labor theory of value | How Karl Marx's Labor Theory of Value Explains Capitalism

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labor theory of value | How Karl Marx's Labor Theory of Value Explains Capitalism

The labor theory of proposed by Karl Marx is a theory of value also known as the labor theory of value (LTV). This theory asserts that the economic value of a service or a good is determined by the exact amount of "socially necessary labor" that is required to produce and deliver it. This theory gives more value to the labor than the consumers and the suppliers.

Historical Background

The political and philosophical ideas of great theorists like Adam Smith and John Locke have no doubt been the backbone of many modern concepts but, if we take a closer look, most of the time, their theories made no sense.

The best thing about them was their consistency and adamancy to disregard any ideas that were contrary to theirs. And, they always had critics waiting ahead to give them a tough time in the battle of ideas.

The labor theory was first propounded by Adam Smith, the father of modern economics. So, Karl Marx was not the first one to introduce it to the world. 

The Labor Theory of Value

The labor theory of Karl Marx, popularly known as the Labor Theory of Value reflects a core pro-labor viewpoint. According to this theory, the profits that an organization earns are solely the product of labor invested in the creation of products.

Hence, workers are entitled to all the profits, irrespective of the raw material costs and other expenses needed to produce a thing.


Let’s simplify it further with the help of an example. Marx meant that if a commodity costs $5 where its production cost is $1, then the worker who produces it deserves the entire profit of $4.

Marx opined that the owner of the factory didn’t invest any labor in the production hence he ought not to have any share in the profit. Of course, the theory welcomed criticism that hit it from all possible directions.

Loopholes in the labor theory

Marx thought that owners by taking any single penny from the profits exploit the poor laborers who invest their time and effort in bringing out the value of a product. There are many loopholes in this theory. Let’s discuss them in turn:

  1. Critics raised a very sane argument that if all value came from labor, then what about the things that require no labor at all? For example gems, pearls, minerals, fruits etc. Some of natural objects are valued more than others even when they require the same amount of labor, e.g. diamonds are worth thousands of dollars whereas an identically sized piece of coal has no value at all.
  2. The labor theory also skips consumer desires that play a vital role in the value of a product. A place where winters stay for an insignificant period would have less value for coats and sweaters as compared to a place where they’re direly needed due to constant cold.
  • The time element was also ignored by Marx which determines the value of some products. For example, an aged wine is more valuable than the freshly prepared wine though they require the same labor input.
  1. He also ignored considering the position of a thing which is sometimes the sole determinant of value. For example, a house on the outskirts of a city will value way less than the same house built in the city center.

Besides, if the labor theory is actually followed the workers wouldn’t be getting any money until the products are sold. How come Marx didn’t think about it?

The Absurdities

There are many absurdities in the theory. Why would the owners risk their money and invest in the capital if they won’t get any profits? Their planning, management skills, qualifications and expertise shouldn’t be worthless. 

Labors are willing to leave their farms and work in the factories at fixed wages because they know that their labor isn’t as beneficial for them on their farms.

What made Marx come up with such a theory? Even in a socialist state, the workers don’t get all the profits if Marx aimed at eliminating the very idea of profit-making.


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