Let’s talk about resources. In Adam Smith’s time, it seemed obvious that there were two things you needed to make an object or provide a service: natural resources and labor. For example, if you want to make a sandwich, you need land to grow the grain to make the bread, and to feed the pigs to make the ham. Then, you need someone to butcher, cook, and brine the hog, farm, mill, and bake the grain, and you have a sandwich. To make a given object, one needs both resources, but these can be traded off (one may farm less land more intensively) and the relative values will determine the ratio of wages to rents on land. By Marx’s time, the height of the industrial revolution, land became less significant while factories increased in value, which meant you could simplify processes. The bottom line for good production is labor. When you buy something, you’re hiring someone to make it for you. This implies, in an efficient capitalist system, the marginal return to labor will be the same across the economy. If two objects each fetch 10 dollars on the market, the amount of labor to produce one more of either must be the same, or production would shift to the one that requires less labor, because who does more work for the same reward? Thus, the value of a good is the socially necessary labor time to produce it, which is proportional to price. 

This is the labor theory of value, and it is not necessary for being a leftist. It is false, and as far as I can tell it’s a common opinion at Wes (you may have heard/believed it in slogan form: Capital is exploitation). Many Marxists see mainstream economics as having abandoned it in favor of talking about the utility value of goods, or because of some arcane issue about converting value in terms of time into prices. But this isn’t what happened.

The thing is, strangely, lots of people make money without doing any labor at all. You can put cash in random stocks, chill, and slowly you will collect cash (very few investors actually do better than this). Hundred-year-old scotch costs much more than year-old scotch. One of Marx’s great insights was that this doesn’t make any sense. Why should they be paid without adding any value? By his understanding, it must be deceit and violence: exploitation. That is, there are ruling interests that keep control over capital, (which is really congealed former labor) and prevent workers from organizing to utilize this labor themselves.

Needless to say, this is not the view of modern mainstream economists. One reason is that it’s perfectly legal to create worker co-operatives, but it rarely happens, and usually they become more like companies over time. If capital profits purely from exploitation, then worker cooperatives should be able to consistently pay higher wages while offering lower prices. Walmart should be rapidly outcompeted out of existence. You may think that capital keeps this from happening somewhere like the United States, but you have to admit that it’s an implausible explanation for, say, Sweden. So what’s going on?

Well it turns out that to produce something, it takes time. That is, to make anything, you can’t just use labor; you also need to wait. Consider the olive tree. It takes ten years before it bears fruit. Thus, the return from the olive tree has to be greater than the amount of money you put into it, because anyone would rather have X dollars now than in ten years. 

This generalizes broadly. If you make a restaurant it’ll generally operate at a loss for several years. You need someone to front money now so that you can live on it while laboring to make the restaurant, you’ll then need to pay them back more than they gave you or they wouldn’t bother to give you the loan. Amazon only accrued reliable profits starting in 2015. This is essentially why capital makes money (also monopoly rents, but ignore those; they are tiny compared to this).

It is thus not mysterious that stocks pay out money. Companies need money now because producing takes time. They are thus willing to promise lots of money in the future so that they can get some now. Just as they pay their employees for labor, they pay stockholders for waiting to spend later when they could spend today. Capital isn’t congealed labor; its congealed waiting (you can always sell an asset now instead of later profiting from it).

But what does this say about your politics? Well, it means that a system in which people are compensated based on how much work they do, or are equally and democratically compensated based on their labor, is a system in which nothing will be produced at all. If you can do one hour of labor, the first part of a job, which will make money five years in the future, I do the second part five years later, and we both get paid the same amount at the same time, you would never take that deal. No one would ever bother investing if they can’t be compensated. Thus, if you envision a future of egalitarian worker co-operatives, some of those co-operatives will be milking the pay-offs of previous investment, and will be fantastically richer than other co-operatives doing the same labor. People will have to buy in to work there, because otherwise why would you let people get the returns from you having waited? If it is illegal or frowned upon to force people to buy in if they want to work for the wealthy co-operative, then everyone will starve. This system isn’t liberation, it’s a slightly worse version of capitalism (Germany is in some ways the best of both worlds, but it’s probably bad for immigrants). Of course, we can have the government do the investment, and sometimes that’s fine, but, well, it’s fine.

However, none of this means you can’t have egalitarian societies. For example, it doesn’t have to be legal to pass fortunes to your children. We can distribute more money from the highest earners to the least. We can spend a lot of money on schools and healthcare. All of this works. All of this will broaden human flourishing when done cleverly. But it doesn’t have anything to do with capitalist exploitation.


Thomas Hanes can be reached at thanes@wesleyan.edu. Thomas is a member of the class of 2020. 

  • Man with Axe

    The other problem with the labor theory of value is that it ignores two other fundamental principles. First, a good idea is a source of value. Amazon is not profitable just because it waited till now. It also had a few good ideas. An iPhone app can create billions of dollars of value without requiring all that much labor.

    But most important is that regardless of the labor required to create something the value comes from the buyer’s willingness to pay. A bad sandwich made by an untalented sandwich-maker may take as much time to make as a great sandwich made by an expert chef, but the latter will have much more value to a buyer, and will sell for a much higher price. The performance of a famous concert violinist will typically be worth only a fraction of the value of a performance of a famous hip-hop artist. the amount of labor has little or nothing to do with it.