Labor Theory of Value

Written By
Paul Tracy
Updated November 4, 2020

What is the Labor Theory of Value?

The labor theory of value says that the value of a finished good correlates solely with the number of labor hours required to produce it.

How Does the Labor Theory of Value Work?

Economist Adam Smith, the founder of the idea of modern capitalism, first conceived of the labor theory of value in the second half of the 18th century -- the time of the industrial revolution. By the mid-1800s, political economist Karl Marx, the founder of communism, suggested that the marked-up price of goods above and beyond their labor cost resulted in the exploitation of workers. 

Marx touted the labor theory of value as the exclusive basis for determining the market price of goods. In other words, any two goods requiring an identical number of labor hours to produce them should have the same market price. For example, if an 18-karat gold filigree bracelet and an electronic toy car each require 10 hours to complete, both should have the same price.

Why Does the Labor Theory of Value Matter?

The labor theory of value is ineffective on a practical level because it fails to account for materials costs, workers' skill levels, or capital usage and depreciation costs. In addition, it ignores the effect of varying consumer demand for different types of goods.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Labor Theory of Value.
Be the first to ask a question

If you have a question about Labor Theory of Value, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Labor Theory of Value, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Labor Theory of Value

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms