Labor Theory of Value

Categories: Home -> Political Science

Last updated: 2026-08-26

This article is part of the Basic Course on Libertarianism and the Austrian School of Economics -> Marxism

Note:

To understand this concept better it would be advisable to have first read the following concepts of the Basic Course on Libertarianism and the Austrian School of Economics -> Module 1: Required foundational topics

The labor theory of value

The labor theory of value (which Marx called rather the “law of value”) holds that the value of a commodity does not arise from its concrete utility nor from supply and demand in the market, but from the quantity of socially necessary abstract human labor that was expended to produce it.

Marx takes this idea from the Classical School of Economics (Adam Smith and especially David Ricardo) and reformulates it in order to explain, according to him, the origin of capitalist profit and exploitation.

According to Marx:

Value is the socially necessary labor time: that which is required, on average, with the average technique and average intensity of labor prevailing in that society.
The value of a good was determined to a large extent objectively by the cost of production or the quantity of labor hours embodied in it in the past.
What generates value is the expenditure of human labor power in general, measured in time.

This idea starts from the past (the labor expended and the costs), to generate value once the product is finished (the future).

The two aspects of the commodity and of labor

Every commodity has:

Use-value: its concrete utility (a shoe serves for walking, a loaf of bread for eating).
Exchange-value: the proportion in which it is exchanged for other commodities.

What makes it possible to compare distinct commodities —Marx says— is that both are the product of human labor.

Internal problems that the theory never fully resolved

Marx was aware that in the real market prices do not coincide exactly with “values” (labor times).

In Volume III of Capital he introduces prices of production and the average rate of profit: capitals of different organic composition (more or less machinery versus wages) tend to obtain the same rate of profit, which deflects prices from labor-values.

This generates the famous transformation problem: how to pass consistently from the values of Volume I to the prices of Volume III without contradiction. Most critics consider that Marx did not resolve it.

The opposite idea

The Subjective Theory of Value is the opposite idea, shown below.

Subjective Theory of Value

The Subjective Theory of Value is one of the fundamental pillars of the Austrian School of Economics. Formulated definitively by Carl Menger in 1871 in his work Principles of Economics, this theory formed part of the so-called "Marginalist Revolution" and permanently transformed economic science.

1. The origin of value: from costs to the human mind

Before Menger, the classical school (Adam Smith, David Ricardo) and later Karl Marx defended variants of the Labor Theory of Value.

They held that the value of a good was determined to a large extent in an objective way by the cost of production or the quantity of hours of labor embodied in it in the past.

Menger destroyed the logical basis of this claim by showing that value is not an intrinsic property of objects nor does it come from their productive past.

Value arises from each person's individual perception of the object (Subjectivism.)

Pure subjectivity:

An object possesses value only if a human being perceives that the object has the capacity to satisfy a specific need and if the good in question is scarce.

Value travels from the future to the present:

An entrepreneur may spend millions of hours of labor and resources manufacturing a good, but if in the end final consumers do not desire it or do not value its usefulness for the future, that product will be worth absolutely zero.
It is consumers' valuations regarding future utility that determine the value of everything that precedes them.

2. The Law of Imputation (Structure of Production)

At the methodological and political-economy level, Menger introduced the concept of goods ordered hierarchically according to their closeness to final consumption:

First-order goods: Goods of direct consumption (e.g. a piece of bread).
Higher-order goods: Factors of production necessary to make them (e.g. flour, wheat, the oven, the baker's labor, arable land).

Under the Law of Imputation,

the Austrians explain that value is not transferred from higher-order goods (costs) toward the consumer good.
It is exactly the reverse: the subjective value that the consumer places on the bread (first-order good) is "imputed" or carried backward, determining the value that flour, the oven, machinery, and the labor employed to produce it will have in the market.
Production costs do not create value; rather, they reflect the subjective value expected to be obtained in the future.

3. Philosophical and Political Implications

The adoption of methodological Subjectivism equips the Austrian School with critical tools against other economic and political currents:

Refutation of the Marxist Theory of Exploitation:

Once it is shown that value does not come from accumulated labor, the capitalist's profit ceases to be seen as a "theft" of surplus value.

Instead, later economists such as Eugen von Böhm-Bawerk argued that profit derives from time preference (the voluntary exchange of secure present goods, such as the worker's wage, for uncertain future goods that depend on the risk assumed by the entrepreneur).

Impossibility of Economic Calculation under Socialism:

If value is purely subjective, internal, and changing in each individual's mind, it is impossible for a centralized planning board or a state dictator to know, add up, or determine mathematically the value of things.

The free market, through the free price system, functions as the only decentralized mechanism capable of coordinating and transmitting those dispersed individual valuations.

Practical example

A diamond and a glass of water under normal conditions:

Labor theory of value: the diamond is worth more because it requires much more labor to extract and cut it.
Subjective theory of value: the diamond is worth more because individuals, in their current situation, value that diamond marginally more than the glass of water (even though water is objectively more necessary for life).

If you are lost in the desert, the valuation reverses immediately. Value changed without anything “objective” about the diamond or the water changing.

This article is part of the Basic Course on Libertarianism and the Austrian School of Economics -> Marxism

Previous topic		Next topic
<- Internationalism	<-->	Surplus Value->

Categories: Home -> Political Science

Last updated: 2026-08-26

| | | |

This site was written based on publicly available free articles from the internet.
The content of this site is available under the: Creative Commons Attribution 4.0 International (CC BY 4.0) license.
You can freely copy, redistribute and modify the material, as long as the source is mentioned: liberwiki.com