The labour theory of value of Karl Marx was developed from the labour theories of value of two classical 18th century economists: Adam Smith and David Ricardo. For them it was a purely economic issue. For Marx it was a political economic issue. He saw the classical labour theory of value as the way that capitalism's exploitive relationship between the capitalist and the worker was disguised— "both were free and the worker was rewarded for his efforts".
It was a key discovery that Marx made. From it he was able to develop his theory of surplus value and from that flowed the three combining theories which explain the inner functioning of capitalism, its contradictions and its tendency to have periodic crises: the decling rate of profit, the over accumulation of capital, and the overproduction of goods.
27 Marx's critique of the classical theory In 1844 Marx first rejected the idea that there was any labour content to value; but by 1847 in his book The Poverty of Philosophy he had accepted it. His own theory was developed in conjunction with his lifelong collaborator Frederick Engels. It was using Engels' polemics against the classical labour theory of value that he put forward his critique of Ricardo's version of the theory, in his Critique of Political Economy, and from there he developed his own version. He had four main criticisms of Ricardo's theory.
The first criticism concerned the distinction between labour and labour power and the theory of wages. The classical theory specified that the labour time was the basic measure of value. How then are wages to be determined on that basis? The confusion
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28 and contradiction arise because labour is an activity and not a commodity. Labour power is the capacity for carrying out labour which is the commodity and it is labour power that the capitalist buys from the worker.
The value of a commodity, therefore, depends not on the value of labour that has gone into making it but the quantity of labour which has been expounded. Wages, as the classical theorists thought, do not constitute the value of
Marx's second criticism involves exploitation and the theory of capital. If production is motivated by exchange value and is solely determined by labour time, how then is it that the exchange value of labour is less than the exchange value of the product of labour (labour
Marx's answer lay in distinguishing between simple commodity production and capitalist production which a generalised commodity production. Under capitalism labour power itself is a commodity. Its value equals the quantity of labour required to produce the subsistence needs of the worker, but this subsistence level (or wage rate) bears no relation to the value of the product of the worker's labour. what the worker is paid (wage = value of labour power) and the value of the worker's product is surplus value. This differential led Marx to develop his most important theory, the theory of surplus value. On top of this he was able to build his theory of the tendency for the rate of profit to decline, of capital accumulation, over accumulation and the (commodities).
The third criticism of Ricardo's theory by Marx concerned how the market prices of commodities fluctuate around their exchange values. If because of supply and demand these market prices fall below or rise above their exchange exchange vales given by the labour time contained within them? According to Ricardo market prices of commodities differ from their exchange values because of supply and demand but in the long run exchange values are given by the labour time that is spent in making the commodities. This meant that Ricardo failed to reconcile supply and demand with his labour theory of value.
Marx pointed to the problem that the relationship between the prices of production (cost prices) and exchange values when the mixture of machines and human capital in the production process (the organic composition of capital, is different in different sectors of an economy. He understood the prices of production as a long run equilibrium concept; market prices will deviate from them but always fluctuate around the axis of the equilibrium.
He highlighted the problem that even if the organic composition of capital is the same across all industries, so that market prices are equal to exchange values, in the short run, market prices would still deviate from the prices of production. This is because of differences between demand and supply in an economy where production is carried out in anticipation of a sale (which the aggregate are the values and that differences in the organic composition capital imply that over several decades equilibrium prices differ systematically from labour value in such a way as to equalise the rate of profit throughout the economy. This happens now on a global scale. The commodities question
The final criticism by Marx of the classical labour theory of value is how it relates to commodities which have not been produced by labour. An example of such a commodity is land and the rent of land
For Ricardo rent is a residual after the deduction of wages and the profit from total value. In his estimation there could not be an absolute rent but a differential rent based on the differences in the fertility of
Marx questioned how the exchange value of natural phenomenon could be derived. According to the classical theory exchange value arises from the amount of labour time embodied in a commodity but land embodies no labour time. Marx insisted that both absolute and differential rent existed. Absolute rent was part of the selling price of corn and not part of the value of corn as in Ricardo's corn model of distribution.
Marx's conclusion was that profit, interest and ground rent are all components of surplus
THEORY
This final criticism goes beyond the class content of the labour theory of value. It nature of the classical theory but it's inner contradictions and shortcomings. Commodity Marx defined a commodity as its properties satisfying human needs of some sort of another. A commodity can be used by the person who produced it or by somebody else. A commodity can be exchanged for another commodity in different quantities. It would take many grams of sand to be exchanged In economic theory aggregation is summary of several individual units which share a characteristic - for example household demand - to link it to its macro manifestation - in this case market demand. Exchange Value For a commodity to be of use to someone else it must be paid for by either exchange or money. So a commodity has a use value and an exchange value. FURTHER READING The Formation of the Economic Thought of Karl Marx, Ernest Mandel (1971), New Left