Critics of the Labour Theory of Value attack it from the argument that it does not explain the value of natural commodities such as rocks and diamonds. This article explains how it ties in.
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One common vector of argumentation that I see many critics of the LTV take, is to attempt to move the discussion away from commodities created via human labour and to commodities that are naturally occuring on Earth, and then claim that the LTV cannot explain how they can have value. They will bring up diamonds, rocks or simply breathable air to make their point and occasionally change to another commodity if their previous example didn’t work so well.
The obvious trend in all of this of course is that they will avoid using a human made commodity for their argument by any means necessary. Even when you specifically bring up cars or bicycles and other such examples, they will be summarily ignored and the discussion will be shifted once more to natural ones.
The critic then is attempting to use a strawman claim in order to make a Reductio ad absurdum and hopefully confuse the LTV proponent long enough to finish them off with Marginalism. What the critic here fails to grasp is that the LTV is explicitly related to commodities created through human labour. It was never intended to say that human labour is what creates the objective value in everything in the universe, but rather that it is what creates the objective value in everything human-made.
Now it is true that naturally occuring commodities do have a subjective value which occasionally facilitates their exchange. All of this ties perfectly to marginalism which is not at all incompatible with the LTV. However this only explains why something very useful (like air) does not need to be exchanged to get or why something useless to most people can have a far higher price than its cost (i.e. diamonds).
However it is also true that human labour does play a role in defining the exchange value of everything. Namely, since human labour is required to bring any natural commodity to the market, then the equilibrium price (around which the market prices move) is always equal to as much socially necessary labour time required to prepare a commodity for the market.
Lets get an example: The diamond which seems to be a favourite of marginalists of course.
The diamond generally has a very high exchange price which we will hear that the LTV cannot explain as no human labour went into creating a diamond. That is undeniably true. However that does not mean that no human labour went into bringing a diamond to the market. They are not just laying around you know.
The diamond has to be found and dug up (most likely in a horrible Congo mine). That requires quite a lot of labour time from people digging and searching all over the mine. Since this is generally done is inhuman conditions (to achieve low costs), this requires a strong security around the mine to protect against a miner’s uprising, defending against foreign warlords and making sure the workers cannot smuggle diamonds out. Then the gems needs to be transported to the developed nations and an expert needs to cut and prepare them for selling.
All of this is quite a substancial cost which tranlates directly to the price the diamond will fetch at the jeweler’s. This is the equilibrium price of the item around which the selling price will fluxuate depending on how high the demand for diamonds will be. Lacking passive or active coercion, the owner of a diamond will never sell one for less than this price.
We can see then, that while human labour does not play a role in the creation of the objective value of a natural commodity, it does still play a role in defining the exchange value it will achieve. When you have a natural commodity that is not abundant (like air), it is the socially necessary labour time that will define the cost of it and thus the minimum acceptable price.
There is one last point I’d like to raise. While it is true that human labour does not create the objective value in natural commodities, in an abstract sense we can consider that labour in general is what creates it. It’s simply not from humans. What I mean is that in order to have anything other than random collections of atoms in space, something needs to be happening to put them in a human usable form. That something can either be human labour or “natural labour” (Bear with me, this is a concept I am thinking of just now).
Now to give you an example let’s take human breathable atmosphere. One could say that this has a very high subjective value as everyone needs to breathe but this value can’t possibly be linked to the LTV as no human labour was extended to achieve it. And this is true. The zero human labour that is necessary to achieve a breathable atmosphere is precisely the reason why the air if free. If on the other hand our breathable oxygen was running low and we needed to run some kind of oxygen factory to increase it, then certainly all of us would be paying for it, at least via some kind of tax.
However, while the breathable atmosphere does not need human labour to get, does not mean it does not need any labour, as is obvious by looking at any planet other than the Earth. What happens in this case is simply that we have inherited as part of our ecosystem an “automated factory” in the form of plant-life that produces abundant oxygen for everyone. Unfortunately for the Capitalists, the nature of this “factory” and the atmosphere make it impossible to be capitalized (or homesteaded) and by necessity it is socialized.
Breathable air is provided to everyone according to his needs.
tl;dr version:
- The LTV is meant to explain the value of human-made commodities
- Nevertheless, LTV can ties directly to the exchange value of non-abundant natural commodities as well
- Even naturally occuring commodities require a form of “labour” to be created. This explains their objective value, even though this labour is not exerted by humans.
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"All of this is quite a substancial cost which translates directly to the price the diamond will fetch at the jeweler’s."
The anticipated price the diamond will fetch at the jeweler's is what determines the labor, time and capital expended in order to bring it to market. Anyone who errs in forecasting the price the product will fetch at the market (whether the product is a car or a bicycle or a diamond) will be made to sell his product at a loss.
If you build cars that nobody wants to buy (maybe they are too expensive, or aesthetically unpleasing, or too slow, or too inefficient – it doesn't matter why), it doesn't make a damn bit of difference how much SNLT was expended on their production, because a good amount of that SNL is revealed as wasteful misallocation: that labor could've been better employed on producing something else for the market that people actually do want to buy. Sure, in the long-run, prices (value) ought to approximate SNLT (cost), but this is not because cost determines value. it's exactly the opposite: value (or anticipated value) determines what costs people are willing to bear in order to bring those products to the market.
The anticipated price may serve as an incentive to bring a product to the market, but the actual equilibrium price around which the price will hover will be based on the final cost which is based on the SNLT.
Furthermore, most new items are not built on the assumption that they will grab a specific market price. The price is set as soon as the production line is ready and the cost is calculated otherwise if you misjudge the cost as lower than it will be, by your logic, the item would still be sold at the lower price which is absurd.
So yes, it makes quite a bit of difference how much SNLT was needed to create a commodity. This is what defines the equilibrium price. The Demand simply shows us how much surplus value the item will grab or if perhaps it will be a flop.
Really? In what industry? I can't imagine pitching a business proposal that doesn't include projections of the product's cost. Nor can I imagine pitching a business proposal that says "We'll set a price as soon as we find out how much it's going to cost to make this all." New items are built on the assumption that they'll sell for more than they cost (but obviously using assumptions/forecasts for both cost and price).
If the cost turns out to be higher than anticipated (or the price, lower) then the business has a decision to make: "Are we satisfied with smaller returns, or is there something more profitable towards which we can devote our time, energy, and efforts?" The fact that it might take 80 hours of SNLT to produce a widget is entirely irrelevant, if there's nobody on earth who values the widget enough to pay that much for it.
If you misjudge, and the productions costs happen to be lower, the prices will eventually fall to reflect same. The speed at which prices fall, however, is going to be largely determined by how free the playing field is in the particular industry. This is a pretty elementary supply/demand interaction: if the price is indeed too low, then people will buy more of the product than the producer can provide, competitors or potential competitors can accommodate the excess demand, and if the industry is relatively unhampered, all else being equal, the companies that can provide the best products at the lowest price are the ones that will succeed.
Unless you're using a different definition, the equilibrium price is the intersection of supply and demand: it is the price below which the marginal seller refuses to bring more to market, and the price above which the marginal buyer will not buy another. If nobody is willing to pay the SNLT, then there is no equilibrium price.
The definite and final price can only be set at that point. Before that it's simply assumptions (especially when talking about a totally new type of widget) but it's the cost of the equipment and the variable capital (human labour) that will set the price.
It is not at all irrelevant. It is this 80 hours that will factor into the cost which as you said is a very large part of the decision to go into a new enterprise. Certainly if the objective value is higher than the subjective value then the widget it not worth creating but this is all something I've already explained how it ties in to labour in the previous article of this series.
Look, you can set whatever "price" you want, and you can calculate that "price" by whatever method you choose. But in the end, if people aren't willing to pay that much for it, your "price" is meaningless. Now, the people who want to buy this widget, ought to be willing to pay up to their opportunity cost of either A)not having it or B)producing it themselves It's their time values that determines the price for which the widget will sell.
Agreed – that's essentially what I said above. If one believes that the costs are too high, or that the eventual price will not be high enough, he employs himself in another manner. But and I think we agree, this part of the equation is all more-or-less speculative, and carries a not insignificant degree of risk: the prices of other factors of production may change in the interim, public tastes may go out of favor for this particular product, a competitor might beat you to the market, etc. And the people who can stomach these risks, in a free market, will be penalized or rewarded according to their failures or successes, respectively.
You need to take this to the logical end. In situations of capitalist competition, the price will always head towards equilibrium, and that is the absolute cost of the widget.
This is not something I dispute, although I would point out to you to look at how the industries will reduce costs: Via more and more investment and by more and more exploitation of the workers. In the end, the one who can exploit their workers most will be the one who will succeed. Simply because their costs will be less.
Perhaps this video will interest you
[youtube 9oXEgH4HzYk http://www.youtube.com/watch?v=9oXEgH4HzYk youtube]
Henry Ford famously offered wages far in excess of the going rate in the early days of Ford Motor Company. By doing so, he was able to attract the best talent and produce a car affordable to the masses. He succeeded at reducing costs through innovation and investment, and was able to distribute a pretty decent amount of these savings to the workers at the time. It's just one example, I know…
I find it curious that you lump "investment" in with "exploitation of the workers," perhaps I am mistaken but it seems that by doing so, you're criticizing investment as an equal evil.
I am not familiar with the history of Ford enterprises so I can't really comment on how much that was the real cause of his success rather than just a handy correlation.
In this case I was simply pointing how things are, not passing moral judgement.
The equilibrium price of a commodity is the cost basically. This can only be reached through a free market absent of coercion and this will be reached via the capitalist competition. This comment by the Barefoot Bum says it well
Then you're using two very different terms to describe the same phenomenon, and I can't see a good reason for it; "equilibrium price" and "cost" both have very different meanings within the field of economics.
I've written elsewhere that prices in a free market tend to approximate costs, so although I don't take any particular exception to this assertion, I find the use/misuse of words distracting, to say the least.
similarly in a free market absent coercion of any kind, any worker or group of workers who feels exploited is free to work elsewhere. He could even start a competing company, which would offer higher wages to the employees, of course he would have to be satisfied with slightly lower "profits" as a result. That's the other edge of the capitalist sword: even though all capitalists would like to earn monopoly profits, in a free market, it's the guys who are satisfied with a 2% or 3% return in the long run, who set the curve – not the guys who require a 10% return.
I was trying to use the terms of the Barefoot Bum as I like how he conceptualizes it.
In any case, I don't mean to treat them as interchangable terms. It just so happens that the equilibrium price is the cost.
It does not matter, as there is always far more labour available than positions, and due to the commodization of labour, they will either have to reduce their worker's wages or go out of business.
This is a very specific evil of the capitalist mode of production, that it naturally forces this situation of workers eventually ending up being paid only the bare cost of their labour power.
Perhaps it would have been more appropriate if I had said the minimum price.
=/ I did not dispute that this is how theoretically a free market works.
Another analogy:
The force of human labor imparts use-value to the furniture that it creates by acting upon lumber just as the force of pressure imparts use-value to the diamond that it creates by acting upon coal (OK, diamonds aren’t really created that way, but it’s a common belief so let’s roll with it).
Both are forces of nature. Humans do not exist outside nature, they are part of it. The difference is that the force of your labor upon the lumber didn’t just happen. You made it happen, by purposely expending time and energy (this does not imply “free will” or any other magic, god help me if anyone goes there), so whatever exchange-value the furniture has is owed to you, just as the exchange-value of the diamond would be owed to “Mother Nature” if she could be paid for it.
Nobody denies that it is subjective use-value that gives either item any exchange-value at all; that is, without a subjective use-value, nobody would exchange anything to begin with (this is not to say that subjective use-value imparts exchange-value, just that the former is the impetus for the latter). The marginalists want to stop there, somehow continuing on to derive price from a system which takes prices for granted (LOL). But no matter, let them have that myth if they want it; the matter of how exchange-value is translated into price (here is where they exhume Bohm-Bawerk and trot him onto the stage, smirking like they’re celebrating a “Weekend at Bernie’s”) is beside the point of labor-value. Whatever method you prefer, and whatever figure you come up with, the whole of the price is owed to the laborer as creator. (BTW, the same sort of folks who tout marginalism to the exclusion of the LTV tend to be proponents of the “Labor Theory of Property,” which is a tacit endorsement of the LTV, only they’re too ignorant to realize it).
Confusingly (or, rather, confusedly), the marginalists concede the premise of natural forces imparting value, when they argue that the landlord is entitled to a portion of the product of “his” land. Of course, those of us who deny the legitimacy of private property in land would argue that simply holding a deed does not entitle the landlord to unearned income, especially not when that deed is backed up by force, whether the force of the state or of “Private Defense Agencies.” These freeriders are essentially claiming to represent Mother Nature, as her personified agents, demanding payment on her behalf — payment which they will spend for her as well, of course.
This is the same premise by which capitalists argue that they are entitled to unearned income by virtue of their ownership of the means of production. If Mother Nature is due a portion of the product for the materials she provides (figuratively speaking), then the capitalist is due a portion for the tools and materials he provides! The difference of course is that the capitalist didn’t create those tools and materials; laborers did, by acting upon the materials of nature. The capitalist merely holds a title backed up by force.
…and, just to slip in another fun analogy: honeybees. When a marginalist values honey above nectar, he leaves it at that, not bothering to investigate why he values it higher. That is, what force lies behind the creation of honey? In this case it doesn’t matter much, since bees can’t be paid, but clearly if they were human then they’d have some payment coming! And not just some, but the full value of the product of their labor! Of course, we humans simply steal from the bees without giving it much thought; or, we treat the beekeeper as having power of attorney on the bees’ behalf (LOL), like his fellow freeriders, the landlord and the capitalist. Capitalists would prefer to treat humans as they treat bees; sadly for them, humans don’t die after the first strike (ooh, I just came up with that one!).
Indeed, that is a great quote. I will quote you if you don't mind đŸ˜‰
You make some great points there I just wish America would go back to the gold standard as to this day I still have no idea what the value of a dollar is based on .
The gold standard is as useless as fiat credit. This is all simply moving the problem around with palliatives.