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The labor theory of value is quite an old economic concept dating back at least to Adam Smith. Today, however, it is most commonly associated with the communist theories of Karl Marx.

A careful consideration of the concept of value, itself, refutes the labor theory of value.

The labor theory of value holds that the inherent value of something is determined by the labor required to create or obtain that thing. Adam Smith considered two types of value, utility and exchange. Utility value is the usefulness of an object. Exchange value is the worth of the object in trade. These two values are often in opposition. Smith used the example of water which often has a high utility value but a very low exchange value. This paradox, in itself, is a step toward the refutation of the theory.

Marx, on the other hand, considered value to be intrinsic. The value of the object was simply a reflection of the labor required to obtain that.

The primary problem with the labor theory of value is the narrow definition of value itself. Value can have many meanings. Those used above are just some of those. Ultimately, however, value is defined by the individual. The broader concept of personal values covers utility value, exchange value, intrinsic value and much more. A person can value family and friends. The value an individual places on the environment is often not considered in economics but is often considered when that individual makes an economic decision.

And, therein lies another problem with the economists view of value. Economists often focus narrowly on trade, while a more broad definition of economics is far more useful when considering value. When economics is looked at as the study of decision making in situations of scarcity, a wider view is taken.

All humans are making decisions on a continuous basis based on conditions of scarcity. Whether it's scarcity of resources, scarcity of time or any other limitation, people are making economic decisions. In that decision making process they are constantly weighing their values in making such decisions.

Every individual has different values from every other. This is where most economic study fails. Making a trade, in and of itself, takes labor. And, whenever a trade takes place, all participants in that trade profit, or have an increase based on their own values system. Otherwise, no one would ever go to the effort to make any sort of trade. But, from a third party's point of view, a person not involved in the trade, there is not necessarily any increase in value.

Beyond the consideration of individual values systems, not all labor results in an equal increase in value. There is obviously useless labor that causes no external increase in value whether utility, exchange or intrinsic. Someone might exercise rigorously for their own values of better health, but that labor is likely to provide no value to anyone else. And, some person's labor creates greater value due to that individual's skill, knowledge or creativity.

Only by ignoring the diverse values held by each and every individual can the labor theory of value have any meaning. But, to ignore those differences is to ignore the very basis of economics.

Learn more about this author, Keith Hamburger.
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