Posted on 12/30/2006 6:06:12 PM PST by G. Stolyarov II
I shall refute here the proposition that “the economic value of all goods and services is derived from the cost of their production and ultimately from the labor expended on their creation—be it measured in terms of the time, effort, or disutility required to produce the goods or services in question—and the labor expended on the creation of goods necessarily endows them with economic value.” This proposition is the essence of the labor theory of value, a false view nonetheless embraced by such notable thinkers as Thomas Aquinas and Adam Smith and used by Karl Marx to justify socialism. I shall then argue that the utility theory, which views economic value as identical to the benefits gained by individuals from goods and services, is a superior explanation of economic value.
Refutations of the Erroneous Theory
Refutation 1: Argument from Naturally Occurring Valuable Goods: There are economically valuable goods which do not require nearly any labor to produce. These goods are given to man by nature yet are still scarce and not available to every man equally. Wild berries and fruit are an example; let us presume that Person X is walking in a forest and picks up an apple that had fallen from a tree. Picking up the apple involved almost no labor on X’s part. There are no further apples to be picked up in the vicinity. Person Y approaches X and wishes to purchase his apple. X can legitimately charge a price for the apple greatly in excess of the minuscule amount of labor required to obtain it. Thus, the economic value of X’s apple greatly exceeds the labor expended in procuring it.
Refutation 2: Argument from Useless Labor: There can be activities on which immense labor is expended yet which yield little or no economic value to anyone. For instance, digging a large hole and filling it in both require extensive manual labor—yet the net result of the procedure benefits nobody and improves nothing.
Refutation 3: Argument from Excessive Exertion: A laborer who works hard to create goods for sale can often expend in their creation labor far exceeding their actual economic value. For instance, an individual who spends years writing by hand a single copy of a book might be able to sell the book for the prevailing market price of books, but he will have expended far more effort on the book than the returns to him justify. The demand for his single handwritten book simply does not suffice to compensate him for his labor. Thus, the economic value of goods can be less than the labor expended on their production.
Refutation 4: Argument from Non-Exertion: Some economic value can be created without little or no deliberate individual effort. A would-be entrepreneur might take a walk and notice—without prior intention—that in one part of the city, a good sells for less than it does in another part. This effortless recognition could enable him to—using minimal labor— purchase the cheaper goods and re-sell them in the other part of the city, thereby enhancing their economic value by an amount far exceeding the labor expended. Likewise, the entrepreneur could inform a fellow businessman of his idea in exchange for a cut of the profits—in which case the entrepreneur himself, through his idea alone, has created economic value which required virtually no labor on his part.
Refutation 5: Argument from Unequal Ability: Individuals differ in skills and abilities—and using the same amount of labor, some can create more economic value than others. Let us posit two carpenters, A and B. A can make a table in one hour, whereas B can make two identical tables in one hour; both A and B must exert equal effort to accomplish this, and both experience equal disutility from their labor. Yet if A and B take their tables to market, B will earn twice as much as A, other things equal, because he has provided twice as many valuable goods. Among different occupations and different types of production, the discrepancies among individuals will be even greater; the president of a corporation—whose ideas animate the productive activities of thousands of people—can generate millions of times more economic value than an ordinary day laborer during the same time period.
Refutation 6: Argument from Incentive: If the economic value of the products of labor were exactly equal to the disutility imposed by the labor, there would be no incentive for the laborer to produce the good or service in the first place. He would have no reason to undertake an effort merely to compensate himself for his costs, for doing nothing would achieve the same result in less time. Unless the economic value—and hence the economic returns—of an activity exceed the disutility of performing it, individuals will overall be strongly discouraged from undertaking it.
Refutation 7: Argument from the Unequal Uses of Purchased Goods: Two otherwise identical goods—with the same amounts of labor expended on them—can have dramatically differing economic values. If a guitar is purchased by a musician, it can generate immense economic value if the musician plays it or records himself playing it and sells the recording. If, however, purchased by a musically illiterate person, the same guitar will be idle and not generate that value.
Refutation 8: Argument from Diminishing Marginal Utility: Two otherwise identical goods, within the possession of the same person, can have dramatically different economic values. For instance, a person possessing two units of the same water might use the first to prevent himself from dying of thirst, while using the second to wash himself. The former bottle saved his life, while the latter only preserved his cleanliness. If both units of water required identical labor to be created, their economic value—even to the same person—is not identical. If he were asked to sell the water, he might charge a substantial price for the second unit, and would likely refuse to sell the first at any price—unless he were compensated sufficiently to be assured of his life’s continuance. This illustrates the law of diminishing marginal utility: that the value to an individual of each subsequent use of an identical good in his possession will be less than the value of the previous use—assuming that the individual puts the first goods in his possession to his most highly-valued uses and devotes subsequent goods to meet his priorities in descending order.
The Utility Theory of Value
Having refuted the labor theory, I propose a superior explanation for economic value: the utility theory, which states that “the value of economic goods and services is identical to the benefits it confers on the individuals employing them.” Rather than equating value with individuals’ costs, i.e., what they lost in producing the goods and services, we can more accurately equate it with what they gain from the existence of those goods and services—for it is the gains that the goods and services are produced to achieve.
I shall show that the utility theory is immune to the above refutations of the labor theory of value:
Immunity to Refutation 1: A naturally found good requiring little labor to produce it can still confer benefits on the individuals who find it and use it; those benefits are the root of the economic value of such goods and justify their sometimes substantial market prices.
Immunity to Refutation 2: Useless labor—like digging a hole and filling it in again—confers no benefits on anyone and therefore is not a source of economic value, according to the utility theory.
Immunity to Refutation 3: Excessive exertion results in producing goods which benefit people less than the creator’s cost in time, effort, and disutility. According to the utility theory, these goods have value exactly in proportion to the benefits they confer—irrespective to how much labor was exerted in their creation.
Immunity to Refutation 4: Little or no exertion—as in spontaneously arriving at ideas or noticing facts that can be turned to individuals’ economic advantage—can produce tremendous benefits for large numbers of people, despite the little effort involved in the initial discoveries. Thus, the utility theory explains why such acts of little or no exertion can create economic value.
Immunity to Refutation 5: The utility theory accounts for the discrepancy of individual abilities and states that the economic value of their actions is exactly equal to the benefits they confer on themselves and others—which implies that some individuals can create far more value than others while expending similar amounts of time and effort.
Immunity to Refutation 6: The utility theory requires that an economically productive activity generate more in benefits than it costs. Thus, there exists an incentive to undertake activities that generate value—because the prudent and foresighted creators of valuable economic goods and services will be compensated beyond the cost of their labor.
Immunity to Refutation 7: The utility theory accounts for the same goods’ different values when they are put to unequal uses—since the benefits they confer on the users differ depending on the uses to which they are put.
Immunity to Refutation 8: The utility theory incorporates the law of diminishing marginal utility and explains that the greater benefits conferred by the first units of good in an individual’s possession cause that individual to value these first units more than subsequent units.
digging a large hole and filling it in both require extensive manual labor—yet the net result of the procedure benefits nobody and improves nothing.
A perfect description of the Big Dig in Boston.
What in the world? I just woke up from a nap. Am I in the 19th century or something?
This was a debate among the classical economists including Marx. This was solved long ago by Jevons, Marshall etal. Particularly Marshall with his discussion of which blade of a scissor does the cutting analogy showed us that value depends on costs and demand.
Not entirely. The Big Dig does benefit some, democrat crooks who fill their pockets with kick backs they get from awarding contracts to their pals.
"The Value of a Thing
Is What That Thing Will Bring."
An apt and well-worded illustration of the utility theory. Thank you.
I am
G. Stolyarov II
http://rationalargumentator.com
Mark
"Thank you. A nice brief description that is very useful (hence, bring utility) when we debate liberals (this brings disutility, but sometimes it is a necessity)."
You are most welcome. Thank you for your readership and kind comment.
I am
G. Stolyarov II
http://rationalargumentator.com
I think your arguments might help persuade a dedicated Marxist, if he had any rationality, which is somewhat in doubt.
I first ran into the Labor Theory of Value in my freshman year in college, and I must confess I could instantly see that it was ridiculous on its face. I couldn't see how an intelligent person could credit it even for a minute, and I still can't.
Like it or not, it's the market that determines value. That is, what people are willing to pay for something.
Workers should earn an honest day's wages for an honest day's work, but it's futile to imagine that that means any kind of work, no matter how misguided.
There are exceptions, but only those freely agreed to. Thus I have sometimes paid people by the hour and for materials when they do work around the house. But we have to agree on the rate, and agree that the work is being done in reasonable fashion. But you can't price an automobile on what it cost for overstuffed union workers to build it. You have to sell it for what people are willing to pay for it. Or you will eventually go broke. Or suck in the whole state, and drive it broke, too.
"This was a debate among the classical economists including Marx. This was solved long ago by Jevons, Marshall etal. Particularly Marshall with his discussion of which blade of a scissor does the cutting analogy showed us that value depends on costs and demand."
While the labor theory of value has long ago been refuted in many different and interesting ways by a variety of schools of economic thought (including the Austrians, the Marshallians (neoclassicals), and other exponents of the marginal revolution), the fact remains that said erroneous theory is the principal theoretical foundation of contemporary socialism-- a view very much alive today and a view that we need the proper intellectual ammunition to combat. Many well-intentioned people without economic training still hold some version of the labor theory and the corresponding view that every good has a "just price" corresponding to costs of production. The purpose of this article is to communicate not only with economists but also with the public at large-- to persuade individuals that the utility theory is a better view and to enable them to argue against the labor theory more effectively.
I am
G. Stolyarov II
http://rationalargumentator.com
Thank you very much for your insightful comments and examples. I agree entirely and appreciate your readership.
I am
G. Stolyarov II
http://rationalargumentator.com
bump it for later
Even the Marxists don't really believe that crap anymore.
Solved long ago, sure, but a few days ago while homeschooling, I was innocently reading from a history book...a passage on the Industrial Revolution, that referred to its consequences with an offhanded mention of how the cotton gin caused unemployment. Nothing else, mind you, just that a lot of folks were thrown out of the only jobs they knew how to do.
To some people, labor-saving inventions aren't valuable. They're anti-valuable.
Economics isn't always taught in college. Sometimes it just splashes on you as you seek education, and spreads by unhygienic contact with others.
Which is not to say there aren't a lot of Marxists teaching it deliberately, as well.
It is a curiosity that Marx himself refused to use the term "Labor Theory of Value," preferring "Labor Definition of Value" for reasons that aren't obvious. I have long suspected it's because he knew it was indefensible as a theory. Whether he knew it or not, it was, as your post details. Many thanks again.
A man of my acquantance, who worked for a bank in Boston, had an office window, as it happened, that overlooked a portion of the Big Dig. One day he noticed that they were commencing a new lane right next to one that they had just completed.
During a break he went out and approached a supervisor, a large man with a cigar in his mouth, visibly (dare we say it) of Irish descent. He asked the man why they had not just built two lanes to begin with. The supervisor took his cigar out of his mouth and looked at my friend in amazement. "I don't think you understand," he said, "this is a whole 'nother project!"
There you have the American Labor theory of value.
I really hate to rain on your parade here, because the ideas are, in essence, solid, but these are not very good refutations. Now, I don't support the labour theory of value, nor would I defend it - but these are just going to get eaten alive by Marxists, or so-called "heterodox" economics:
Refutation 1 is correct, but misapplied - "value" is only related to socially necessary labor; that is, a kind of "average" labor that society uses to produce a good. This is not a situation in which we are talking about a good, on the whole, and it does not apply here. What is extremely vexing about the LTV is that is hideously muddles micro and macroeconomic explanations for terms. This is one area where the traditional micro/macro distinction leads you to the wrong conclusions.
Refutations 2 and 3 is simply incorrect, once again because of the "socially necessary" caveat. If it takes "society", on average, one hour to, say, weave a bolt of cloth then that is the value of a bolt of cloth. If it takes ME two hours to weave that same bolt, that means nothing. Likewise, if I spend hours doing pointless work, that does not give the work value - since it is not socially necessary work.
Refutation 4 is also good - but, again, it misses the "socially necessary" aspect. Tied up in the concept is that of zero arbitrage; social necessity is a matter of classical equillibrium, and in equilibrium there can be no arbitrage.
Refutation 5 is incorrect for the same reasons 2 and 3 are - in addition the "value" of a product produced need not be tied to the wages paid. For instance, it is perfectly consistent with the LTV to have wage-differentiated workplaces.
Refutation 6 is good, but both ignores the fact that it could be applied equally to classical treatments, and that it ignores the marginality of work. For instance, we are only talking about value - this allows a kind of "equation" of goods based on value. For instance, lets talk about that bolt again. Say, because I am skilled, I can produced one bolt in a half hour. Thus, in an hour, I produce two units of value - and can then exchange them for other goods I desire. If I had to go make those goods myself, I would not be able to - or it would take much, much more time. The LTV is consistent with specialization, and the marginality of labor.
Refutation 7 and 8 try to use two different concepts of "value" in the same notion. You either get utility, or value - you can't have both.
Perhaps a better way to put it is that "value" is a kind of definition - like one foot, or one meter. What people like Smith, Ricardo, or Marx were saying is that goods have this property which they called "value" that was equal to the amount of socially necessary labor embodied in them. They weren't making an observation, or stating a theory - rather, they were saying that value IS that embodied labor, and then used it to try and explain the economy. The problem is that "value" has connotations, and means different things in different contexts. For instance, many of your criticisms implicitly assumed that you could use utility as another measure of value - well, you can't, because value is a definition. Maybe it was a bad thing to call it - say, call it "praxis" or "puisse" or something.
In the end, however, it's really just a different definition they've tried to apply, in order to explain how the economy works. We all know how their project turned out, but trying to refute it in such a way is not productive.
Now, if you'll excuse me, I need to go wash my hands. I feel dirty for having to say that.
Isn't there a difference between cost and value? Value has nothing to do with cost. Value is subjective. Something that is valuable to one person is worthless to another. But cost is related to labor whether it creates value or not.
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