The Economics Book

106

THE VALUE OF A

PRODUCT COMES

FROM THE EFFORT

NEEDED TO MAKE IT

THE LABOR THEORY OF VALUE

T

he importance of labor in

determining the value of

goods has a history that

can be traced back to the ancient

Greek philosophers. For about 200

years from the mid-17th century, it

dominated economic thought. In

primitive, preindustrial societies

the role of labor in determining the

rate at which one good could

be exchanged for another was fairly

simple. If it took a man a week to

make a fishing net, he was unlikely

to exchange it for a wooden spoon

that had been carved in a morning.

However, the issue became much

more complicated with the

emergence of modern industrial

societies in the 18th century. The

classical economists Adam Smith

(p.61) and David Ricardo (p.84) had

each developed a theory of value

connected to labor, but it was

the German philosopher Karl

Marx (p.105) who set out the most

famous description of the labor

theory of value in his magnum

opus Capital.

Natural resources come

free from nature.

Adding labor to raw

materials creates machines

and commodities.

Adding labor to

natural resources

creates raw materials.

Adding labor to

machines and

commodities creates goods.

The value of a product

comes from the effort

needed to make it.

IN CONTEXT

FOCUS

Theories of value

KEY THINKER

Karl Marx (1818–83)

BEFORE

1662 English economist

William Petty argues that land

is a free gift of nature, and so

all capital is “past labor.”

1690 English philosopher

John Locke argues that

workers deserve the fruits

of their labors.

AFTER

1896 Austrian Economist

Eugen von Böhm-Bawerk

publishes Karl Marx and

the Close of his System,

summarizing the criticisms of

Marx’s labor theory of value.

1942 Radical US economist

Paul Sweezy publishes The

Theory of Capitalist

Development, defending

Marx’s labor theory of value.