How did classical economists justify the Labour Theory of Value?

External question — Economics Stack Exchange Author: nilookmen Original post: https://economics.stackexchange.com/questions/57458 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I have skimmed a handful of chapters of older Political Economy books (Adam Smith, Ricardo, Marx), and I'm trying to understand how they argue for the LTV, or their versions of it(or if they take it as a given). Adam Smith initially posits it as a natural exchange value, what would happen in a simple barter economy with his example of trading beavers for deer, but I don't see why it would apply to a full-fledged economy. Ricardo seems to take it as a given in his first chapter. Marx seems to somewhat justify it philosophically. Both Adam Smith and Ricardo have parts where they talk about a commodity's "natural price", but I don't see why this has to necessarily be related to the amount of labour. I've seen marxist writings relate surplus value to surplus product, like how a peasant will produce more grain than what they need to survive, or to exchange for what they need to survive. However, I don't get then why only free human labour is taken to produce value as opposed to machinery or animal labour, since these two also create more product than they consume (If a commodity were produced with purely simple manual labour, and then the industry incorporated animals and/or machinery to increase productivity, why wouldn't more value be produced per worker in the same amount of time as before the addition of animals and machinery). Lastly, I've read somewhere that Marx writes that the "Law of Value" is what regulates the division of labour in a capitalist economy. I don't quite get this either. Please note that I don't want to be told that the LTV is wrong or why it is wrong. I would like to understand these writer's reasonings.

External answer — Economics Stack Exchange Author: 1muflon1 Original post: https://economics.stackexchange.com/a/57459 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. The Adam Smith's justification for labor theory was the following argument (Wealth of Nations Book I, Chapter V) [emphasis mine]: The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money, or with goods, is purchased by labour, as much as what we acquire by the toil of our own body. That money, or those goods, indeed, save us this toil. They contain the value of a certain quantity of labour, which we exchange for what is supposed at the time to contain the value of an equal quantity. Labour was the first price, the original purchase money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command. To understand it its important to little bit know about the context, because if you look at it from the vantage point of modern research where we know that price is subjective the above statement seems puzzling. In Smiths times people believed that price can be objective. As a result there were various 'explanations' of what the correct price. For example, Thomas Aquinas argued that 'just' or correct price, was the price that covers sellers material and labor cost. Although classical economics would not accept Aquinas' notion, they were working under the same paradigm of trying to find some objective 'rule' for determining price. For Smith the rule simply was that the objective price is equal to the value of labor and his justification was the simple empirical observation that things that are difficult and take long time to produce (e.g. Man of a War ship, large castle etc) also tend to be valued by people a lot. Hence he came to believe that labor is the objective determinant of value. David Ricardo was working directly off of Adam Smith's work. Hence, the main justification for LTV is the same. The main difference is that Ricardo was also trying to be more precise and argued that you cannot just look at a labor inputs into commodity itself, because he argued that the price of a commodity cannot be just determined by the direct labor inputs but also by past labor inputs into capital that was used to produce good (see David Ricardo (1817). On The Principles of Political Economy and Taxation). Marx for the most part just took over the Ricardo's LTV and changed terminology a bit (see discussion in Grant and Brue History of the Economic Thought). For example, what Smith and Ricardo call labor theory of value, Marx called it the 'Law of Value' (hence whenever you read the law of value just think LTV, Marx never even used the name labor theory of value if my memory serves right, it is just that he was using LTV with different terminology so modern scholars retroactively call it LTV). Moreover, whereas Smith and Ricardo were looking at LTV from individual perspective Marx always looked at it from social perspective that is why he talked about 'socially necessary labor time' instead of individuals 'toil and labor' that Smith describes. However, aside for terminology it was the same thing so justification is the same as previously. Hence why many modern economic historians such as Grant and Brue don't really talk about Marx as being one of the developers of LTV. He was proponent of it, but he did not really developed the theory itself, this is however often obscured by different terms he used. The major and virtually only point on which Marx disagreed with Ricardo was that he argued that not all value is produced by labor some can be produced by nature, but for value produced by labor essentially Ricardo's LTV applies with just his specific terminology where he tried to write from a collective angle. Surplus value and surplus product are not part of LTV. They are part of Marx and Engel's theory of Surplus Value. The theory of surplus value uses LTV, but they are not the same (e.g. modern neoclassical consumer choice theory uses subjective theory of value, but that is not the same as claiming modern neoclassical consumer choice theory is a theory of subjective value). In research one theory may build upon different theory. For example, in biology there might be some theories of mating behavior of various animals that may build on theory of evolution but still be independent theories themselves.

External answer — Economics Stack Exchange Author: Jumboman Original post: https://economics.stackexchange.com/a/57492 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I'm not an expert on Smith, but his LTV focusses on the labour that the consumer can save with their purchase. I know more about Marx, whose LTV (based on Ricardo) is based on the labour 'embodied' in a product by the producer . I'll try to explain this view in a different way than the other answer. The typical way that a price is determined for an elastical good looks something like: Amortized fixed costs (buildings, machinery) - €0,50 Variable costs (wages, resources) - €0,50 Profit of x% - €0,50 However, the contracter that built the building has made a similar calculation, so we can substitute 'building' with the entire list, which becomes Amortized fixed costs ([machinery, wages, resources, Profit ], machinery) - €0,50 Variable costs (wages, resources) - €0,50 Profit of x% - €0,50 We don't have to rewrite 'building' between the [] because we could do that infinitely and it would regress to zero. And we can do the same thing for machinery (which is made by companies with similar calculations) and for resources (which, if you repeat this process often enough, comes from the ground in lumber, ore, farms etc.). So the list becomes: Amortized fixed costs ([[wages, Profit ], wages, [wages, Profit ], Profit ], [wages, Profit ]) - €0,50 Variable costs (wages, [wages, Profit ]) - €0,50 Profit of x% - €0,50 As you can see, all that we are left with is labour and profit. Now, if we assume a healthy, functioning free market where competitors are ready to undercut any business with outrageous margins (even though we know from game theory that cartels can form spontaneously), it is clear that prices aren't "whatever subjective value some person attributes to the product" but a sum of all labour (its value ) + the profit a capitalist wants to make by selling (its surplus value ). If competition drives profits to near-zero, the price should be nearly equal to the value. It is important to note that the authors you mention make this assumption of a functioning free market for goods meant for use/consumption . They never made the claim that the LTV holds for someting like land (capital), or gold or Supreme bricks (which have no use-value), or Van Gogh paintings (monopoly). For capital this is clear from the hard distinction that all the authors make between Profit and Rent; they have a seperate theory for land-rent, so the LTV does not directly apply to it. The requirement for functioning markets can be inferred from the following passage where Marx quotes Smith: It suffices to say that if supply and demand equilibrate each other, the market prices of commodities will correspond with their natural prices, that is to say, with their values as determined by the respective quantities of labor required for their production. A full list of exceptions where the LTV does not apply (i.e. the price does deviate from the natural price) is found on https://en.wikipedia.org/wiki/Law_of_value .