Karl Marx's Labor Theory of Value In developing a theory of relative prices, or the quantitative relationship between things or co odities,

Marx essentially used !icardo's theory of value" #o odities anifest in their prices certain quantitative relationships, and this eans, according to Marx, that all co odities ust contain one ele ent in co on that ust exist in certain easurable quantities" Marx considered use value, or utility, as a co on ele ent but re$ected this possibility" %e then turned to labor as the co on ele ent and concluded that it is the a ount of labor ti e necessary to produce co odities that governs their relative prices" &s an advocate of a labor theory of value, Marx wor'ed through the various proble s inherent in the for ulation of a labor theory of value, as !icardo had before hi , and essentially followed the !icardian solutions" Marx was able to give a clearer presentation of the difficulties of a labor theory of value, but he was no ore able to solve the proble s than !icardo had been" To Marx, the only social cost of producing co odities was labor" &t the highest level of abstraction, Marx disregarded the differing s'ills of labor and conceived of the total labor

available to society for co odity production as a ho ogeneous quantity, which he called abstract labor" The production of any co odity requires the use of a part of the total supply of abstract labor" The relative prices of co odities reflect the a ounts of this abstract supply of labor, easured in cloc' hours, necessary to produce the goods" This raises what we have called the s'illed labor proble , na ely, that labor with varying s'ills will have varying outputs" Marx then reduced the level of abstraction and et this issue by easuring the a ount of labor required to produce a co odity by the socially necessary labor ti e, which is defined as the ti e ta'en by a wor'er with the average degree of s'ill possessed by labor at the ti e" Labor with s'ill greater than the average is reduced to the average by easuring its greater productivity and a'ing an appropriate ad$ust ent" If, for exa ple, a given laborer, because of greater natural ability, produced ()) percent ore than a laborer with average s'ills, each hour of the superior labor would count as two hours of average labor" In this anner, all labor ti e is reduced to socially necessary labor ti e" *e saw that + ith beca e involved in circular reasoning by easuring differences in labor s'ills by wages paid to labor" Marx sidestepped the entire issue by assu ing that differences in labor s'ills are easured not by wages but

by differences in physical productivity" &nother proble raised by a labor theory of value is how to account for the influence of capital goods on relative prices" Marx used !icardo's solution to this proble , aintaining that capital is stored,up labor" The labor ti e required to produce a co odity is, then, the nu ber of hours of labor i ediately applied plus the nu ber of hours required to produce the capital destroyed in the process" Marx's solution, li'e !icardo's, is not co pletely satisfactory, because it fails to allow for the fact that where capital is used, interest ay be paid on the funds used to pay the indirect labor stored in the capital fro the ti e of the pay ent of the indirect labor until the sale of the product" & labor theory of value ust also address the issues raised by differing fertilities of land" -qual a ounts of labor ti e will produce varying outputs when applied to land of different fertilities" The labor theory of value that Marx developed in the first two volu es of #apital co pletely neglects this proble , but in Volu e III he et the question by adopting !icardo's theory of differential rent. the greater productivity of labor on land of superior fertility is absorbed by the landlord as a differential rent" #o petition will cause the rent on superior grades of land to rise until the rates of profit on all grades of land are equal" !ent, then, is price,deter ined, not

price,deter ining" & final difficulty inherent in a labor theory of value derives fro the influence of profits on prices" /ne of the crucial aspects of this proble involves labor,capital ratios in various industries" Industries that are highly capital,intensive will produce goods whose profits are a larger proportion of final price than industries of lesser capital intensity" 0ecause of his close study of !icardo, Marx was fully aware of this proble , but throughout the first two volu es of #apital he avoided the issue by assu ing that all industries and fir s have the sa e capital intensity" %e dropped this assu ption in Volu e III, however, and atte pted to wor' out an internally consistent labor theory of value" 0ut he failed in this, as !icardo had before hi " 0efore exa ining this proble ore closely, we need to beco e ore fa iliar with so e other Marxian concepts"