Karl Marx added two qualifications to a pure theory of labour as the only source of value. In both he admitted the role of individual preferences. Nevertheless Marx failed to see the implications of those concessions. I will try to show that both, which are meant to rescue the theory from obvious objections, amount in fact to a recognition that his theory is wrong.
Marx adopted the theory of value ready made by Smith, Malthus, and Ricardo. They had just assumed without much discussion that human labour is the only source of economic value. However, Smith never followed the theory strictly, Ricardo admited exceptions, and Malthus later rejected it altogether. The modern theory that we know under the not entirely satisfactory names of marginalist or subjective, came just when Marx had given the final touches to his theory, and apparently he never took notice of it.
Marx adopted the labour theory of value with a dogmatism that was absent in his predecesors. Such theory must have looked attractive to Marx for two reasons. Hours of labour can be counted, thus seem proper in a theory that boasted of its scientific precision. They are not capricious as individual preferences seem to be. And on the political side, the labour theory of value gave Marx the basis on which he built his theory of capitalist exploitation.
Nevertheless, and in spite of those great advantages, Marx soon found that there are obvious objections to the idea that labour is the only source of economic value.
The first qualification
First of all, it is patent that there is no simple relation between hours spent working on an object and its value. If one worker spends three hours to make a chair and another finishes exactly the same chair in just an hour, both chairs will have the same value. No buyer will pay more for the same chair by being informed that one has taken more time to be made. So Marx added a qualification to the simple theory: it is not just hours of labour but the amount of labour that is “socially necessary” taking into account available technology and average skill.
Marx wrote in the first chapter of the first volume of Capital: “The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time” (Capital p. 29, I will cite the translation that can be downloaded for free at marxists.org here)
Although such qualification allowed Marx to get rid of the obstacle, it should have led him to ponder about the source of the objection. Why is that two identical goods will have identical value regardless of the different amount of time spent in making each of them? It is a pity that Marx did not stop to consider such question. The obvious answer is that they have the same value because they have the same utility for the buyer —but that would have lead him to the real source of value.
Marx contented himself with such qualification and went on. However, there appeared a second objection, this one even more damning, an obstacle that should have led Marx to abandon his theory altogether instead of trying to prop it up with a second qualification.
The second qualification
Say some company makes a new car and that they employ the amount of labour “socially necessary”. Nevertheless, for whatever reasons the public dislikes the car. It will not sell at a price that rewards the company for the “socially necessary” labour employed in making it. Yet Marx had assured us that “The value of one commodity is to the value of any other, as the labour time necessary for the production of the one is to that necessary for the production of the other. As values, all commodities are only definite masses of congealed labour time” (p. 29). After reading that, an adviser to the car company comes with an idea: we should advertise the fact that our factory uses the amount of labour “socially necessary” according to the average skill prevalent in industry. Our car has the same congealed labour-time than that of the competition.
As we know, that won't help a bit.
To parry this obvious objection to his theory Marx was forced to add a second qualification. It is not enough to produce a good according to the labour time necessary, so he writes “nothing can have value, without being an object of utility. If the thing is useless, so is the labour contained in it, the labour does not count as labour, and therefore creates no value” (p. 30). Marx avoids mentioning people but it is clear that utility is always utility to somebody, as judged by that somebody. At this point Marx could have discarded the theory he received as a legacy from Smith, Malthus, and Ricardo and could have formulated a better one, that value comes from the utility that goods provide to individuals, and that such utility must be acknowledged by them (rightly or wrongly), otherwise it will have no economic relevance.
Nevertheless, Marx clinged on to the old school. He considered himself a serious scientist and was used to counting average labour hours. Individual choices seemed too frivolous. He also considered himself a revolutionary and by ditching the old theory of value he would have lost the basis for his theory of capitalist exploitation.
Now and then Marx provided hints that should have led anyone, including him, to recognize his error. About manufactures he wrote “the product must be not only useful, but useful to others” (p. 48). I would add that it is plain that if the product is made for sale, useful and useful to others are not different things. And about the exchange of commodities Marx wrote “the labour spent upon them counts effectively only in so far as it is spent in a form that is useful for others. Whether that labour is useful for others and its product consequently of satisfying the wants of others, can be proved only by the act of exchange” (p. 60).
So Marx was very close to the true theory of value but he skillfully avoided it. He used averages to deny that different things were different, rehashed Aristotelian arguments to “prove” that exchange requires a common element (spent labour) in commodities, and rejected facts that contradicted his definition of value on the authority of that very definition. As an example of that last trick, we see that though he admited that people pay a price for uncultivated land, he declared that such land has no value. Why not? Because it would contradict his definition of value, according to which labour is the source of value.
That curious, even desperate, argument about uncultivated land would lead us to the point where Marx made his initial mistake. It was the same mistake made by Malthus before him.
Marx's error was not even original
Marx wrote that “A thing can be a use-value, without having value. This is the case whenever its utility to man is not due to labour, such as air, virgin soil, natural meadows” (p. 30).
Here Marx mixed up things badly. Air is indispensable to life but has no economic value precisely because it does not need economizing, it is not scarce —tough it would be different in a community that lived under water. However, virgin soil and natural meadows are scarce, there are not unlimited extensions of them, they are useful but scarce, they need economizing, that is why —in spite of Marx— they do have economic value.
Well before Marx, Malthus had made the same mistake but he fell into it only in passing and in a few remarks limited to air. Moreover, in the second edition of his Principles of Political Economy, Malthus rejected the theory altogether (the book can be downloaded for free here). Marx instead deepened the mistake and built an entire doctrine upon it. Malthus had tried to explain why certain things like air, though useful, have no economic value. He wrote that this is because we do not have to expend labour in order to enjoy them. To be precise, Malthus should have said that as air is not scarce, we do not have to expend labour in order to have it. That slight lack of precision (later corrected by Malthus) was made far worse by Marx, who following blindly the consequences of Malthus' initial error added “virgin soil¨ and “natural meadows” as things that have no economic value. He should have noticed that although people do not purchase air (unless we think of people going under water), virgin soil is sold and bought regularly. There have been wars for land, but not wars for air.
Marx surely saw that facts contradicted his theory so he tried to counter the objetion by writing that prices of uncultivated land are “imaginary, like certain quantities in mathematics”. Marx himself must have seen that this way of explaining away facts was unsatisfactory so he added that such imaginary prices “may sometimes conceal either a direct or indirect real value-relation; for instance, the price of uncultivated land, which is without value, because no human labour has been incorporated in it” (ps. 70-71).
With this Marx did not explain how is that virgin soil has a price but no value, he only ofuscated the issue by suggesting that there might be —sometimes— some relation, even a direct one, to a real value. What was the nature of such “concealed” relation, and how the “relation to a value” differed from a plain “value”, he did not dared to explain.
Certainly, the difference cannot be based on the fact that uncultivated land may play a role in the production of wheat and bread because that is also the role of steam engines and of every good that is used in the production of other goods. And Marx never said that only final goods have value.
So in spite of his references to imaginary quantities and to concealed relations, Marx failed to explain why he declared that uncultivated land has price but no value. The issue posed a danger to the theory so it was prudent to keep it concealed in mist.
In truth, the key is not average labour time but the all too common scarcity of useful things, the fact that there is not enough of some good so that it can be enjoyed freely and without limit by everyone. The key is the need to economize such useful goods. Actually, that is what gives rise to economics as a science.
Unfortunately, Marx made that fundamental mistake at the beginning of his reasoning and on top of it he based his theory of capitalistic exploitation. Certainly, in spite of its flaws the labour theory of value remains powerful today, not for the strength of the reasoning that sustains it, but because of the services it provides in the political struggle. Indeed, there have been marxist academics like G. A. Cohen ready to ditch the labour theory of value and still keep the marxist brand name. Which is like trying to plant a tree without its roots.
Marx's theory of value is not the only part of his system that shows unmerited persistence. More than a century ago Eugene Böhm-Bawerk demonstrated that Marx's theory about the rates of profit in different branches of industry is wrong. On the political side, there is also the notion of a “dictatorship of the proletariat”, which is almost a contradiction in terms. Nevertheless, it has been very useful to dictators, their coteries, and fellow travellers, to justify their oppresion.
