Labor theory of value is a socialist cornerstone - and it makes for an interesting plaything. Ive discussed it before, but its worth going over afresh now and then.
The theory states basically that the value of an object is solely a result of the labor expended to produce it. Marx defined value as "consumed labor time", and stated that "all goods, considered economically, are only the product of labor and cost nothing except labor".
Here is an example of how the labor theory of value works: A worker in a factory is given $30 worth of material, and after working 3 hours producing a good, and using $10 worth of fuel to run a machine, he creates a product which is sold for $100. According the Marx, the labor and only the labor of the worker increased the value of the natural materials to $100. The worker is thus justly entitled to a $60 payment, or $20 per hour.
If the worker is employed by a factory owner who pays him only $15 per hour, according to Marx the $5 per hour the factory owner receives is 'theft'. The factory owner has done nothing to earn the money and the $5 per hour he receives is "surplus value", representing exploitation of the worker. Even the tools which the factory owner provided were, according to Marx, necessarily produced by other workers subjected to their own exploitation.
There are two fundamentally different answers to the question of where economic value originates. According to intrinsic theories of value, value is inherent in objects; remains constant despite changing demand, the passage of time, and other factors; and can be "objectively determined" by calculations based upon some fundamental scientific principle. The labor theory of value is clearly an intrinsic-value theory or it is a strange interpretation of the second approach;
The other approach is the market-exchange theory. According to this theory, value is not inherent in objects, but is a product of many different consumer judgments. According to market-exchange theories, value depends upon people’s desires: the more they esteem an object and are willing to trade for it, the more it is worth. This theory is the basis of free-market capitalism, which Marx bitterly opposed.
We observe the second theory as being correct. The amount you are willing to trade for a given object is related to the degree to which you value it in terms of opportunity cost (ie what you would have to give up in order to buy it), in turn dependant upon a plethora of factors. So, in the above scenario - if the product sold for $200 then the worker is entitled $160 ($53.3/hr), if it can only be sold for $50 then the worker is entitled to $10 ($3.3/hr).
The value of a product is determined by the amount which other people wish to trade for it. The worker who receives the results of his 'labor value' according to marx is subject to this potential variation in wage - self employed people are often very familiar with this phenonomen of market exchange affecting their income.
Labor cannot be the cause of value in the above - the same work was done yet the value changed. One way round this is to accept market-exchange theory and tack on the end "whatever the exchange value is, thats the labor value" - thus labor value is to be determined by the consumer.
Not all economically active 'poducts' are created by labor, nice weather areas being popular and driving up house prices is not the result of labor. So labor does not determin value - the best it can do is add a condition as quoted above - now being "whatever the exchange value is, thats the labor value, with the exception of things in which labor was not mixed". In the case of nice weather houses the 'labor value' of their construction must be assumed to be greater because the house prices are greater - even though the skills and qualities of housebuilders in Alaska may be objectively superior - they are not entitled to the same rate according to labor theory of value within a market context.
The labor theory also ignores the importance of time and position. A 20-year-old wine is far more enjoyable than one-year-old wine. Oil in a desert is a potentially valuable resource, but oil in the local reservoir or in the middle of a farmer's field is a hazard.
This brings up an interesting scenario. For example, most workers prefer to be paid when their work is completed rather than when their products are sold which may be months later. For workers to be paid now, rather than later, someone must advance their wages, and clearly this service has a value. But proponents of the labor theory would have it both ways: workers are to receive the full future value of their product now. In other words our wine worker would be demanding the full value of the wine twenty years before it is bought.
How is this to be resolved - according to the strict logic of the labor theory the wine worker *deserves* nothing until the wine is traded. Same goes for any time delay. No long term project or investment is possible, lest the worker starve waiting for the outcome of his effort to be traded.
One can only assume that Marx secretly intended for all individuals to be self employed. Ofcourse the intent was for some kind of socialist utopia - the essential premises of which I made clear here.
Even worse, the entire labor theory is unproven. In the entire first volume of Das Capital, where Marx proposed the labor theory, there is not one "positive proof". Rather Marx offers a fallacious "negative proof" in which he argues:
Premise 1 – some factor in the production of a good gives it value [true];
Premise 2 – only those goods to which man has applied labor have value [false];
Procedure – Examine all the factors producing a good by discarding those which did not create equal value in equal quantity, and end up with one factor – Labor. [Arbitrary].
Conclusion: Labor must be the source of value [False].
Marx promised to provide a positive proof in the Volume 3 of Das Capital. However, that book does not offer a positive proof, and implicitly refutes one. Marx proclaims that two types of capital exist in production, only one of which can produce "surplus value". Thus exchange of items of equal value can have uneven mixtures of these two types of capital, implying that labor alone is not the sole determinant of value.
So much for labor theory of value.