Image by Nick Youngson - source: Picpedia
What is something worth? That's the question economists have tried to answer throughout history, and they're still trying to answer that question right now, every minute of every day. You see, this is not an easy question to answer, no matter what you may have heard about how the market will give you your answer. Here we run up against the first big misconception immediately; markets will tell you what the price of something is, it will not tell you its value. Price and value are two different things, and the first thing to know about their relationship is that the price will never be the same as the value. Price is a practical thing, it's what comes about in the interaction between buyers and sellers, between supply and demand, and according to the urgency of buyers wanting or needing something and the urgency of sellers wanting to sell it. Value on the other hand is an almost purely theoretical concept that we can use to answer some fundamental questions about the morality, or lack thereof, in the economy.
To make things even more complicated for a minute, labor itself has a price as well. This price has a special name and is called "wages". A wage laborer sells his or her time, muscle power and brain power, for an agreed upon price to an employer. So we can immediately conclude that wages will never be the same as the value added by this labor, and that's even without reckoning with the employer's need to make a profit. Although this need to make a profit does ensure that the labor will always be undervalued, and commodities will almost always be overpriced, because in the eyes of the employer, labor itself is a commodity, one he or she needs to value as low as possible for the profits to be as high as possible. And profits need to be as high as possible because the employer will be out-competed and go bankrupt if he or she doesn't. This is why sustainable or socially responsible entrepreneurship is all but a pipe-dream in the capitalist free market economy.
Let's for a moment return to the root of the labor theory of value, which is so simple that I titled this post the Obvious Theory Of Value. The theory says that ALL value is the result of labor. Here's another common misconception dispelled: this wasn't Marx's theory, as other theoretical heavyweights before him, like Adam Smith and David Ricardo already used it. Every commodity we need, want and use has come about through time and effort being put into the creation of those commodities. A piece of wood is worth almost nothing, and only after a carpenter shapes it into a chair or a table, it has use-value. That is the simple core of the theory as well as a core truth about the evolving human race. Modern right wing libertarians, neoliberals and neoconservatives in their critique of the theory sometimes like to turn this around in a feeble attempt to do away with this obvious truth. They say that value being the result of labor is nonsense and give the famous mud-pie example to explain why; they say that if someone works hard all day creating mud-pies, that labor isn't worth anything because mud-pies aren't worth anything to anyone, and therefore the price someone is willing to pay for product is the sole arbiter of the value of the labor that's put into the creation of that product. But they're wrong on two accounts; firstly the fact that all value is the result of labor does not mean that all labor is valuable, and secondly this is one of the many ways price and value are conflated. But hey, the mud-pie theory sounds like it's right, it's funny and makes proponents of the subjective theory of value feel good; their feelings don't care about the facts, not even one as obvious as the fact that all that is valuable comes from labor.
But the subjective theory of value, which should rightly be called the Subjective Theory Of Price, has truth in it nevertheless, even if it's just because it's our current manufactured reality. And like I said in the beginning, it's almost impossible to exactly quantify value. It's also true that we value things differently at different times; I might value a bottle of water higher when I'm in a desert than when I live next to a lake, and some delicious ice-cream is worth more to me during the summer than in the winter. That's why I also said at the start that the Labor Theory Of Value is useful mainly to lay bare some fundamental and moral truths about our current socioeconomic arrangements. Although, and this should be clear by now, the real economy consists of the value added by labor to the resources given to us by Mother Earth, we experience something completely different. We have tons of work being done that doesn't produce value at all. Advertisements, a billion dollar industry all of its own, don't add real value, but are imperative in increasing the subjective value of products we don't need...
We have a profit incentive that causes us to overproduce and overprice all products, and undervalue all labor put into the creation of products (and services) with real use-value. The main question and the most frustrating reality that needs explaining is why workers are increasingly underpaid when it's clear that their labor is the source of all value. Maybe this is best summarized in a famous quote by Big Bill Haywood:
"The mine owners did not find the gold, they did not mine the gold, they did not mill the gold, but by some weird alchemy all the gold belonged to them!"
source: A-Z Quotes
All human societies in all of history survived and thrived through collaborative labor, by putting work into the creation of what we need to survive, be it food, shelter or an iPhone. And all human societies in all of history have been compelled to allocate the necessary labor in one way or another, and we've always produced more than we individually need. In prehistoric times this overproduction, or "surplus value" if you will, was needed to feed those who could not work; the infants, the elderly and the disabled. But since the day we were able to organize labor in larger groups and produce even more surplus value than needed to feed everyone, the lion's share of this surplus value has gone to the owners of the means of production. Together with the profit motive necessary for those owners to stay owners in the deadly game of market competition, we've culturally evolved into societies in which we've lost touch with the reality that all value and everything with real use-value is the product of labor. Bankers, CEOs and hedge fund managers are the modern equivalents of the mine owners in Haywood's famous quote, and they now are the movers and shakers of the economy that is our daily reality while producing nothing that's of any real worth.
What the Labor Theory Of Value teaches us, and this is the core of Marx's critique of capitalism, is that our capitalist socioeconomic arrangement is unsustainable and unjust. Even though the theory can not, and doesn't presume to exactly quantify the price of products and labor, it opens us up to the insight that workers, the real creators of wealth, should be the movers and shakers in the economy, as they are the creators of all that's valuable to us as individuals and as a society. They should collectively own the means of production, which is socialism as well as a radical departure from our current system in which the means of production are owned by individuals. This would be a cure to all of the problems inherent to capitalism, like overproduction and the consequent ruination of the environment, the rising and immoral gap between rich and poor, the exploitation of labor in all its forms and so on.
By way of illustration of the increased power of the financial sector over the economy, in 1978 commercial banks held $1.2 trillion (million million) in assets, which is equivalent to 53% of the GDP of the United States. By year's end 2007, commercial banks held $11.8 trillion in assets, which is equivalent to 84% of U.S. GDP. Investment banks (securities broker-dealers) held $33 billion (thousand million) in assets in 1978 (equivalent to 1.3% of U.S. GDP), but held $3.1 trillion in assets (equivalent to 22% U.S. GDP) in 2007. The securities that were so instrumental in triggering the financial crisis of 2007-2008, asset-backed securities, including collateralized debt obligations (CDOs) were practically non-existent in 1978. By 2007, they comprised $4.5 trillion in assets, equivalent to 32% of U.S. GDP.
source: Wikipedia
Now, in order to make this post not too long, and to make it so that you all hopefully can understand its core principles, I've oversimplified the theory, so please do watch the videos included, especially the short one linked below.
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