Labor Theory of Value: From Locke, to Franklin, to Marx – How Work Creates Private Property and Value
As John Locke and Adam Smith elude, physical work creates private property and gives possessions economic value (value in a trade).
The labor theory of value is a fundamental concept which expresses the relationship between work, the commodities of labor and capital, and property rights. Early thinkers like Aristotle discussed this concept, as did classical economists like David Ricardo, the founding father Benjamin Franklin (see Franklin’s Theory of Value), later thinkers like Kant (see Aristotle and Kant’s Theory of Value), and later economists like Marx (see Marx’s Capital Chapter 1).
Each theorist added their thoughts about the different forms of value and their relation to labor and capital. Perhaps Marx provided the most detail. He made a distinction between “use value” or a thing’s value in usefulness, “trade value” or a thing’s value in a trade, “relative value” or a thing’s value when compared to another thing such as the value of 10 yards of wool when compared to a coat.
There are many ways of looking at the complex relationship between labor types and value types or a specific later theory. We will not examine details here and leave the following concepts for another time: “labor” and the quantity or quality of labor, the productivity of labor, its expected market value, perceived value, supply, demand, and all the factors which go into setting the trade value of possessions and capital. We will focus on the fundamental relationship between labor, value, and property as John Locke originally postulated.
John Locke & Adam Smith “Private Property” &”Race of Laborers”. Rousseau and Marx critiqued private property, pointing to it being the source of much of the world’s woes. Smith and Locke used it as the basis of their liberal philosophies. It is a double edged sword at the heart of classist and political divides. Of course, this is all the more reason to study it. This video helps explain the foundational importance of this theory, the problems it has been used with, and clearly illustrates counterpoints related to inequality in practice. It does not, however, refute the core point.
How to Understand the Idea that Work Creates Value: The Relationship Between Labor and Capital
The simplest way to think about it is that there are two general things with economic value: labor (workers and the work they do) and capital (all non-human assets like land, stocks, materials, machines, companies, etc.).
While raw materials, untouched by humans, have intrinsic value, it is either physical entrepreneurial labor that gives people property rights and gives property, capital and products value. From here other factors come into play to round out value theory. These factors would be things like different types of labor, the quality of labor, the quantity of labor, the rarity of raw materials, relationships between commodities, the use value, trade value, market value, as well as supply and demand, etc.
FACT: The labor value theory is a fundamental theory of classical liberal economics presented by Locke and Smith. It was built on by other social economists like Marx and Keynes. It is derived from the state of nature argument. The logic behind it relates to many classical liberal principles including the idea that humans cannot own other humans as slaves and Kings do not have absolute rights.
Factors of Production (Resources). Land/raw materials, labor, capital and entrepreneurship are “factors of production” in any historic era in both the state of nature and in civil society of any type. In this theory, we will consider capital and land/raw materials as “property” and labor and entrepreneurship as “work.” It is work that gives property value and work that establishes the right to property (with a note that although one can never own a person, as Locke states clearly, one can hire another to do work and then by this relationship have rights to the property created by that work; AKA employment). Marx expands greatly on any complexities related to the theory as eluded to in the video and our introduction above. Learn more about Marx’s theories.
TIP: See Thomas Piketty’s Capital in the Twenty-First Century for a modern take on labor and capital.
The Logic Behind Why Work Creates Private Property and Economic Value – In a State of Nature
While many economic philosophers provide a justification for the concept that work creates value and private property, we will illustrate the fundamental principle using Locke’s simple and widely respected logic:
- Humans have natural ownership of themselves, and of the whole earth.
- Even though all humans have an equal right to nature, they also have an equal right to take what they need from nature (if not they would starve and be unable to settle anywhere).
- When a person works to take what they need from nature, what they take becomes their private property otherwise eating an acorn would be a theft punishable by all other beings.
- Once the acorn (or other possession) is taken, a human has the right to use it (in the case of the acorn to eat it), or to trade it.
- The possession’s value in a trade is then generally based on how much work it takes to get the possession to the state it is in when it comes time to trade (at that point its trade value is roughly explained by supply and demand). It isn’t that a thing has no intrinsic value, it does have a fraction of its potential value as raw unowned material.
- Thus, although ownership of all things is a common right, the work (time and energy effectively directed) that a person puts into taking from or cultivating the earth gives them property rights to its fruits. The property rights give trade rights, and finally, supply, demand, and other complex factors give in effective value in a trade.
- Thus, intrinsic value and complex factors aside, it is work that creates property rights and gives things economic value.
The labour of his body and the work of his hands, we may say, are strictly his. So when he takes something from the state that nature has provided and left it in, he mixes his labour with it, thus joining to it something that is his own; and in that way he makes it his property. – John Locke on Property… If we note that this item taken from the state of nature now has value in a trade (and can be traded as it is owned), we can say it is work that has created private property and given that private property economic value.
The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. – Adam Smith‘s Price Theory (Wealth of Nations Book 1, chapter V)
FACT: Locke’s general theory of value and price is a supply and demand theory. It was set out in a letter to a Member of Parliament in 1691, titled Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money. In it in he discusses landownership, rent, and supply and demand. He also lays out bits of his theory in his Second Treaty of Government to justify his stance on property rights.
TIP: Many economists have mused on this topic, Smith provides what may be an overly simple opinion. There are many complex factors that determine economic value. Some, like Marx, eventually used their views to take a stand against capitalism. It isn’t just well-directed time and energy that create value. Many other complex factors like supply and demand need to be factored in. If it takes you a week to get an acorn, you still only have an acorn. A person’s time has value depending on skill and the relative scarcity of that skill. That doesn’t magically translate to the value of the fruits of one’s labor or the value of the final product; other market factors apply. This is something that Marx discusses in detail. If you are not going to dig through the textbooks, keep in mind the concept, “work gives things value” isn’t an end-all-be-all. It is a philosophical foundation upon which other more complex theories rest. Like the non-aggression principle, it doesn’t just apply blindly to every situation in a civil state.
How this Principle Works in Civil Society
In the state of nature simply collecting an acorn gives a person rights to the acorn, and they can use or trade the acorn.
However, this works a bit differently in practice in a civil society where more complex factors have to be accounted for.
In the civil state, some amount of natural liberty, equality, and right is traded for the comforts of civil society. In this, we get things like worker protections, anti-trust, fair trade, and environmental protections. In the current economy, visible hands regulate an otherwise fully free-market. In civil society, one can’t just take as much as they can, and free land that one can claim without any payment or paperwork is essentially non-existent. By any basic philosophical measure, we can say it is the duty of the state to safeguard against “bad practices,” and by any reasonable economic measure, there is much more than just “work” that gives “things” value. Still, the fundamental principles apply.
TIP: Adam Smith’s concept of an invisible hand is the concept that self-interest drives the free-market. Even though a person can gather more acorns than they need, they will sell the acorns rather than letting them rot, as the capital from selling the acorns is more useful than a bunch of rotten acorns. Advents like price-fixing certainly prove that this isn’t ALWAYS true (see price fixing and the flour wars for instance), but it is a true maxim.
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” – Adam Smith
3. Counting the Fingers of Adam Smith’s Invisible Han.
TIP: There are different types of capital and value. There is trade value, perceived value, usefulness, social value, etc. I can go on with this like Bubba talking about shrimp, so see our page on the different types of value for more information. This concept applies to ALL value types, but we’ll make a case for economic value only to keep it simple.
TIP: It isn’t only a person’s labor, but all the labor that goes into something that gives it value. When a person does work for another person the employer typically owns the fruits of the labor (as they have in advanced traded capital for work). All this work gives possessions value.
The Math Behind Labor to Value LTV
The right to property is a philosophical concept, but we have an equation the explains how work creates value.
- is the constant capital of materials used during a period plus the depreciated portion of tools and plant used in the process. A period is typically a day, week, year, or a single turnover: meaning the time required to complete one batch of coffee, for example.
- is the quantity of labor time (average skill and productivity) performed in producing the finished commodities during the period.
- is the value (or “worth”) of the product of the period ( comes from the German word for value: wert).
Some More Examples
A potato grows out of the ground, but without a human to cultivate and grow potatoes future cultivation isn’t sustainable (and that would have totally changed European history; thanks, Columbian exchange).
Even a wild potatoes need to be harvested and then prepared. When you take a potato from the ground, you do work, when you plant and harvest potatoes, you do work. When you turn them in into delicious mashed potatoes, you do work. When you serve the potatoes you do work.
It is the work that gives a person property rights over a potato, and it is property rights that give the owner of the potato the right to use it (and thus it has trade value).
Although work isn’t the only thing happening here, we can say, at the core, it is work that gives the potato value in a trade (economic value).
If the gold remains in the ground, it has no practical value unless someone owns the land and sells the land, it is only by organizing a team to mine the gold and then bringing that gold to market that gives it value. To do this requires work. The value of the gold raises each time work is put in. When the land is claimed, it is worth something. If the land mined, it is worth more. If the gold is extracted raw, it is worth more. If it is refined, it is worth more. If it makes its way to the storefront, it is worth more. If that store is in the right location, it is worth more. Each step requires more specialized work, which is imbued into the current value of the gold in its current state. Meanwhile, gold futures can be traded and the price of gold fluctuates.
Economics can be very complex in practice, but the core principles aren’t.
Econ 305, Lecture 12, Part I, The Labor Theory of Value. The Marx version. Apparently, the truism of the enlightenment has caused a stir over time. It isn’t that difficult: hoarding has negative consequences, capitalism (the direction and investment of capital have positive consequences), safety nets have positive consequences as they get people back to participating in the market, and mindless subsidization has negative consequences as work isn’t creating capital. It isn’t just “work,” it is specialized and skilled work, that is effective. This too is in Smith’s book.
TIP: Although subsidization is a vital aspect of civil society, it can be a slippery slope. When someone gets something for nothing, it necessarily devalues what they are getting as work wasn’t put in, but value was artificially created. This isn’t a call to cut holes in safety nets as those are meant to catch people who are falling, not to trap them and keep them down, but it does give some reasons why capitalism has merit.
Some More Points
- Economic value is the maximum amount a consumer is willing to pay for an item.
- For an item to be purchased it must be owned.
- For an item to be owned, it takes work.
- The more work it takes to obtain an item, the more value it has.
- In all ways, work is the foundation of value and private property.
Excerpts from Chapter 5: Property of John Locke’s Second Treatise of Government
John Locke presented a very solid argument for the above which you can find in Chapter 5 of his Second Treatise of Government. He coined the idea that “man has inalienable rights of life, liberty, and property” in the state of nature and that those rights should be upheld in civil society due to the implicit social contract. Here is an excerpt of the argument:
Someone who eats the acorns he picked up under an oak or the apples he gathered from the trees in the forest, has certainly appropriated them to himself.
Nobody can deny that the nourishment is his.
Well, then, when did they begin to be his? When he digested them? When he cooked them? When he brought them home? When he picked them up ·under the tree·?
It is obvious that if his first gathering didn’t make them his, nothing else could do so.
That labour •marked those things off from the rest of the world’s contents; it •added something to them beyond what they had been given by nature, the common mother of all; and so they became his private right.
He then presents a string of reason to prove this is true in all cases and why it is true. He then brings us to Adam Smith’s invisible hand (the idea that self-interest and necessity drive the free-market). What stops a man from gathering all the acorns, why if gathering some to prevent starving is his right is it not his right to gather them all? The answer:
Nothing was made by God for man to spoil or destroy. If one gathers more than they can eat, they have the right to sell or trade. If one can sell or trade a thing, then they have not taken more than they can use, for participating in the market is not only useful to the participator, but to those on the other end of the trade.
Nature did well in setting limits to private property through limits to how much men can work and limits to how much they need. – John Locke. This isn’t a justification for hoarding, obviously. Does each philosopher really need to spell out each little obvious truism?Sometimes I think the answer might be yes. As Carnegie said, the man who dies rich dies disgraced. However, we can’t throw out the system over a few bad eggs whether we are talking about Barons or philosophers and economists.
TIP: Humans, being clever, create tools and organize labor to allow them to create value and profits. Sometimes some humans are “too effective” and need to be checked and balanced by the state. A company doesn’t have the right to destroy the earth, even if they have the right to take from it in moderation. A person can employ another and debt can be owed but slavery is immoral and illegal. Usury used to be considered a sin. There is no clear line, but that is part of the reason why modern governance is complex. The foundation and theory isn’t wrong, it just needs to be seen through the right lens.