Mon, 31 May 2004

The Labor Theory of Value

This dude on slashdot complains about "our purely monetary system -- there is no measure for the labor hours, or the quality of those hours, that go into the production of much of anything. The cost of things that can't be measured monetarily is all too often assumed to be "ZERO", but that simply isn't true. Even freeware costs somebody something to make."

Marx had this theory for the source of value. At the time he was writing, there was no consensus among economists for the source of value. Why are diamonds more valuable than water? They couldn't explain that, since obviously water is more necessary to human life. They didn't have the idea of marginal utility, so they were casting about for an explanation. Marx's explanation was that the value of something came from the labor that went into it. Water was easy to get, but diamonds had to be mined from the earth.

Curiously, some people still believe that theory even though there are numerous counter-examples to it. For example, it doesn't take into account time preference. If all else is the same, people value something now over something later. If I hide two packets of gold coins, and offer to sell you their location, one of which you will be told immediately, and the other of which you will be told in twenty years, you will pay more for the first than the second. How can that be, according to the labor theory of value? The same exact labor has gone into each packet.

The slashdot dude has obviously made the same mistake. There is no measure for the labor hours or the quality of those hours, that go into the production of anything. That's not how you assign a value to something. First, since value is relative, everyone assigns their own value to something. There is no such thing a single measurement of value. Second, you cannot assign a value to something by looking at what it cost you. If the value of something was always equal to its cost, nobody would ever sell anything for less than what it cost them. Third, the way you find out how much somebody values something is by looking to see what they will trade for it.

If something is not scarce, it is not an economic good, and you cannot measure its value with anything, much less money. Since it's not scarce, nobody will trade anything that is scarce for it. Doesn't matter what: time, drugs, sex. Or even money. Economics is not about money. It's about figuring out what people will trade for what. So, what would you trade to get a copy of the Linux kernel? Not the bits themselves, I mean the right to use or redistribute the Linux kernel. What would you give up to get that right?

Answer: nothing, because you already have that right. It's not scarce. Its value to you has nothing to do with its cost to you, or to the amount of labor that went into it.

Posted [23:21] [Filed in: economics] [permalink] [Google for the title] [digg this]