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Sense and Nonsense About Labor

By Gordon Francis Corbett

    Of all the sense and nonsense that people have written about that economic phenomenon called "labor," perhaps two of the most nonsensical, and two of the most popular and least understood, are the labor theory of value and the surplus value theory.

    Adam Smith invented the labor theory of value.  He said in "The Wealth of Nations," "Labour...is the real measure of the exchangeable value of all commodities."  He continued,

    "The real price of every thing, what every thing
    really costs to the man who wants to acquire it,
    is the toil and trouble of acquiring it.  What every
    thing is really worth to the man who has acquired
    it, and who wants to dispose of it or exchange it
    for something else, is the toil and trouble which
    it can save to himself, and which it can impose
    upon other people.  What is bought with money or
    with goods is purchased by labour, as much as
    what we acquire by the toil of our own body.  That
    money or those goods indeed save us the toil..."

    Smith had a point, but he realized that it could not found an economics.  He noted that prices are not calculated in amounts of labor, and that goods' labor does not determine their prices in the market.  He knew that it is one thing to say that a fellow values something because he must work to obtain it, and quite another to say, as Karl Marx did later, that its value comes from the amount of labor its production requires.

    It is wrong.  If I spend two hours to produce a mud pie, it will remain a mud pie, however fine its mud, and regardless of its decorations.  Mud is mud, and mud is inedible.  Therefore, no one will want to eat it.

    Nevertheless, its value for display may be considerable:  a bakery might want me to make a mud pie they would put in the window to advertise their edible pies.  They might pay me more for my two-hour mud pie than they would charge for one of their edible ones, even though they might require only one-half hour to make.

    They would pay me more, not because I spent four times the labor they invest in a real pie, but because my dummy pie would help the bakery to sell many edible ones.  Their idea of value is what really counts, and that is why the labor theory of value is wrong.

    Now, suppose that bakeries desiring displays want me to make mud pies for them, and that, consequently, I hire people to make them.

    Karl Marx created the "surplus value theory."  According to this idea, if a mud-pie-maker I hire takes X amount of wage-time to make a mud pie, and the bakery pays me X.5 over the cost of the pie's mud, that the .5X is "surplus value" that I steal when I, the worker's employer, put it in my pocket.  Instead, maintained Marx, that "surplus value" .5X should be distributed throughout society.  The formula for that distribution runs, "From each according to his ability;  to each according to his need."

    This theory is pure baloney.  The mud pie's value comes, not from my worker's time, but from my customers' desiring to buy it.  Meeting those customers' idea of value is what keeps me in business.  My idea of my mud pies' intrinsic worth is irrelevant.

    The same goes for my worker's idea of the intrinsic value of his wage.  He may not realize it, but he is in business, too.  He may continue working for me, and continue taking my payment of X for the time he needs to make a mud pie.

    Or, he may leave my employ, and begin making mud pies for his own customers, some of whom may have been mine.  In that case, he will run the same risks, and will have to pay roughly the same necessary expenses, as I do, regardless of profit.  Those expenses are the costs of doing business:  mud, gas or electricity, rent, bookkeeping, and several taxes.

    In the mean time, he works for me.  He and I have agreed on the price of his wage.  If his product attracts customers, those customers are mine by right of contract.  Their "custom"--the money they pay for my shop's products--is mine, too.  And, whatever I retain from the .5 X after paying those expenses is my rightful profit.

    That profit is mine because my worker chose freely to produce my pies.  If I cannot sell them, I still must pay his wages and my other expenses.  If they do sell, of course, paying those expenses becomes much easier.

    That these theories are wrong is indisputable.  That they are popular is tragic.  That they are vulnerable to logical and accurate argument is a fact we must exploit.

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