Freedom in One Lesson

41.

Leaving behind the
Labor Theory of Value

The labor theory of value, as a rationale for various incarnations of socialism, has for a long time undermined the miracles of markets and prevented people from understanding them. Leonard Read understands why it is of immense value to undo that misunderstanding, for those who believe it as well as for those who use it as an excuse for what they want government to impose on unwilling citizens. In his December 1956 Freeman article, “Unearned Riches” (Read 1956b), he offers a very insightful look at the issues.

Understanding the fallacy of the labor theory of value is a first step toward respect for privately owned and controlled property, without which there can be neither voluntary exchange nor freedom.

Many people sincerely believe that the value of anything is determined by the labor used in producing it. . . . Day-to-day experiences reveal its error. . . . The same labor could be used to make mud pies as to make mince pies, yet the value in the marketplace would differ. A service or a product of little value at one time or in one place may be highly valued at another time and place. . . .

Individuals have varying value judgments. Value in the market sense, therefore, is a subjective rather than an objective determination. . . . Value, as beauty, cannot be objectively determined.

Why did the labor theory of value prevent people from understanding market economies?

. . . Until the latter part of the nineteenth century . . . economists . . . were stymied in their development of economic theory because they accepted the cost-of-production or labor theory of value. They simply could not explain what they otherwise knew to be the great advantages of the free market process of voluntary exchange. They knew full well that both parties must gain when each traded what he wanted less for what he wanted more, yet they could not show that such gain had been “earned,” for they were unable to explain it in terms of labor costs. . . .

Marx, as distinguished from Adam Smith, followed the labor theory of value to its logical conclusion: socialism. . . . To allow any . . . return on capital . . . would be exploitation. . . .

Only if one understands the marginal utility or subjective theory of value based upon the judgments of countless individuals acting freely and voluntarily in the market may he proceed logically to a belief in private ownership and control of property. With this kind of an understanding, he can see why any person may have a perfect right to consume more than he could ever hope to produce by his own labor. He can . . . properly own anything others will freely offer in exchange for what he has to offer them. This means gains for all participants in the exchange process, gains which must always appear to be unearned in terms of labor expended. Nonetheless, it reflects the approval of all who are properly concerned in any transaction. . . . Because it is based on willing exchange, it works without coercing anyone. The labor theory of value—the labor theory of price determination—on the other hand, founded on unwilling exchange, cannot function without coercion.

Read also sees through the attacks on capitalists and “the rich,” which were justified by an appeal to the labor theory of value. He recognizes that efforts to expropriate capitalists were not only unjustified and misunderstood but harmful to the workers whom socialists claimed to want to benefit.

If the wage earner were to succeed in cutting off what he might think are the unearned riches of his “lucky” brothers, he would at the same time destroy his own source of livelihood. . . .

The opportunities that are constantly presented to him . . . are done by a vast work and exchange process . . . more complicated than any one person can understand, let alone control. . . . And he obtains all of this in exchange for his own meager efforts.

The astounding thing is that it is possible for him to gain without any change in his efforts, his skills, his knowledge. Let others become more inventive and more productive, and he may receive more in exchange for what he has to offer. . . .

. . . True, the millionaire has gained much from the doings of others. But the wage earner himself owes his life to the doings of others. . . . Both flow from the same exchange process and . . . whatever each has . . . comes to him unearned in the sense that he alone did not produce all of it. We trade because we can all get more satisfaction from our labor by that means. Vast stores are available to those who have anything to trade that others value. In the free market, each earns all that he receives in willing exchange. This is fantastically more than one could produce by himself.

In order fully to grasp the process by which one can consume in a day that which he could not produce in thousands of years . . . it is only necessary for one to see that one’s earning power is capable of unlimited expansion by the productivity and exchange and value judgments of others. . . . In short, each of us is the beneficiary of this productivity through division of labor and capital accumulation and investments by others. . . .

. . . It is only necessary that we grasp the idea of being a beneficiary of this benefactor, this division of labor, and that we understand and appreciate our dependence on and our relationship to it.

At this point, Read comes to a very important conclusion that is in sharp contrast to the sorts of arguments used by antimarket ideologues: improving your own ability to produce for others is the best way to benefit others as well as yourself. And you should recognize the benefit to yourself in everything that potential suppliers of goods and services whom you value do to improve their productivity.

Looked at in this light—oneself as a beneficiary and division of labor as a benefactor. . . . If we would best serve our individual self-interest . . . one should do everything possible to increase his own perceptive and exchange powers. It is only by self-improvement that one can best serve self. And, clearly, it is only by self-improvement that one can better serve others—that is, add to someone else’s well-being.

What should our stance be toward those whom, despite their not having expropriated us, socialists urge us to expropriate?

Self-reliance, a great virtue, should be emphasized. The way to be self-reliant is to keep off the backs of others and to engage in willing—never unwilling—exchange. This is the free market.

. . . Others, like oneself, will work at their best if permitted the ownership and control of the fruits of their own labor. . . . This is the institution of private property.

As with oneself, these others will act at their best creatively if left free to do so. One should, therefore, look with great disfavor on any interference with creative activity and on any inhibitions to free exchange and communication of creative action. One’s own interest is impaired if there are marauders or robbers or authoritarians among these others; if there are men among them practicing violence, fraud, misrepresentation, or predation. One’s own interest suffers if voters use the political apparatus to gain their own ends at the expense of the vast majority of the public. The form of government that protects the smooth operation of the free-market economy and its voluntary division of labor is limited government.

. . . Each individual . . . must give at least as much concern to the rights of others as he does to his own . . . as eager to protect the creative energies and the free exchange and communication of others as he would his own. For each of us can truly say, “I am the beneficiary of their existence.” . . .

Are the riches received in a free society unearned? Only in the sense that all producers reap fantastically more than they could earn in isolation. The benefits flowing from our division of labor are available to all of us in willing exchange if freedom prevails. . . . All others who act creatively are his benefactors. . . . Hence if I would live and prosper, I shall work as diligently for their freedom as for my own.

Leonard Read understands the subjective nature of benefits and costs and thereby sees through the greatest flaw in the labor theory of value. He sees in it an assertion that the “riches” acquired through voluntary arrangements may have been unearned. But voluntary arrangements reflect gains in value for all whose rights are involved, regardless of how many labor hours were spent.

But it is also important to recognize that not all “riches” are earned. When government intervenes to override voluntary arrangements, those who gain by the political piracy acquire unearned riches, often massive in scale, and their efforts to enrich themselves impose harm on others. Not only do they fail to improve others’ lives but they even discredit the labor theory of value, not having put in the hours to justify such large incomes.