Marx got it backwards

Poor Karl Marx, he seemed to ask great questions but get the answers completely backwards.

Consider the keystone of his economics: "A use value, or useful article, therefore, has value only because human labour in the abstract has been embodied or materialised in it." In other words he was saying things have value because labour was used to create them. Contrary to what most Marxists think the idea of the labour theory of value is not unique to Marx. Other economists made the same mistake.

Adam Smith, often considered the father of free market economics, also thought that labour created value. Smith said that labour "is the real measure of the exchangeable value of all commodities." Another early economist, David Ricardo said, "the quantity of labour must augment the value of that commodity on which it is exercised". Marx borrowed the idea from these men. Unfortunately they were wrong.

Under Marx's theory mud pies have the same value as meat pies. But labour is a nuisance more than a blessing. If we could have all the things we wanted without labour we'd be thrilled. Imagine food, housing, medical care all created without effort. Wouldn't those things still have value to us? Wouldn't we still want them?

Marx got it backwards. Value exists for one reason alone. If no one wanted a product it would have zero value regardless of how much labour was expended to produce it.

Demand for a product gives it value. That, along with the supply of the product, determines its price. But something's value and its price is not necessarily the same thing. A price is the amount of money someone will pay for a product. The value of the product is different from person to person. I do not enjoy eating fish and never have. Fish has a very low value to me. Others love the smelly little creatures and will pay dearly for some of them.

Labour in itself has absolutely no value. Only the product has value. But because the end product has value, the labour to produce it obtains value. It is the product that gives labour its value not the labour that gives the product value.

A specific quantity of labour can produce a car under one set of circumstances and a bunch of bananas under another. But the workers are not paid the same amount. It is the value of the car that determines the wages of the workers under the first set of circumstances and the value of the bananas that determines wages under the second. If the same amount of labour is used to produce both, the wages will still be different because most people prefer having a car to having a bunch of bananas. The car is worth more than the bananas so the labour that produces cars is more valuable.

Labour used to produce a product that no one wants is worth exactly nothing. It is the end product that determines the value of labour. Nothing else does. Labour laws that try to make labour more valuable only makes labour less attractive and jobs are lost.

Under capitalism, labour increases in value as workers become more productive. Foreign investment and investment in general in the form of capital or capital goods that increase the value of the labour, make each worker more productive. Making labour more productive makes labour more valuable and that alone pushes up wages. Without increased productivity no labour legislation can create better wages for workers. All it can do is make more workers unemployed.

Author: Jim Peron is President at Laissez Faire Books. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/19 October 2004 - Policy Bulletin / 27 October 2009