labour theory of value The idea that labour is the ultimate source of all wealth—a commonplace among the early political economists. Adam Smith, for example, argued that, in a market society in which workers owned their own means of production, the prices of goods would be proportional to the amount of labour required to produce them. However, where a class of non-labouring capitalists hired a propertyless class of workers to do the labouring, then competition in the market would establish an average rate of profit, such that capitalists would price goods at a level at which they could pay their workers a fair wage, and retain a profit equal to the average yield on capital. In this way, Smith (and later David Ricardo) used the idea as part of a justification for the existence of, and for the privileges associated with, the ownership of private property.

Later neo-classical economists somewhat embarrassedly distanced themselves from the theory, on the grounds of its metaphysical and immeasurable quality, preferring instead to argue that, far from prices being determined by the role of labour in the production process, they simply reflected people's subjective preferences (or feelings of so-called utility). By contrast, Karl Marx reformulated the theory such that it became the basis for a whole new way of looking at society, and for criticizing the system of private-property ownership itself.

Almost thirty years elapsed between Marx's first use of the term and the publication of his reformulation in volume i of Capital (1867). It appears in chapter 6 and represents the critical moment in the entire text. The earlier chapters lead up to, and the later ones follow from, this proposition. As Marx said (chauvinistically) of the wife of one Dr Kugelman, if she could understand this chapter, even she would be able to understand the remainder of Capital.

Some sense of the pleasure that Marx derived from the achievement of this reformulation may be gathered from the way in which, following the method of critique, it is suddenly produced, like a conjurer's rabbit, as a solution to a problem whose appearance of impenetrability he takes great pains to create. This problem is as follows: why do those with money invest in production, when all commodity exchange, as symbolized by the existence of money itself, is the exchange of equivalents? Marx's answer is that, within what had hitherto been ‘the hidden abode of production’, the investor may find and purchase a unique commodity which, when used, creates more value than it costs. This commodity is labour-power. The reason that it possesses this unique attribute is that, with the advent of the capitalist mode of production, labourers finally lost all rights in their means of production, and therefore both had to and were able to sell their labour-power to those with property in the means of production, in order to live.

Thus, when the market rule that all commodities exchange for their equivalents is applied in the realm of production, the result is that labourers are not paid on the basis of what they produce but on the basis of what it takes in the way of food and other necessities of life to enable them to continue presenting themselves and their offspring for work. This, then, is what creates the possibility of ‘surplus value’—since the value of the labourer's subsistence (‘necessary labour’) should be produced, under normal conditions, in less than the total number of hours worked. The result is that capital has at its disposal a quantum of ‘surplus labour’ whose product it is free to realize for its own sole benefit.

Like most other aspects of Marxist doctrine this particular theory has proved to be highly controversial. Arguably, it has been largely discredited, since not only mainstream economists but also many Marxists themselves have demonstrated its technical deficiencies. One obvious problem, for example, is that the costs of subsistence vary historically and culturally, so that there is no absolute definition of ‘necessary labour time’. The quantitative connection between labour and prices in Marxist economics has proved extremely difficult to specify. Conversely, some Marxists have argued that the central position accorded the theory within the Marxian system is unwarranted and indeed unnecessary, since a useful Marxist analysis of the exploitative nature of property relations is possible without recourse to the theory itself. Nevertheless, the labour theory of value (though not necessarily its Marxian variant) remains the principal alternative to orthodox utility theories of value, and the debate continues (although largely, these days, within highly specialized sub-fields of economics).