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Leaving behind the Labor Theory of Value

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Tags Value and Exchange

11/16/2021

The labor theory of value has long undermined people’s understanding of the miracles created by markets and rationalized various incarnations of socialism which mangle those miracles. Leonard Read understood why undoing that misunderstanding by all who hold to it, as well as those who just use it as an excuse for what they want government to impose on unwilling citizens, is of immense value to each of us. And in his December 1956 Freeman article, “Unearned Riches,” he offered a very insightful look at the issues. That look is worth taking again.

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…. [but] 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 [also] 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 undermine understanding of 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 … [because] 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 saw through the ultimately envy-based attacks on capitalists and “the rich,” justified by appeal to the labor theory of value, recognizing that efforts to expropriate them were not only unjustified and misunderstood, but harmful to the workers that socialists claimed it was to benefit.

If [a] 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 … 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.

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 (or envy manipulations) relied upon by antimarket ideologues: improving your own ability to produce for others is the best way to benefit others, as well as yourself. Further, everything a potential supplier of goods and services you value does to improve their productivity should be recognized as a source of benefit to you.

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.

So what should our stance be toward others which socialists of all stripes, degrees, and self-designations urge us to expropriate, even though they did not, in fact, expropriate us first?

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 understood the subjective nature of benefits and costs, and so saw through the greatest flaw in the labor theory of value. He saw that assertions that “riches” acquired through voluntary arrangements may be unearned are misguided: they are earned because they reflect gains in value for those they deal with, leaving all whose rights are involved better off as they see it, regardless of how many labor hours it took them.

However, it also important to recognize that all “riches” are not earned.

When government intervenes to override voluntary arrangements, those who gain by the political piracy, and the politicians and bureaucrats who commit it, acquire unearned riches, often massive in scale, demonstrated by the harm their self-enrichment efforts impose on others. Not only do they fail the test of improving others’ lives, they even fail the labor theory of value, because they didn’t work enough hours, even committing piracy, to justify large incomes.

Author:

Gary Galles

Gary M. Galles is a Professor of Economics at Pepperdine University and an adjunct scholar at the Ludwig von Mises Institute. He is also a research fellow at the Independent Institute, a member of the Foundation for Economic Education faculty network, and a member of the Heartland Institute Board of Policy Advisors.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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