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The labor theory of value is an economic theory that states that the value of a product is completely reliant upon the amount of labor put into making that product. This theory was first espoused by Greek philosopher Aristotle and was later the central tenet of the economic theory of Karl Marx, the German philosopher whose views inspired socialism and communism. According to the labor theory of value, the work put into creating a product determines its value and, according to Marx, any profits made from the product should go back to the workers. This theory has fallen out of favor in modern times, as detractors claim it takes a naive view of economic and social realities.
In order to make suggestions on how to improve existing economies, economists have long studied the basics of how products are made and sold. Some believe that a product has a certain intrinsic value that remains unchanged. Others feel that the inhabitants of a society determine the value of a product by creating a market for it through buying and selling it. The labor theory of value holds the view that the amount of labor and time needed by that labor to produce an item determines its ultimate worth.
For example, one product might require four workers laboring for four hours to complete it. That product, according to the labor theory of value, would have more worth than a product that could be made by a single person working for just one hour. Aristotle first made these claims, and his work was later picked up by other classical economists.
Marx used the labor theory of value as the basis for his complaints against capitalism. He felt that any profits made from production should go back to the workers, since it was their efforts that products their value. For example, a product that required $100 US Dollars of raw materials to produce in a factory and is later sold for $500 USD produces $400 of surplus value, as Marx called it. This surplus value belongs to the workers in Marx' opinion, but, in fact, usually goes to the owners of the factory who hired the workers.
Those people who deny the validity of the labor theory of value point to what they perceive as flaws in terms of its realistic economic applications. These detractors claim that if all profits went to the workers, there would be no incentive for investors to put capital in any new products. In addition, they claim that the theory leaves out the fact that some products, like diamonds, are worth much more to consumers that other products that take far more time and effort to produce.
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