In the previous posting on this subject, we noted that where Adam Smith said a thing is worth what the customer is willing to pay for it, David Ricardo said a thing is worth the labor it cost to produce it combined with its scarcity. We then asked the forbidden question, What if it takes immense labor to produce a unique item that nobody wants? That’s where the “labor theory of value” gets more than a little dicey.
Getting down to the nitty gritty, did you ever really look at the explanations of the “labor theory of value”? Both Ricardo and Karl Marx take as a given that all things have “:utility value” even if it is zero. “Utility value” is the value of the thing to the consumer; in other words, what use the good or service is to him or her.
|Marx: Labor gives value except when it doesn't.|
We will repeat that: both Ricardo and Marx start from the assumption that a thing has “utility value” as the starting point of their respective discussions of “exchange value.” The difference between Smith’s theory of value and those of Ricardo and Marx, is that Smith assumed as a given that the “utility value” to the consumer automatically determines the “exchange value” of the thing in the market. As far as Smith was concerned, any difference between the “utility value” and the “exchange value” of a thing is a difference that makes no difference; “utility value” and “exchange value” are simply two ways of saying the same thing.
Stop for a moment and think about that. If a thing is worth $1 to the consumer for its utility, why would he or she pay one cent more? And why would the seller take one cent less? Common sense tells us, then, that “utility value” and “exchange value” must be the same, at least in a market where everyone has perfect knowledge. Of course, we know that doesn’t exist, and it leads to bargain hunting and price gouging, but things usually settle down to their “real values” if given the chance and there is no interference, e.g., governments printing funny money, capitalists cornering markets, socialists imposing price controls, etc.
|Ricardo: Only labor gives value except for utility and scarcity.|
Now comes the twist. Both Ricardo and Marx started with “utility value” and pretty much admitted that without “utility value” there wasn’t any reason to discuss “exchange value.” Both men insisted, however, that “utility value” and “exchange value” are different things, although they didn’t say why they are different, just how. Oddly, however, their arguments don’t really explain anything except to disregard the consumer . . . except when they can’t.
Hence, both Ricardo and Marx stated that, although all things have “utility value” by their nature, all “exchange value” comes from labor and scarcity. The price or value of something, therefore, is not the utility to the consumer (why not? they don’t say), but the value or price of the labor that went into producing it . . . unless it’s scarce and the consumer really wants it, whereupon the price goes up, or it is useless, in which case the labor doesn’t count as labor, and the thing is without value.
|Smith: Pay what it's worth to you.|
No, we didn’t make that up. Ricardo said that the labor that goes into a thing determines its value except when scarcity and consumer demand does, and Marx said the labor that goes into a thing determines its value except when utility does. It’s right there in Das Kapital: “[N]othing can have value, without being an object of utility. If the thing is useless, so is the labour contained in it; the labour does not count as labour, and therefore creates no value.”
In other words, the utility of the thing to the consumer determines a thing’s value, but labor is the only thing that gives value!!
Ricardo simply ignored the problem of goods that nobody wants, while Marx declared that labor both gives value and does not give value. Problem solved . . . or not.
And if you think that’s confusing, wait until you hear this.
According to Smith, land can produce without the addition of human labor. People add value (not create value) by gathering up what nature has freely offered, and by mixing their labor with it create private property in the thing they have gathered.
Of course, if someone owns the land, then what the land produces belongs by natural right of private property to the owner of the land, unless a tenant has paid rent for the use of the land. In that case, what the land produces belongs by natural right to the tenant who purchased the usufruct (control and enjoyment of the fruits . . . literally) from the owner.
Not so! said Ricardo. And this is where things get “interesting” . . . .
|George: Abolish property, not ownership.|
As Ricardo declared in his famous (or notorious) “detour,” labor is the only factor of production. That being the case, land is not a factor of production, except when it is. In the latter case, land is a “cost-free factor of production” because it gives forth its produce (at least that portion of it that does not require human labor) without the addition of human labor. Thus, land both is, and is not, a factor of production.
And you thought the labor theory of value by itself was contradictory! But wait! There’s more!
The agrarian socialist Henry George (1839-1897) agreed with Ricardo and thought he was full of bologna. That is, George agreed with Ricardo that human labor is the only factor of production . . . except when it isn’t, as in the cases of land and capital. Where Ricardo was wrong (according to George) was in assuming that the owner of land is due rent, even though land is a cost-free factor of production.
According to George, people can only own what they create with their own labor. Anything like land not created by human beings but by God belongs not to any individual, but to humanity as a whole, and no one has any better right to it than anyone else.
That being the case, the collective in the person of the State should be the universal landlord, and all rent for land should be paid as a “single tax” to the State. This would abolish all other taxes, turn the State into the “universal landlord,” and universal prosperity would result . . . universally, of course.
There are, however, a few holes in George’s theory:
|"Henry George has set us free!"|
· God made human beings, while human beings create the abstraction of humanity. By claiming that a manmade abstraction has rights that human beings created by God so not have, George made man greater than God. Oops.
· If only a thing made by one’s own labor can be owned legitimately, then inheritance and charity are illegitimate. Anyone who can’t produce can’t own . . . and has no claim on the necessities of life. Oops.
· Livestock and pets are not created by human beings. That being the case, no one may legitimately own animals. Oops.
· Raw materials are not made by human labor in most cases. Logically, then, someone can own a thing he or she made, but not the material out of which it is made. Oops.
· As recorded in an article in The North American Review in the early 1880s, an economist once cornered George and asked if tenants would pay rent. George said no, they would get the use of the land for free. Who, then, would pay the single tax? asked the economist. Why, the landlord, said George. But where does the landlord get the rent he pays? asked the economist. George avoided the question. Oops.
Then there is the problem of Monsignor John A. Ryan (1869-1945), and his 1906 book, A Living Wage, which is a most remarkable document — which we will take up in the next posting on this subject.