Labor theory of value

The labor theory of value (LTV) posits that the economic value of a good or service is determined by the total amount of socially necessary labor required to produce it. The theory is usually associated with Marxism, although versions of it were originally used by classical economists like Adam Smith and David Ricardo to explain the long-run "natural price" of commodities. For Karl Marx, the LTV was not primarily a theory of relative prices but a tool to explain the social dynamics of capitalism.

Smith argued that a commodity's value was determined by the amount of labor it could command in exchange, while also suggesting that in primitive societies it was regulated by the labor embodied in its production. Ricardo developed a more consistent theory based solely on the quantity of labor embodied in a commodity. Marx built upon and radically transformed the classical theory, making it the cornerstone of his critique of political economy. He argued that value is a social relation specific to commodity-producing societies, with its substance being abstract labor—undifferentiated human labor whose magnitude is determined by the average socially necessary labor time required for production under normal conditions.

The development of the LTV from the late 17th century reflected the rise of capitalism and the increasing focus on the sphere of production rather than exchange. Classical economists used the theory to analyze the distribution of the social product between different classes in the form of wages, profit, and rent. Marx extended this analysis to develop his theory of surplus value, which holds that profit originates from the exploitation of workers, whose unpaid labor is appropriated by capitalists.