Is Marx's “Labor Theory of Value” true? What's LoV Got to Do with It?

Jim Devine

Brad deLong of U.C.-Berkeley economics writes that: >The LTV [“labor theory of value”] is not true: average market prices are not labor values, and the deviations of the average prices of particular commodities from their labor values are not simple redistributions of “surplus value” from boss to boss…. <

It's hard to say that Marx's “labor theory of value” is “not true” if one doesn't understand it, just as it's hard to say that it's “true” if one doesn't understand it. In fact, I think there's a lot of questions about what “it” is.

In fact, it's unclear what to call “it.” The “labor theory of value” is too easy to telescope into David Ricardo's “labor theory of price,” in which amounts of labor that were needed to produce a commodity determines its price (98 percent of the time). This in turn gets us into writing complex mathematical equations for the determination of prices and endless debates about how to mathematically “transform” values into prices, all of the time assuming that values and prices are totally independent phenomena, so that one (values) can be used to derive the other (prices). On top of that, we get into emphasizing market equilibrium conditions (such as the equalization of profit rates between industries), even though markets are seldom, if ever, in equilibrium. That is, we often see monopolies, profit rates that aren't equalized between industries, working conditions and wages that aren't equalized, etc.

That road is a dead end, as indicated by the long and generally fruitless debate over the so-called “transformation problem.” So we need to start from scratch. Since Marx himself never used the phrase “labor theory of value” except to describe others' theories, I'll use his phrase, “the law of value” (LoV) instead.

One thing that should be clear from the start is that the “LoV” does not assert is that “average market prices” for each market equal “labor values.” Quite the contrary: deviations of prices from values are just as important as their connection with each other. Marx was quite conscious before he started Capital that values and prices deviated from each other. In fact, each commodity has both a value and a price.1 They should be seen as two different characteristics of each commodity. The price represents how a commodity is “valued” by individuals in the market. The value, on the other hand, represents how that commodity is “valued” by capitalist society as a whole. It represents the contribution of the labor that went into producing that commodity to the total societal labor process.

Marx's “law of value” is first and foremost not a theory of prices. Economists have typically approached Capital assuming that it's about prices and pricing, but that seems more a symptom of commodity fetishism than a product of a serious reading. That assumption gets in the way of a true understanding.2 If Marx had wanted to study pricing, he would have started with supply and demand — or a Ricardian general equilibrium parable. Rather, the LoV is a theory of social relations between people.3 He sees prices as obscuring these social relations (that's his theory of commodity fetishism in a nutshell), so he uses values instead. If prices actually equaled values, then much of the social relations of capitalism would be more obvious to the casual observer within the system and to the economist. But they don't so, Marx needed the “acid of abstraction” to cut through surface appearances. That's what the law of value is for.

Whereas NC economists start their analysis with the isolated individual person coping with scarcity4 and then move on to trying to understand the common-sense but superficial world of markets. Marx, on the other hand, starts with society, the society that limits, shapes, and sets the context for the operations of individuals and markets.5

As many observers have observed, Marx starts with the abstract and moves to the concrete. In volume I, he starts with an abstract commodity-producing society, one without labor-power, capital, or exploitation. Under these weird conditions, on average, prices equal values, because of the zero degree of exploitation. Even then, there are lots of deviations due to the constant fluctuations of supply and demand. This analysis also provides some insights into commodity exchange in general and sort of a moral yardstick (from the capitalists' own point of view) for judging capitalism, i.e., equal exchange under which prices equal value.

It turns out that capitalism fails according to its own moral yardstick, since capitals are able to exploit labor despite (the assumption of) equal exchange -- and in the end such equal exchange does not prevail. That's the subject of Capital volume I after chapter 3: he deals with capitalism, bringing in labor-power, capital, and exploitation (while showing that profits cannot be created simply via buying and selling but must be produced by labor). However, it's a very abstract capitalism, since he abstracts from the differences amongst the various capitals. So we can talk about volume I describing a “representative capital” -- or alternatively, about a “societal factory” in which capital in general faces labor-power in general in an abstract class conflict.6

In this story of abstract capital, one of the key differences between capitals that's abstracted from is differences in the “organic composition of capital” (differences in technology). Nor are there any land or scarcity rents. So, just as in the first three chapters, values = prices. It's much more intelligent than the common orthodox economist's assumption that an aggregate production function exists, since Marx is talking about the shared characteristics of diverse capitals, i.e., the exploitation of labor and the accumulation of capital. But it's an aggregate theory, a macrofoundation for the microeconomics of volumes II and III of Capital.

Here, he developed the central conservation principle that I think defines the “LoV” more than anything else except the theory of commodity fetishism: as any point in time, the total of all surplus-value produced in the exploitation process of capitalism as a whole equals the total of all property income (profits, interest, rent, some of taxes) in that society, just as the total labor done in capitalist society equals the total price of the commodity produced.7

It's only in volume II that Marx gets to microeconomics of the sort that economists like to talk about (and typically talk about exclusively). He brings in the role of time -- metamorphoses of capital, the circuits of capital, turnover time, introducing the differences amongst capitals. He turns to discussions of the relations between different types of industries (in the famous but often-misinterpreted reproduction schemes) while being very explicit that he is assuming that values = prices.

In volume III, he not only brings up the differences among capitals but looks at how they interact with each other. At this point what was obvious all along to Marx comes out: prices don't equal value, while individual profits don't equal the surplus-value that each individual capitalist organized the production of (since in reality, organic compositions aren't equal between industries). Supply and demand work to make sure that some capitalists are rewarded more than indicated by their workers' contribution to the societal surplus-value. suppose that an enterprise has extremely “capital intensive,” having a high organic composition of capital. If this firm were to be rewarded according to its workers' contribution of surplus-value, then its rate of profit would be below average for society. Thus, the capitalist running the business would like to leave this sector post-haste. But this exit from the industry reduces the supply of the commodity being produced, raising its price. This makes the enterprise's operations more profitable, keeping most firms from leaving. In sum, prices (and supply and demand) work here to allocate profits in a way that tends to equalize the rates of profit between sectors.

In fact, someone can earn revenues and profits without actually contributing to total value or total surplus-value, as with those unproductive folks in the FIRE (finance, insurance, & real estate) sector who simply gain from the redistribution of surplus-value from other sectors (rather than actually producing surplus-value). They receive revenues and profits because people within the system find that they have little choice but to deal with financiers, insurance companies, and real estate agents. “Supply and demand” redistribute surplus-value to that sector. And a redistribution it is, since the conservation principle referred to above applies. The FIRE sector is able to capture a piece of the aggregate surplus-value pie even though they don't contribute to it.8

The theory of land rent is very similar. The ownership of land does not contribute to the total surplus-value produced in society. However, land is a necessary input to production, so that those who own it can deny its use to others. Thus, they can and do receive a chunk of society's surplus-value. (This, in short, is the theory of “absolute rent.”) Further, some land is better than other land, so its owners can get more than this basic amount of rent (“differential rent”).

To summarize, Marx's “LoV” is a societal theory (seeing the “economy” as implicitly embedded in society), emphasizing the way in which commodity fetishism -- volume III's illusions created by competition -- obscures the reality of capitalist society, using values as a conceptual tool for prying out that reality, while seeing that society as a unified totality involving the exploitation of labor, so that those who receive profits, interest, or land-rent benefit from exploitation even if they don't exploit labor themselves.

Is the LoV “true”? What are the criteria used to answer such questions? Using the standard ones, this theory is logically consistent and hardly contradicts empirical reality (though the discussion above was still at a high level of abstraction). It hardly contradicts supply and demand theory. Further, this theory, unlike the orthodox economists' one, does not leave out important issues of societal relations and exploitation. That is, it is not one-sided, incomplete. All of these issues can be discussed more, but I'll stop here for now.


1. By the way, Duncan Foley's article in a recent issue of the Review Of Radical Political Economics (volume 32, no. 1, March 2000) is quite good on this subject.

2. Hey, I've been there. I assumed that Capital and the “LoV” was about pricing, too. Then I read the book. The section on commodity fetishism and the end of volume III are especially revealing of what Marx's purposes were, as is the first page of volume III.

3. I know that this makes him look like a mere worm in the eyes of orthodox economists, but Marx was a sociologist. He saw the economy as part of society.

4. This is the Robinson Crusoe story, ignoring all the social relations aspects of the original book, including colonialism, as Steve Hymer pointed out years ago in Monthly Review.

5. I wish he had written like a modern academic, explaining what he was talking about and the progress of his presentation better. The first page of vol. III is a notable exception.

6. He doesn't deal seriously with labor's side of the conflict, as Mike Lebowitz stresses in his Beyond Capital, so that it's mostly a story of capital rampaging over labor. I guess Marx hoped that it would arouse labor to resist and fight for something better.

7. This assumes a constant “Monetary Expression of Labor Time.” Even so, it's more complicated if we bring in the articulation with other modes of production or the family, but Marx doesn't do so.

8. They do contribute in the sense that Doug Henwood can write interesting books about them, though.


James Devine, “The Utility of Value: the 'New Solution,' Unequal Exchange, and Crisis,” Research in Political Economy (Paul Zarembka, ed.), vol. 12, 1990: pp. 21-39.

_____, “The Law of Value and Marxian Political Ecology” In Jesse Vorst, Ross Dobson, and Ron Fletcher, eds., Green on Red: Evolving Ecological Socialism (Socialist Studies/Études Socialistes, vol. 9, 1993), Winnepeg/Halifax, Canada: Society for Socialist Studies/Fernwood Publishing, pp. 133-54.

_____, “What is 'Simple Labor'? A Re-Examination of the Value-Creating Capacity of Skilled Labor,” Capital and Class (U.K.), issue 39, Winter 1989: pp. 113-131.

Jim Devine &