Labour theory of value

The labour theory of value (LTV) explains how wealth is produced and distributed under capitalism, and how the working class is exploited. Human labour power applied to nature-given materials is the source of most wealth. The wealth produced, however, belongs not to the workers but to those who own and control the means of wealth production and distribution (land, factories, offices, etc.). Wealth production under capitalism generally takes the form of commodities produced for sale at a profit.

In somewhat oversimplified form, the theory states that the value of a commodity is equal to the labor time necesssary to produce that commodity. A more formal definition that takes into account differences in intensities and efficiencies of labour is: the value of a commodity is determined by the amount of socially necessary labour time required under average conditions for its production and reproduction. The labour time necessary to the production of any raw materials used in making the commodity is included in its value.

Theoretical development
The idea that the value of a commodity is proportional to the labour time required to produce it appears in the work of Marx's predecessor in classical economics, Adam Smith (1776). Several decades later, David Ricardo consciously adopted a labour theory of value as a means of demonstrating that the wage rate and the rate of profit are arithmetically inversely related to each other. The argument is that if one goes up the other goes down because wages and profits are taken from a common fund, the sale price of the commodity, and that price is dependent only on the amount of labour time embodied. If the price were dependent on other things, such as an independently derived rate of return on capital, an increase in rate of profit could conceivably push up the price while the wage remained unaffected, but Ricardo held that this is not the case: ie., he held that causation runs from price to rate of profit, not from rate of profit to price.

Marx developed Ricardo's LTV further and made the corollary notion of surplus value a keystone of his own analysis of capitalism.

Differences in Marx and Ricardo
Ricardo held to a strict version of the LTV in the sense that he considered prices in individual industries to be determined by labour time. Marx on the other hand considered the LTV applicable only at an abstract level, or applied to the ratio of wages to profits aggregated over the whole economy. In particular sectors, or industries, he considerd that numerous secondary influences would drive prices above or below the level predicted by labour time.

Such secondary influences could include differing proportions of labour to non-labour costs between industries, as well as monopoly, state action in the economy (eg. taxation, subsidy), worker resistance to the imperatives of capital, and non-capitalist enclaves in the economy.

20th century debate
Modern techniques using input-output matrices of physical quantities confirm that the wage and profit rate are not independent. They do this without invoking the concept of value as used by Ricardo and Marx, a fact which has prompted some economists to say that the concept of value (and the LTV) should be relegated to the scrap heap as unneccessary. Others contend that they remain vital to an understanding of other aspects of capital, and as connectors between economic theory and broader sociological and philosophical concerns.

External link
Labour Theory of Value F.A.Q. by Robert Vienneau. Includes an overview of 20th century debates in the labour theory of value.