Karl Marx and the Labor Theory of Value

In the early to mid-19th century, it was popular to believe that there are objective answers to great questions. This idea was destroyed by the idea of subjectivity in field after field. Albert Einstein introduced the idea of relatively even to Physics - the laws of Physics actually change depending on where you are in the Universe. In Economics, Adam Smith developed the Labor Theory of Value - the idea that what gives something value is the amount of labor that is put into creating that object. Karl Marx took this idea from Adam Smith and stated that since labor produces all value, owners of capital (such as factory owners) do not provide any service to economic production. The owners of capital (capitalists) steal the wealth from the true creators of value - the workers.

The Austrian economist Eugen Böhm von Bawerk made the point that if labor determines value, then businesses that are more labor intensive should produce greater profits. What we find empirically however, is that profit is equal among all industries given the risk. This makes sense because capital will flow from less profitable enterprises to more profitable until the returns are equal. This critique was actually presented during Marx's time, and Marx was unable to solve the problem.


Modern mainstream economists would argue that the price is determined by the intersection of supply and demand. Demand factors in people's preferences. Thus, even if a million worker hours are put into creating something, if people do not want it, its value will be zero. There still is a place for labor - but it is a part of the supply curve, which factors into the determination of price, but it is not the sole determinant.

The mainstream notion is far better at explaining price fluctuations that we see in the world. When the price of gas spiked up in 2008, the demand for SUVs fell sharply. How would Marx explain the fall in the price of SUVs? The amount of labor that went into producing those SUVs did not change, only the demand for them changed and that was enough to lower their price.

The Austrian economists go even further and argue that the supply curve itself is also dependent ultimately on demand. The prices the supply curve are partly determined by the current product. Thus, demand ultimately determines the prices for all products.