Labor Theory of Value

BIBLIOGRAPHY

Fundamentally, the labor theory of value is a prohibition: it asserts that produced means of production cannot be sources of surplus value, and hence of profit. Once seen as an essential component of Marxian economics, it is now a divisive issue even amongst economists who describe themselves as Marxist. It is rejected by many non-neoclassical economists, and of course by the neoclassical school in general. However, it is still championed by several sub-schools of Marxian economics, and will no doubt always be part of the ideological appeal of anti-capitalist political parties.

The concept that work, or relative effort, was the just determinant of the ratio in which two commodities were freely exchanged was first aired by Aristotle (c. 450–388 BCE) in his Nicomachean Ethics. Starting from the premise that “the good has rightly been declared to be that at which all things aim” (Bk. 1, chap. 1), Aristotle deduced that, for justice to prevail, commodities should exchange in relation to the amount of work embodied in them: “Let A be a builder, B a shoemaker, C a house, D a shoe. The builder, then, must get from the shoemaker the latter’s work” (Bk. 5, chap. 5). However, Aristotle subsequently added demand, or utility, as the basis of exchange, thus conflating the two great traditions in the determination of value and exchange: that relative prices are set either by the objective effort expended in production, or by the subjective utility enjoyed in consumption.

By the time of Adam Smith (1723–1790) and David Ricardo (1772–1823), these two perspectives were regarded as essentially contradictory. The then-dominant classical school subscribed to the former, while the then-nascent neoclassical tendency asserted the latter. However, though Smith identified work as the basis of exchange, and labor as its measure, he also argued that nonhuman inputs could be productive, and hence sources of profit: “labouring cattle, therefore, … not only occasion … the reproduction of a value equal to their own consumption, … but of a much greater value” (Smith [1776] 1904, Bk. 2, chap. 5). He also argued that only “in that early and rude state of society which precedes both the accumulation of stock and the appropriation of land” (Bk. 1, chap. 6) could commodities actually exchange in proportion to the labor embodied in them.

Ricardo also treated labor as a measure of value, rather than its sole source. The assertion that labor was not only the measure but also the source of value, and hence profit, was first made by Karl Marx (1818–1883).

Marx argued that profit could originate even when commodities exchanged at their costs of production. He assumed that commodities exchanged at their value, where value was “socially necessary labor-time,” so that capitalists purchased labor at its value, which was a subsistence wage (the value of labor-power, signified by v ). These commodities might take, say, six hours of direct and indirect labor to produce (where indirect labor included the depreciation of machinery and consumption of raw materials).

Marx then drew a crucial distinction between labor (actual work activity) and labor-power (working ability). Workers receive a wage that is equal to the value of their labor power; however, the value created by workers will normally be greater than this. Surplus value (signified by s ) arises from the fact that the working day is longer (typically twelve hours in Marx’s day) than the time required for laborers to create value equal to the value of laborpower (say, six hours). Surplus value arises from the unpaid labor time that accrues to capitalists as a legal right, and not because of capitalists’ contribution to production. The capitalist gains this unpaid labor time “for free” from the labor contract. Expansions in the length of the workday, increases in the speed of work, or productive changes in the organization of work will all extend this gap between the value of labor-power (v ) and the value of labor activity (v + s ), giving rise to a surplus (s ).

So, in Marx’s analysis, surplus value does not arise because commodities exchange above their value: the commodity that is produced is exchanged according to its value, and laborers are paid a wage that is equal to the value of labor-power. Exploitation, which for Marx means the creation of surplus value, occurs because workers create value that is greater than the value of their laborpower. Marx argued that labor-power is the only commodity with the capacity for value greater than its own value, and he regarded the distinction between labor and labor-power as his important contribution to political economy.

Marx assumed that s /v, the “rate of surplus value,” was constant across industries, though it could of course vary over time. He was emphatic that all other inputs to production (signified by c and measured by their depreciation) made no net contribution to surplus: “However useful a given kind of raw material, or a machine … may be, though it may cost £150 … it cannot, under any circumstances, add to the value of the product more than £150” (Marx [1867] 1887, chap. 8). Surplus, and therefore profit, thus emanated solely from labor.

The rate of profit, which Marx defined as s /(c + v ), was positively related to the rate of surplus value and negatively related to the ratio of c to v (c /v, the ratio of capital to labor, which Marx termed the organic composition of capital ). Allied with an alleged tendency for the organic composition of capital to rise over time, this led to Marx’s prediction of a falling rate of profit that would ultimately lead to the demise of capitalism via a socialist revolution.

Critics of Marx’s economics have long argued that the dilemma for the labor theory of value was that it could not be made consistent with the competitive equalization of the rate of profit across different industries, when the organic composition of capital differed from one industry to another. Marx’s solution of what became known as the transformation problem was strongly challenged by Ladislaus von Bortkiewicz (1868–1931) and remains a contentious issue within Marxian economics.

By the end of the twentieth century, economists inspired by Marx had broken into two broad camps: those who accept the labor theory of value and those who do not (most of whom would describe themselves as belonging to other schools of non-neoclassical thought). Indeed, one of the most influential present-day economists inspired by Marx, Ian Steedman, believes that “the project of providing a materialist account of capitalist societies is dependent on Marx’s value magnitude analysis only in the negative sense that continued adherence to the latter is a major fetter on the development of the former” (Steedman 1977, p. 207).

Anwar Shaikh (1984) presents an orthodox defense of Marx’s value theory. Two other important attempts to sustain the labor theory of value are the temporal single system interpretation that the determination of price from value is a dynamic process in which the labor theory of value can be sustained (Foley 2000), and the empirical argument that, while subject to theoretical criticism, the proposition that prices are proportional to labor values is empirically valid (Cockshott and Cottrell 1998, 2005). Both the theoretical and empirical defenses are subject to criticism from other non-neoclassical economists (Mongiovi 2002; Podkaminer 2005).

Most critiques of the labor theory of value, as with Steedman’s pivotal contribution, effectively discourage consideration of other aspects of Marx’s thought, such as his philosophy of dialectical materialism. An exception here is Steve Keen’s argument that Marx’s philosophy itself contradicts the labor theory of value. Keen argues that, after 1857, the concept of a dialectic between the objective use-value of a commodity and its exchange-value became Marx’s fundamental axiomatic base, rather than the labor theory of value itself.

Marx mocked Ricardo for not having an explanation of the gap between the value of labor and labor-power: “Value of labour is not identical with wages of labour. Because they are different. Therefore they are not identical. This is a strange logic. There is basically no reason for this other than that it is not so in practice.” In contrast, Marx argued that “what the capitalist acquires through exchange is labour capacity: this is the exchange value which he pays for. Living labour is the use value which this exchange value has for him, and out of this use value springs the surplus value and the suspension of exchange as such” (Marx [1857] 1973, pp. 561–562).

The distinction between use-value and exchange-value was also central to Marx’s explanation of surplus value in Capital : “The past labor that is embodied in the labor-power, and the living labor that it can call into action … are two totally different things. The former determines the exchange-value of the labor power, the latter is its use-value” (Marx [1867] 1887, chap. 7, sec. 2). Keen (1993) asserts that Marx misapplied this dialectic to machinery to sustain the labor theory of value, and that when properly applied, Marx’s dialectic concludes that the means of production are also sources of surplus value. This critique thus maintains Marx’s philosophy, while also rejecting the labor theory of value.

SEE ALSO Exchange Value; Immiserizing Growth; Marx, Karl: Impact on Economics; Primitive Accumulation; Relative Surplus Value; Surplus Value; Transformation Problem; Value

BIBLIOGRAPHY

Aristotle. [c. 350 BCE] 1980. Nicomachean Ethics. Trans. W. D. Ross. Oxford: Oxford University Press. http://classics.mit.edu/Aristotle/nicomachaen.html.

Cockshott, W. Paul, and Allin F. Cottrell. 1998. Does Marx Need to Transform? In Marxian Economics: A Reappraisal, ed. Riccardo Bellofiore, Vol. 2, 70–85. New York: St. Martin’s Press.

Cockshott, W. Paul, and Allin F. Cottrell. 2005. Robust Correlations between Prices and Labour Values: A Comment. Cambridge Journal of Economics 29: 309–316.

Foley, Duncan K. 2000. Recent Developments in the Labor Theory of Value. Review of Radical Political Economics 32: 1–39.

Keen, Steve. 1993. Use-value, Exchange-value, and the Demise of Marx’s Labor Theory of Value. Journal of the History of Economic Thought 15: 107–121.

Marx, Karl. [1857] 1973. Grundrisse. Trans. Martin Nicolaus. London: Penguin. http://www.marx.org/archive/marx/works/1857/grundrisse/.

Marx, Karl. [1867] 1887. Capital. Vol. 1. Trans. Samuel Moore and Edward Aveling. Moscow: Progress Publishers. http://www.marx.org/archive/marx/works/1867-c1/index.htm.

Mongiovi, Gary. 2002. Vulgar Economy in Marxian Garb: A Critique of Temporal Single System Marxism. Review of Radical Political Economics 34: 393–416.

Podkaminer, Leon. 2005. A Note on the Statistical Verification of Marx: Comment on Cockshott and Cottrell. Cambridge Journal of Economics 29: 657–658.

Shaikh, Anwar. 1984. The Transformation from Marx to Sraffa. In Ricardo, Marx, Sraffa: The Langston Memorial Volume, eds. Alan Freeman and Ernest Mandel, 43–84. London: Verso.

Smith, Adam. [1776] 1904. An Inquiry into the Nature and Causes of the Wealth of Nations. Ed. Edwin Cannan. London: Methuen. http://www.econlib.org/library/Smith/smWN1.html.

Steedman, Ian. 1977. Marx After Sraffa. London: NLB.

Steve Keen

Value, Labor Theory of

BIBLIOGRAPHY

The labor theory of value is the general name given to a set of economic doctrines developed by the English classical school, particularly Adam Smith and David Ricardo, and adopted by Karl Marx. Very loosely, it states that the value of goods is derived from labor, and, in its socialistic versions, that the laborer is therefore exploited when he does not receive the full value of all production. It is held only by Marxists today. In the view of Marxists and some others, it is the foundation for Marx’s analysis of the historical tendencies of the capitalist system, including his prediction of its eventual downfall. Given this Marxist interpretation, the labor theory of value could be said to play an integral part in determining how communist leaders view and deal with capitalist countries. It should be admitted, however, that other commentators (see, for example, Robinson 1942) sympathetic to Marx hold that the essentials of his analysis of capitalism can be assembled from his work independently of this theory. There is also some evidence that the labor theory of value affects the internal planning of communist countries, specifically in the pricing and allocation of investment [see Communism, economic organization of].

The doctrine is obscure, controversial, and has provoked an enormous literature. The word “value” has different meanings for different authors and, not infrequently, in the works of one author. The first section of this article will discuss the modern interpretation of the doctrine and the conditions for its validity. Subsequent sections will treat its different meanings in the works of Smith, Ricardo, and Marx.

The modern interpretation—relative prices . The theory of value, or exchange value, in modern (Western) economics is an explanation of relative prices or exchange ratios. If a hat costs $10 and a shirt $5, the theory of value attempts to explain why one can, in effect, exchange one hat for two shirts, rather than, say, one-half shirt or ten shirts. Following this definition the labor theory of value is interpreted as asserting that commodities “normally” or in the long run tend to exchange in proportion to the labor time used, or “contained,” in their production. In the above example the ratio is two for one, according to the theory, because twice as much labor has been used to make the hat as the shirt.

Adam Smith first attempted to enunciate the conditions under which this labor theory of relative price would hold. Suppose, to follow his example (1776, book I, chapter 6), we have a nation of hunters consuming only deer and beaver. Suppose further (1) that land is so abundant that it has no price, (2) that there is no known equipment for hunting either animal, and (3) that all hunters are born and remain equally willing and able to hunt both animals. Under these circumstances if it takes twice the labor to kill one beaver as one deer, one beaver will normally exchange for two deer, and the modern interpretation of the labor theory of value (relative price) will hold. For if the rate of exchange were temporarily, say, three to one, while labor costs were two to one, hunters would have an incentive to shift from deer to beaver until the increased supply of beaver and the reduced supply of deer would bring the exchange rate down to two to one.

The purpose in such a parable is to throw light upon why this type of labor theory of value does not hold in a private enterprise economy in the actual world. It may be that special skills, natural or acquired, are necessary for beaver but not for deer; that hunters consider hunting beaver arduous or disgraceful; that the land on which beaver are hunted is limited and in private ownership; or finally, that special equipment must first be constructed in order to hunt beaver but not deer. In all these circumstances the demand for beaver relative to the supply of these scarce factors may be such that a premium on beaver or a discount on deer will emerge, compared to the labor times required for their production. The sum of these premiums or discounts will go to the now scarce (and therefore economically “productive") factors in the form of skilled-labor rates, rents of land, or rates of interest.

A special question might be raised as to why the equipment mentioned above should invalidate the labor theory of exchange value, if we count the labor required to produce the equipment as well as the labor of hunting in the total labor requirements. We do count such labor, but a premium still emerges. The production of the equipment requires that the hunter (or his employer) give up the beaver or deer that he could have caught in this period in exchange for future beaver. In an economy with a positive rate of interest, this tying up of “funds” (saving) will not be done unless there is a premium in the price of beaver equivalent to the amount of this interest. This “waiting” is the service provided by capital, and interest is its price, which must be over and above total payments to labor.

Smith concluded that in the actual world, as opposed to his nation of hunters, goods exchange in proportion to their total cost of production rather than in proportion to their labor content. Cost of production would be calculated by the going rates of wages, profits, and rents, and by the quantities of labor, capital, and land required to produce any commodity. Cost of production per unit was conceived as not varying when the amount produced of a commodity changed. Thus, a change in demand would merely change the amount produced of a commodity, not its relative price.

Ricardo and Marx accepted the essentials of Smith’s argument on this question (as did the lesser classical economists and the pre-Marxian socialists). However, all three developed different, and from their viewpoint more important, meanings of value, and to these concepts we now turn.

Absolute value in Adam Smith . While Smith defined “exchange value” in the modern sense, he also used the term in the sense of “absolute value.” By absolute value we mean a number that may be attached to a commodity independently of any exchange through buying and selling. Smith conceived of an hour’s labor as requiring at all times and in all places the same amount of psychological cost in pain, or disutility. In his words, the laborer “must always lay down the same portion of his ease, his liberty or his happiness” ([1776] 1937, p. 33). The (absolute) value of a commodity is defined by the amount of this disutility that it can purchase or command. This is the “labor-command” theory (or better, definition) of value. It is a measure, not a determinant; clearly, at any one time and place the amounts that two commodities can command will simply be in proportion to their money price, however the latter is determined.

Smith’s psychology is primitive. He apparently wished to use the labor-command definition of absolute value for welfare judgments. If labor has the same disutility over time and space, we can compare the welfare of the laborer at different times and places by the amount of goods an hour of labor can purchase. This notion is not without interest today.

Quite apart from exchange value and absolute value, Smith scattered throughout his writing many comments on labor which have bewildered his followers and scholars and which were significant for the ideological development of socialism in the nineteenth century. He spoke of labor as “the fund which originally supplies it [the nation] with all the necessaries and conveniencies of life” (ibid., p. lvii); he spoke of profits and rents as deductions from the product of labor (pp. 48-49); and he referred to labor as the “original purchase money” (p. 30) of all things.

It is not easy to interpret these statements. It is impossible to imagine that Smith thought of labor as the sole productive agent in a physical or in an economic sense, since he explicitly rejected this view elsewhere. It is possible that he was anxious to counteract what he conceived to be the prevailing idea, that money is the source of national wealth. He wanted to point out that economic life consists essentially in the exchange of services in the form of goods, and since labor is the most important quantitatively, it may be understandable that he took labor services as representative of all services. Thus, we may interpret him as saying that it is labor and not money that is the source of wealth, not that it is labor alone and not labor, capital, and land. It may also be that he thought of labor as the sole agent of production that entails subjective psychological cost; it should be noted that even today we refer loosely to the national product as exhibiting “labor’s” productivity.

Ricardo . Ricardo accepted Smith’s conclusion that exchange values were, in principle, proportional in the long run not to labor requirements but to money costs. However, by a process of abstraction he concluded that changes in long-run exchange values were very close to changes in the labor content of commodities. He eliminated land rent as a relevant money cost by considering only those agricultural commodities produced on soils too poor to yield any rent. He argued that skill premiums between skilled and unskilled labor are constant over long periods and thus would not cause changes in relative values. He was left with changes in the rate of interest on capital as a cause of divergence between (changes in) exchange ratios and (changes in) labor content. Ricardo was insistent that such divergences occur; he was equally insistent that they were quantitatively unimportant. And he was prepared to use labor content in applied problems as an approximate determinant (or “regulator") of exchange values.

Ricardo also had a labor theory of absolute value. It was not until late in his life that he distinguished sharply between absolute and relative value, but both concepts were implicit in his earliest work on value. For Ricardo the absolute value of a commodity was the quantity of labor it contained, not what it could command. Given, therefore, his belief that exchange ratios are close to labor ratios, the ratio of two absolute values would be close to, although not equal to, exchange ratios. There is some evidence that Ricardo thought of capital, i.e., “waiting,” as well as labor, as a determinant of absolute value. Yet the preponderant evidence points to labor alone. In the only place that Ricardo defined absolute value, he mentioned only labor ([1815-1823] 1951, p. 397).

More important, absolute value has meaning only in terms of one homogeneous unit. Ricardo’s purpose was to find an expression for the total output of all goods and services. To describe this as x units of labor and y units of capital (waiting) is not satisfactory unless we have a link between x and y. Similarly there is no meaning in the summation of the ratio 2 deer = 1 beaver over all deer and beaver. But there is meaning (even if modern economists would question its usefulness) in the sum of the labor hours in all goods, and Ricardo considered the aim of political economy to be the determination of how such an aggregate is allocated among total rents, profits, and wages, similarly measured. Thus Ricardo was not so much interested in relative prices for their own sake. (The modern notion of real national product—the money value of all goods and services deflated by a price index—was not available to him.)

Marx . Scientifically, if not ideologically, Marx’s purposes were very similar to those of Ricardo, whom he considered his intellectual mentor. Marx, in effect, defined “exchange value” as absolute and as equal to labor content. (Relative value, or exchange value in the modern sense, was the quite distinct “prices of production.”) He attempted a proof of this definition along the following lines: If two shirts have a value equal to one hat, we may write 2 shirts = 1 hat. What is implied by the symbol ” = “? It tells us that in two things there is some common quantitative entity. Marx eliminated the possibility that this common thing may be a physical property of shirts and hats, not on observed empirical grounds, but with the argument that the physical properties have to do with the usefulness of commodities whereas usefulness and exchange value are uncorrelated. He concluded that the common entities must be the amounts of labor contained in the commodities. (See 1867-1879, vol. 1, chapter 1.)

The argument could be disputed on several grounds. Most fundamentally it is a play on the symbol “=.” It is an illegitimate if ancient procedure to use an undefined word and then to establish a point of fact by using a particular definition of the word. The use of “=” does not, in general, require homogeneous units. Apart from this, there are other characteristics that the equality could express. A later school would have suggested marginal utility; but in ordinary conversation it would seem that it simply means the quantity of money which must be paid for the respective quantities.

If we choose to ignore this proof we may regard Marx as defining value, like Ricardo, as the labor contained in a commodity and aggregating, like him, this quantity over all commodities. Again like Ricardo, he was interested in the distribution of this aggregate. Subtracting from the aggregate the quantity of commodities (measured in labor) that make up wages, we have “surplus value.” Labor is by definition “exploited” whenever it receives less than the total product which it, by virtue of the method of measurement, has “produced.”

In another dubious equality, Marx equated the sum of labor-defined values with the aggregate of money values of commodities (ibid., vol. 3, part 2). The relationship between such values in labor and prices in money is termed the “transformation problem.”

None of the three great exponents of the labor theory of value held the labor theory of relative prices or exchange value in the modern sense. Ricardo was willing to use it as an approximation. The labor theory of value therefore means a theory of absolute value. For Smith this was defined by labor command as a method of making welfare comparisons. For Ricardo and Marx, the definition of absolute value as labor time was a method of aggregating total output as a preliminary to investigating its distribution.

Much confusion has been caused by the failure of modern and neoclassical economists to perceive the distinction between exchange ratios and absolute values and to appreciate the purposes of Ricardo and Marx in using the latter. On the other hand, while Marxist writers have been more conscious of the distinction, they have generally supposed that relative values are in some sense the “phenomenal” form which can be derived from an underlying “substance” or “foundation” in absolute value. In fact they are radically different and incomparable.

Donald F. Gordon

[See also Economic thought, article onsocialist thought; Utility; and the biographies of Marx; Ricardo; Smith, Adam.]

BIBLIOGRAPHY

Bladen, V. W. 1938 Adam Smith on Value. Pages 27-43 in Essays in Political Economy in Honour of E. J. Urwick. Edited by H. A. Innis. Univ. of Toronto Press.

Blaug, Mark 1962 Economic Theory in Retrospect. Homewood, 111.: Irwin. → Contains valuable bibliographical appendices.

Cassels, John M. 1935 A Re-interpretation of Ricardo on Value. Quarterly Journal of Economics 49:518-532.

Dobb, Maurice (1937) 1940 Political Economy and Capitalism: Some Essays in Economic Tradition. Rev. ed. New York: International Publishers.

Gordon, Donald F. 1959 What Was the Labor Theory of Value? American Economic Review 49:462-472.

Marx, Karl (1867-1879) 1925-1926 Capital: A Critique of Political Economy. 3 vols. Chicago: Kerr. → Volume 1: The Process of Capitalist Production. Volume 2: The Process of Circulation of Capital. Volume 3: The Process of Capitalist Production as a Whole. Volume 1 was published in 1867. The manuscripts of volumes 2 and 3 were written between 1867 and 1879 and first published posthumously in German in 1885 and 1894.

Meek, Ronald L. 1956 Studies in the Labour Theory of Value. London: Lawrence & Wishart. → A thorough commentary from the Marxist point of view.

Ricardo, David (1815-1823) 1951 Works and Correspondence. Edited by Piero Sraffa. Volume 4: Pamphlets and Papers, 1815-1823. Cambridge Univ. Press.

Robertson, Hector M.; and Taylor, W. L. 1957 Adam Smith’s Approach to the Theory of Value. Economic Journal 67:181-198.

Robinson, Joan (1942) 1947 An Essay on Marxian Economics. London: Macmillan.

Robinson, Joan 1951 The Labour Theory of Value. Volume 1, pages 146-151 in Joan Robinson, Collected Economic Papers. Oxford: Blackwell; New York: Kelley.

Smith, Adam (1776) 1937 An Inquiry Into the Nature and Causes of the Wealth of Nations. New York: Modern Library. → A two-volume paperback edition was published in 1963 by Irwin.

Sraffa, Piero 1951 Introduction. In Volume 1 of David Ricardo, Works and Correspondence. Cambridge Univ. Press.

Stigler, George J. 1952 The Ricardian Theory of Value and Distribution. Journal of Political Economy 60:187-207.

Stigler, George J. 1958 Ricardo and the 93% Labor Theory of Value. American Economic Review 48:357-367.

Sweezy, Paul M. 1942 The Theory of Capitalist Development: Principles of Marxian Political Economy. New York: Oxford Univ. Press.

LABOR THEORY OF VALUE

The labor theory of value may be traced to the writings of John Locke, an English philosopher of the late 1600s. While Locke assumed that all the resources that were found in nature had been provided by God and therefore were common property, he argued that when people took things that had been present in a natural state and reshaped them into products of use for human beings, they mixed their labor with the raw materials, and thus had the right to personal ownership of the resulting products. Indeed, the products that a worker produced became an extension of that worker. Locke employed the labor theory of value to justify private ownership of property, the cornerstone principle of capitalism. He planted the seeds of the ideas that human labor is the unique factor that creates value in commodities, and that the value of any product is approximately determined by the amount of labor that is necessary to produce it.

Karl Marx became familiar with the labor theory of value through his extensive reading of the works of British economists, including Adam Smith and David Ricardo, whose works reflected the pervasive influence of Locke's ideas and accepted the labor theory of value. Ironically, in Marx's hands, the Lockean premises became the basis for an radical critique of capitalism and an implicit justification of socialism. In Marx's theoretical model of a capitalist economy, the workers or proletarians labor with means of production, such as industrial plant and machinery, which are owned by a capitalist. Since the workers own no share of the means of production, they are driven by necessity to work for someone who does own productive property. During the hours of each worker's labor, the worker produces commodities, or products that are bought and sold in the market. The capitalist sells those commodities in order to receive income. The price for which each commodity is sold is called "exchange value" in Marxist terminology. The capitalist must return some of that value to the worker in the form of wages, since workers will not work without some material reward. It is axiomatic in Marx's theory that the value that is returned to the worker is less than that which has been created by the worker's labor. That portion of the value that has been created by the labor of the proletarian, but is not returned to the proletarian, obviously flows to the capitalist, and constitutes "surplus value" in Marx's words.

In Marx's view, surplus value is the excess of the value the proletarian has produced above what it takes to keep the proletarian working, and surplus value is the source of profit for the capitalist. Marx argued that with the development of capitalism, competition would force capitalists to strive relentlessly to extract as much surplus value as possible from their workers. Initially the capitalists would simply increase the hours of labor of their workers and decrease the workers' pay, but that kind of simple intensification of exploitation would soon reach physical limits. The capitalists would then adopt the strategy of increasing the mechanization of production, substituting machine power for human muscle power to an ever-growing degree, with the objective of getting more products out of fewer laborers. Mechanization, by throwing ever larger numbers of workers out of the factories, would ensure the growth of unemployment, which would guarantee that the wages of those who continued to work would be driven down to the subsistence level. Marx believed that he was describing the inexorable tendency of the increasing misery of the proletariat, which would give rise to a progressively sharpening struggle between the proletariat and the bourgeoisie, which, with the final crisis of capitalism, would result in proletarian revolution and the elimination of capitalism.

In the first volume of Capital, which he published in 1867, Marx clearly suggested that the exchange value or market price of a commodity was determined, at least on the average, by the labor which had gone into producing it. Until the end of his intellectual career, Marx continually struggled with the attempt to reconcile the conception of the intrinsic value of a product, which supposedly represented the amount of labor embodied in it, and its exchange value, which in actuality reflected supply and demand. It could be argued that in the third volume of Capital, edited by Friedrich Engels and published after Marx's death, that problem was still unresolved, as indeed it could not be resolved on the basis of Marx's fundamental assumptions.

The labor theory of value was wholly accepted by Soviet Marxist-Leninst ideology as a fundamental theoretical assumption. The premises of that theory explain why Soviet leaders from Lenin to Gorbachev were extremely suspicious of the practice of hiring laborers for wages in private enterprises, since any employment of workers on privately owned property was automatically considered exploitation, the essential source of class struggle. In fact, with the proclamation by Stalin that the foundations of socialism had been constructed in the Soviet Union by 1936, hiring people to work for private employers was prohibited by law. In socialist society, the payment of wages to workers and peasants in collective enterprises was not thought to present any problem, since in theory the means of production in the Soviet Union belonged to those same workers and peasants. In light of the labor theory of value, it is not difficult to understand why, in the late 1980s, when Mikhail Gorbachev finally began to allow limited, small-scale private enterprises, such endeavors were officially termed "individual labor activity" and "cooperatives," avoiding the admission of a relationship between employers and employees in the private sector.

See also: marxism; socialism

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