Thank you for this! I've been wanting to write an essay about this for a long time but now I can just point to yours. It always bugs me when people say things like "people deserve to be compensated for their labor", or, worse, "you have to appreciate this work of art because clearly it took a lot of effort to create". It seems rude to bring up Mein Kampf as a counterexample, maybe I'll use your wavy swords thing instead.
One reason I think people hold on to this intuition is that we teach kids that effort is important, and we teach this by attaching value to effort directly. E.g. "A for effort", participation trophies, "showing up is 80 percent of life", "genius is 2% inspiration and 98% perspiration". This is fine, we want to encourage kids to put in the effort because usually effort is a good thing, and its benefits are not immediately obvious. But we don't do a good job at teaching that *productive* effort is the actual goal.
As a complete non-economist, I have a perhaps out of left field question: why do we care what Adam Smith, David Ricardo, Karl Marx etc thought? Really smart guys and all that, but hasn't the field of economics progressed far beyond them? I mean, physicists respect Newton and Maxwell but don't base their arguments on disputes among that generation of scientists, or chemists with Priestley and Faraday. And I suspect that, great as they were, Weber and Durkheim do not dominate what sociologists say to each other.
The only field that seems similar to me (based on limited knowledge) is philosophy where Hegel, Hume and the like still define much of the dialogue.
Is the labor theory of value just a curiosity from those early days or if it still represents a live debate that has continued on since their time, what would that imply?
“If value is defined by price – set by the supposed forces of supply and demand – then as long as an activity fetches a price (legally), it is seen as creating value. So if you earn a lot you must be a value creator. I will argue that the way the word ‘value’ is used in modern economics has made it easier for value-extracting activities to masquerade as value-creating activities. And in the process rents (unearned income) get confused with profits (earned income); inequality rises, and investment in the real economy falls. What’s more, if we cannot differentiate value creation from value extraction, it becomes nearly impossible to reward the former over the latter. If the goal is to produce growth that is more innovation-led (smart growth), more inclusive and more sustainable, we need a better understanding of value to steer us.”
A few misconceptions on LTV here. I think Smith, Ricardo, Marx etc said that 'value' = the amount of labor you can buy with it - they didn't say that prices = labor hours. By the 18th &19th century people already knew that prices were a function of supply and demand.
The caveat is that their conception of 'value' isn't the same as our conception of value/ usefulness/ utility. LTV says that 'value' is a constant and intrinsic property to socially necessary labor. So if you compare a chicken farmer in 1900, who produces 1 chicken per hour of labor with a chicken farmer in 2000, who produces 10 chickens per hour of labor, LTV would say that a modern chicken farmer only has to offer up 1/10 of his 'value' per chicken. 'Value' to LTV is literally just another word for number of hours of useful labor put into something.
Marx assigned an additional term to the concept modern economics now associates with the 'utility', and that's 'use-value'. So he would say that 1 chicken in 1900 has the same use-value as a chicken in 2000, but a chicken in 2000 would have only 1/10 the 'value' as a chicken in 1900. Though use-value is not EXACTLY the same thing as 'utility' though, because Marx believed that use-value was intrinsic to the good. In other words, he thought that the intrinsic properties of bottled water quenching thirst and being portable was a use-value intrinsic to the good, not the consumer. So he'd say that a water bottle is useful in the sense that it quenches thirst, even when nobody is thirsty.
And yea, he basically squares that contradiction by simply assuming that water bottle allocation is already optimal. And of course this is the root of the knowledge problem in the socialist commonwealth: by assigning intrinsic 'value' to labor, and assigning intrinsic 'use-value' to goods, you still haven't solved the problem of HOW to assign these values productively.
A quick aside on the CEO example. It seems to assume two things that are by and large not true: (1) that corporate executives have visionary decision-making abilities, (2) that they are compensated for them. For (1), going back to Herbert Simon, authors who study decision-making in corporations show that all of your typical human cognitive biases and limitations are present in executives (and often exacerbated by the hubris of status), even the highest-paid ones. And for (2), executives are extraordinarily insulated from the bad outcomes of their decisions, and so have very little incentive in becoming these decision-making oracles. Plus, in reality, the day-to-day of an executive is rarely about making these pivotal decisions (which, in any case, are always pre-massaged by armies of strategists and consultants); rather, they spend most of their time fighting fires, arbitrating disputes, and being spokesmen/figureheads for their companies.
The more interesting and realistic version of this is: top executives are *celebrities*, or more charitably, charismatic leaders. Their value comes from their trustworthiness (to employees, boards, and market analysts), ie, their perceived ability to "rally the troops" (20th century "company as army" version) or to "hold the space" (21st century "company as community of purpose" version), so that the aggregate output of the employees is decisions and products that are well aligned with the company's strategy and that make money in the market.
Or as Lou Reed sang, some people work very hard and still they never get it right.
It's very right to trace LTV back to ancient social ethics, but first we need to look at the more recent history of industrialization from which the current Marxist version sprang. In that context LTV was never really an earnest theory of how prices were set. But LTV's true function in Marxism has always been something else: as a rhetorical tool for framing a complaint that a capitalist class was exploiting an entrenched position to grab more than its fair share from a working class. This is how LTV is still used by Marxists today.
Marx and the relatively few Marxists who have genuinely cared and written about value theory indeed add on a demand factor that turns LTV into a nothing-burger. But that's beside the real issue, which is whether a capitalist class is entrenched and a working class is exploited. That issue was addressed in the 20th century with progressive taxation, regulation of working conditions and unionization. But globalization and corruption of representative politics have effectively eliminated progressive taxation for the highest income levels while dramatically weakening the bargaining positions of lower-skilled laborers in higher-income countries. This has been hard to fight as enough people respond to higher campaign spending and prefer lower prices over left or right versions of America-first ideology.
Biden's response is to try to rally enough public support for higher taxes on top earners to make vote-buying impossible, and to use the funds to create jobs that can't be off-shored. It's still very much an uphill battle.
The timing of this article is crazy! I was just reading this morning about the water-diamond paradox and the struggle of early economists in solving it using the labor theory of value.
I think the controversy over value isn't really about value – it’s about desert. People want to live in a world where those who have wealth earned it in some moral sense. (This isn't a disagreement with the post; I think it's getting at the same thing as it starts talking about morality)
Personally, as a pretty strict utilitarian, I prefer to scrap the concept of desert altogether and just try to get at some distribution of wealth that maximizes happiness – to hell with trying to figure out who’s the most deserving. But I recognize that opinion isn’t very politically effective.
Just have to say, your argument today with Damon Linker was the epic anime-esque showdown I've been waiting for, and I'm looking forward to seeing the dialogue continue (I read both of you quite often).
Conservatives be like: “Just how long do you think you’ll last holding on to your precious "democracy" in this new Authoritarian Era…?”
Noah be like Saito Hajime: “I’ll do it till I die.”
I hope you read this: I don't think this is an accurate understanding. Marx didn't believe in the labour theory of value, because he defines a completely new theory of value, based on labour, in Das Kapital. It's really just his own theory. He argues that in order for 2 objects to be exchangeable, they must have some commensurability. This means they must be able to be compared with exact values, otherwise they wouldn't be able to be exchanged. He does not care what those exact values are, hence he doesn't mention price very often. He simply wants to explain how two objects can be commensurable. So he shows that everything has labour embedded into it, like a pebble has a certain shape from the labour embedded into it from a waterfall, giving it some use-value (utility). The same goes for machines. Machines were made by other machines, which were ultimately made by humans. Which humans? It doesn't matter, all humans do this and all humans share in each others products.
So then, how for example does a capitalist get objects into his hands? The argument goes that they worked to create those objects. Well what about land? You can't create land, at least not really. So how does the land fall into the capitalists hands? And there you have roughly the subject of inquiry of Das Kapital volume 1, which i recommend you go read.
After (in hindsight, erroneously) following my Marxist friends' advice and trying to read Das Kapital to understand Marx's labor theory of value, I can't agree with your own formulation of the labor theory of value as espoused by Marx. In the first chapter of volume 1 of Kapital, Marx unambiguously equates the exchange value of a good (which is exactly semantically equivalent to economists' term "relative price") with the labor expended in producing said good, despite vehement insistence by my friends that Marx's LTV denied this. Or rather, Marx clearly and unsurprisingly believed in the LTV as articulated by Smith, Ricardo, and every other economist that came before him.
That experience forced me to accept an inescapable conclusion: modern defenders of Karl Marx are transparent (pseudo)intellectual frauds and not worth your, my, or anyone else's time.
I think we are spending too much time proving or disproving one idea over the other . Most complex phenomena do not have just one explanation. This must be the case for the theory of value. For personal services like barber , hair dresses and may be profession teaching , Labour theory of value may have a direct explanation.
For others like CEOs jobs, innovation, Labour explains less of value created from such . Life isn’t that simple.
Economists are always falling intro this Trap of simplifying very complex ideas.
Thank you for this! I've been wanting to write an essay about this for a long time but now I can just point to yours. It always bugs me when people say things like "people deserve to be compensated for their labor", or, worse, "you have to appreciate this work of art because clearly it took a lot of effort to create". It seems rude to bring up Mein Kampf as a counterexample, maybe I'll use your wavy swords thing instead.
One reason I think people hold on to this intuition is that we teach kids that effort is important, and we teach this by attaching value to effort directly. E.g. "A for effort", participation trophies, "showing up is 80 percent of life", "genius is 2% inspiration and 98% perspiration". This is fine, we want to encourage kids to put in the effort because usually effort is a good thing, and its benefits are not immediately obvious. But we don't do a good job at teaching that *productive* effort is the actual goal.
As a complete non-economist, I have a perhaps out of left field question: why do we care what Adam Smith, David Ricardo, Karl Marx etc thought? Really smart guys and all that, but hasn't the field of economics progressed far beyond them? I mean, physicists respect Newton and Maxwell but don't base their arguments on disputes among that generation of scientists, or chemists with Priestley and Faraday. And I suspect that, great as they were, Weber and Durkheim do not dominate what sociologists say to each other.
The only field that seems similar to me (based on limited knowledge) is philosophy where Hegel, Hume and the like still define much of the dialogue.
Is the labor theory of value just a curiosity from those early days or if it still represents a live debate that has continued on since their time, what would that imply?
One more Mazzucato thought (see https://evonomics.com/value-of-everything-mariana-mazzucato/)
Value-creation vs Value-extraction
“If value is defined by price – set by the supposed forces of supply and demand – then as long as an activity fetches a price (legally), it is seen as creating value. So if you earn a lot you must be a value creator. I will argue that the way the word ‘value’ is used in modern economics has made it easier for value-extracting activities to masquerade as value-creating activities. And in the process rents (unearned income) get confused with profits (earned income); inequality rises, and investment in the real economy falls. What’s more, if we cannot differentiate value creation from value extraction, it becomes nearly impossible to reward the former over the latter. If the goal is to produce growth that is more innovation-led (smart growth), more inclusive and more sustainable, we need a better understanding of value to steer us.”
A few misconceptions on LTV here. I think Smith, Ricardo, Marx etc said that 'value' = the amount of labor you can buy with it - they didn't say that prices = labor hours. By the 18th &19th century people already knew that prices were a function of supply and demand.
The caveat is that their conception of 'value' isn't the same as our conception of value/ usefulness/ utility. LTV says that 'value' is a constant and intrinsic property to socially necessary labor. So if you compare a chicken farmer in 1900, who produces 1 chicken per hour of labor with a chicken farmer in 2000, who produces 10 chickens per hour of labor, LTV would say that a modern chicken farmer only has to offer up 1/10 of his 'value' per chicken. 'Value' to LTV is literally just another word for number of hours of useful labor put into something.
Marx assigned an additional term to the concept modern economics now associates with the 'utility', and that's 'use-value'. So he would say that 1 chicken in 1900 has the same use-value as a chicken in 2000, but a chicken in 2000 would have only 1/10 the 'value' as a chicken in 1900. Though use-value is not EXACTLY the same thing as 'utility' though, because Marx believed that use-value was intrinsic to the good. In other words, he thought that the intrinsic properties of bottled water quenching thirst and being portable was a use-value intrinsic to the good, not the consumer. So he'd say that a water bottle is useful in the sense that it quenches thirst, even when nobody is thirsty.
And yea, he basically squares that contradiction by simply assuming that water bottle allocation is already optimal. And of course this is the root of the knowledge problem in the socialist commonwealth: by assigning intrinsic 'value' to labor, and assigning intrinsic 'use-value' to goods, you still haven't solved the problem of HOW to assign these values productively.
A quick aside on the CEO example. It seems to assume two things that are by and large not true: (1) that corporate executives have visionary decision-making abilities, (2) that they are compensated for them. For (1), going back to Herbert Simon, authors who study decision-making in corporations show that all of your typical human cognitive biases and limitations are present in executives (and often exacerbated by the hubris of status), even the highest-paid ones. And for (2), executives are extraordinarily insulated from the bad outcomes of their decisions, and so have very little incentive in becoming these decision-making oracles. Plus, in reality, the day-to-day of an executive is rarely about making these pivotal decisions (which, in any case, are always pre-massaged by armies of strategists and consultants); rather, they spend most of their time fighting fires, arbitrating disputes, and being spokesmen/figureheads for their companies.
The more interesting and realistic version of this is: top executives are *celebrities*, or more charitably, charismatic leaders. Their value comes from their trustworthiness (to employees, boards, and market analysts), ie, their perceived ability to "rally the troops" (20th century "company as army" version) or to "hold the space" (21st century "company as community of purpose" version), so that the aggregate output of the employees is decisions and products that are well aligned with the company's strategy and that make money in the market.
Or as Lou Reed sang, some people work very hard and still they never get it right.
It's very right to trace LTV back to ancient social ethics, but first we need to look at the more recent history of industrialization from which the current Marxist version sprang. In that context LTV was never really an earnest theory of how prices were set. But LTV's true function in Marxism has always been something else: as a rhetorical tool for framing a complaint that a capitalist class was exploiting an entrenched position to grab more than its fair share from a working class. This is how LTV is still used by Marxists today.
Marx and the relatively few Marxists who have genuinely cared and written about value theory indeed add on a demand factor that turns LTV into a nothing-burger. But that's beside the real issue, which is whether a capitalist class is entrenched and a working class is exploited. That issue was addressed in the 20th century with progressive taxation, regulation of working conditions and unionization. But globalization and corruption of representative politics have effectively eliminated progressive taxation for the highest income levels while dramatically weakening the bargaining positions of lower-skilled laborers in higher-income countries. This has been hard to fight as enough people respond to higher campaign spending and prefer lower prices over left or right versions of America-first ideology.
Biden's response is to try to rally enough public support for higher taxes on top earners to make vote-buying impossible, and to use the funds to create jobs that can't be off-shored. It's still very much an uphill battle.
I think the modern take on this issue involves minimum wage and progressive taxation.
Betteridge's law of headlines (mostly) strikes again!
A non-economist, I nevertheless read your blog avidly. Coming upon the Jiro/Saburo example (a nod, I trust, to that masterpiece, RAN) made my day!
The timing of this article is crazy! I was just reading this morning about the water-diamond paradox and the struggle of early economists in solving it using the labor theory of value.
I think the controversy over value isn't really about value – it’s about desert. People want to live in a world where those who have wealth earned it in some moral sense. (This isn't a disagreement with the post; I think it's getting at the same thing as it starts talking about morality)
Personally, as a pretty strict utilitarian, I prefer to scrap the concept of desert altogether and just try to get at some distribution of wealth that maximizes happiness – to hell with trying to figure out who’s the most deserving. But I recognize that opinion isn’t very politically effective.
Just have to say, your argument today with Damon Linker was the epic anime-esque showdown I've been waiting for, and I'm looking forward to seeing the dialogue continue (I read both of you quite often).
Conservatives be like: “Just how long do you think you’ll last holding on to your precious "democracy" in this new Authoritarian Era…?”
Noah be like Saito Hajime: “I’ll do it till I die.”
//gratuitous Rurouni Kenshin reference.
I hope you read this: I don't think this is an accurate understanding. Marx didn't believe in the labour theory of value, because he defines a completely new theory of value, based on labour, in Das Kapital. It's really just his own theory. He argues that in order for 2 objects to be exchangeable, they must have some commensurability. This means they must be able to be compared with exact values, otherwise they wouldn't be able to be exchanged. He does not care what those exact values are, hence he doesn't mention price very often. He simply wants to explain how two objects can be commensurable. So he shows that everything has labour embedded into it, like a pebble has a certain shape from the labour embedded into it from a waterfall, giving it some use-value (utility). The same goes for machines. Machines were made by other machines, which were ultimately made by humans. Which humans? It doesn't matter, all humans do this and all humans share in each others products.
So then, how for example does a capitalist get objects into his hands? The argument goes that they worked to create those objects. Well what about land? You can't create land, at least not really. So how does the land fall into the capitalists hands? And there you have roughly the subject of inquiry of Das Kapital volume 1, which i recommend you go read.
After (in hindsight, erroneously) following my Marxist friends' advice and trying to read Das Kapital to understand Marx's labor theory of value, I can't agree with your own formulation of the labor theory of value as espoused by Marx. In the first chapter of volume 1 of Kapital, Marx unambiguously equates the exchange value of a good (which is exactly semantically equivalent to economists' term "relative price") with the labor expended in producing said good, despite vehement insistence by my friends that Marx's LTV denied this. Or rather, Marx clearly and unsurprisingly believed in the LTV as articulated by Smith, Ricardo, and every other economist that came before him.
That experience forced me to accept an inescapable conclusion: modern defenders of Karl Marx are transparent (pseudo)intellectual frauds and not worth your, my, or anyone else's time.
For any good, you can imagine a hypothetical economy without that good and it still makes sense.
With the exception of labor. If nobody’s laboring it seems like in some sense there wouldn’t be an economy.
So maybe labor does have some kind of special status, even if the Marxian labor theory of value doesn’t make sense.
I think we are spending too much time proving or disproving one idea over the other . Most complex phenomena do not have just one explanation. This must be the case for the theory of value. For personal services like barber , hair dresses and may be profession teaching , Labour theory of value may have a direct explanation.
For others like CEOs jobs, innovation, Labour explains less of value created from such . Life isn’t that simple.
Economists are always falling intro this Trap of simplifying very complex ideas.