooner or later their bodies and minds will force the issue.  

RAGING AGAINST THE MACHINE

Workers can and should advocate for higher wages. Workers agitating against wage cuts and for wage increases aren’t causing disruption. Marx argues that’s a natural and necessary part of the capitalist system. A rise in wages does not automatically result in a rise in prices or in the value of products.  Whether it does or not is often up to the individual capitalist entity. Sure, they have strong incentives to make it the consumer’s problem. But in the end, they have to be held culpable for that choice, both by consumers and by workers.

A “healthy” market tends to adapt to price increases, and pay workers what they need to meet their cost of living.   And in that healthy market, where there’s more demand for labor, it should fetch a higher price.  In 2022’s economy, labor is in demand, for sure.  This, however, should lead you to ponder: is what we’re experiencing now what you’d call a healthy market?  

Tech and automation make more products cheaper and cut manual labor, but at a hidden and growing cost. Machinery and technology will continue to make common, simple forms of work obsolete. They’ll also make more complicated work cheaper for employers. But in order for this to happen, capitalists will have to buy more and more of them all the time. That tech gets more expensive and complex as the years go on. Employers do it to keep up with their competitors, build capacity and remain “state of the art”.  Marx called the ratio of labor versus machinery and tech the organic composition of capital.  Over time, the constant side of that equation (machinery and tech) grows compared to labor.  

Capitalists will look for innovations or, failing that, dirty tricks to stay profitable. Since labor creates surplus value, profits fall as the ratio of machinery to labor increases.  Many capitalist moves intend to minimize this, and counteract lowering rates of profit.  Among their greatest hits are “Capitalist Increases the Work Day,” “Management Works You Harder”, and “Boss Man Cut My Wages”.  

Marx argues we must be careful not to tolerate unfair schedules and worsening conditions.  Workers agree to work, but with few exceptions they don’t agree to be destroyed by their work.  Without time to rest, pursue our passions in free time and enjoy being alive, we’re no better than animals.  Hell, I’ve seen dolphins and chimps playing around and pranking each other.  Without time to enjoy ourselves, we’re worse off than some animals.

OTHER PERSPECTIVES

Neoclassical economists no longer believe in the Labor Theory of Value. Modern capitalist economists prefer the utility theory of value. This idea doesn’t center how much labor goes into producing a product. It considers the marginal utility, or perceived satisfaction, consumers receive from a product. Here, the level of utility the consumers feel for a product determines its value. Marx believed this notion of utility had some bearing on the level of demand that exists for a product. He acknowledged that supply and demand do impact price. However, for Marx the amount of labor involved in producing a product is more important.

Neoclassical economists don’t buy the idea that surplus value is created as a byproduct of labor. They rarely acknowledge that workers get paid less than the value of their work. When they do, they still argue that the owners of a corporation still deserve the largest share. Why? Because the owners own the capital, which is essential to production. They assume risk by putting their capital to work in a business, risk a loss if the business venture fails.

This risk isn’t insignificant. In fact, this risk is often staggeringly important. But to Marxists, this view not only ignores the value of labor but also ignores the history of how that capital was obtained (not only through exploitation, but through a violent period of primitive accumulation that we discussed in the earlier briefing, What is Class?). It ignores the material reality that capitalist production creates. It ignores worsening labor conditions that increase inequality. This puts the entire system at risk when workers can’t afford to buy capitalism’s products. Those last points will return in greater detail in future briefings.

WRAPPING UP

What can workers do against this except fight?  In the short term, according to Marx, that’s really it – fight for better conditions.  Fight for better pay.  Pool your resources, organize, unionize, and stand them down until they yield concessions.  Demand compensation for more of the value you create.  Still, in the end, this method will be a losing battle if capitalism continues. Mechanization and automation may continue unabated. Marx argues workers shouldn’t rely on the hope of reforms solving all their problems. They shouldn’t depend on appealing to their employers’ sense of shame.  

Future briefings will discuss how capitalists play with these forces to expand wealth.  That is, until it all starts to expand beyond capitalists’ ability to control.  When this system can no longer reign in the forces it’s unleashed, economic crises take hold. 

We will also discuss Marx’s proposed revolution to institute socialism and abolish the wage system.

TIRED OF READING?

Hadas Thier, author of A People’s Guide to Capitalism, has an entry in her video series “Marxism in a Minute” that goes over the core elements of the Labor theory of Value. It’s really more like two and a half minutes long, but still brief and clear, with contemporary examples.

Professor Richard Wolff, whose book Understanding Marxism I also reviewed, discusses the Labor Theory of Value – including criticisms of it – in his usual boisterous and entertaining way as part of the “Talks at Google” series. Still can’t quite get my head around Google inviting him, but there you go. If you’re intrigued beyond that six minute clip, the full ninety-minute talk is also pretty fascinating.

Cover Photo: A man welds metal as blue smoke rises. Photo by Fatima Shbair via Scopio.

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