Labor Theory of Value

The Labour Theory of Value (LTV) is an economic theory that purports to explain how the value (of goods and services) is generated in a market economy. Today, a specific form of it, dubbed the Law of Value by Karl Marx, is a central idea of Marxism, although he arguably adapted it from the ideas of David Ricardo. In Marxism it states that so-called "socially necessary labour" objectively determines the real value of a commodity instead of the price signaled by the ratio between supply and demand of a commodity. The endgame of this philosophical exercise is to show that the ruling class unjustifiably extracts and pockets surplus value through the sale of a commodity generated through labour by the working class.

Ricardian economists sometimes refer to the term value as "absolute value" or "real cost" — to describe the on average necessary labour embodied in a commodity under a given structure of production — within the LTV-framework to distinguish it from more (neo-)classical definitions of value, such as "value in exchange" (i.e. what monetary price are economic agents willing to pay for a commodity in an exchange) or "value in use" (i.e. how useful, thus valuable, is a specific good/service to an economic agent in practice).

Relationship to worker exploitation (or lack thereof)
Traditionally within Marxism it is argued that under capitalism, the value of commodities is determined by the "socially necessary amount of labour required to produce them (a.k.a. "variable capital"), plus the current necessary cost of the capital used up in production (a.k.a. "constant capital"). Fixed capital, such as machines, adds value at the same rate it depreciates, while raw commodities are used up completely and so add all of their value. Labour is generally paid less than the value it adds, since it is the sole source of profit considering all other potentially added value is canceled out by machine/tool deterioration due to usage and diminishing stocks of raw materials.

Since capitalists tend to use labour-saving technology to increase productivity, over time they use relatively more constant capital – which as theorised above cannot be a source of surplus – and this drives down the rate of profit. Though the first capitalist who uses the technology will be able to sell at the market price, and thus gain, once the technology is widely adopted, the value of the commodity will decrease. As capitalists face lower profits they try to increase them by pushing down wage costs either by lowering wages or laying off workers.

Capitalists shouldn't even be extracting profits in the short run if all goods and services in a capitalist society tend to be sold at prices (and wages) that reflect their true value (measured by labour). But then how would capitalists manage to squeeze out a residual between total revenue and total costs anyway? This could only come to pass if the worker didn't receive the amount of money he was due thanks to the amount of labour they invested. Instead the capitalist might have made the worker work more hours than are needed to create the worker’s labour power. Ergo, the surplus value generated by the additional work was — in an exploitative fashion — extracted.

Critics of Marx sometimes attempt to argue against the existence of labour exploitation by undermining the labour theory of value, which on it's surface looks to be necessary to the Marxist conception of workers exploitation. The analytical philosopher G.A. Cohen has argued that the two concepts actually possess a mutual irrelevance, and that the concept of labour exploitation does not rest on the labour theory of value as spelled out in Marx's first volume on Capital. Cohen refers to many a critic's conception of worker exploitation (and even some proponents) as based on a "naïve" understanding of the labour theory of value.

Cohen offers a thought experiment of a considerably talented homeless man being offered paint supplies to produce a painting for a local business man. Needing the money to survive and having no access to paint supplies of his own the homeless man agrees. The business man offers to pay the homeless a wage for every hour worked. For the sake of argument lets say the homeless man is paid $10/hr. The painting takes the Homeless man 8 hours and so he receives $80 for his work. The business men then proceeds to sell the painting he received for $800 without the consent of the homeless man. Was the homeless man exploited?

Cohen takes for granted that the intuition is that the homeless man was indeed exploited, but this is just an analogy for the relationship between worker and capitalist with the paint supplies being analogous to the means of production. Cohen then argues that the presence of exploitation of the worker is therefore independent to what ever theory of value one chooses, and so any "debunking" of the labour theory of value fails to be a debunking of labour exploitation under capitalism.

Criticisms
Critics point out that the LTV does not explain the value we ascribe to naturally occurring, yet valuable/priced objects. Marxists counter that these things only become valuable when labor is applied when the purpose of sale has value been generated in the Marxist sense. It could however be pointed out that Marx's LTOV is more relevant to explaining and exploring class dynamics than explaining value as an abstract property. This counter does not address why land that has not been altered by labour would have any economic value as some natural areas of land do.

Some criticize that Marx's Law of Value cannot explain Fiat currency. Marxists can circumvent this by positing that fiat currency is a method of labor-accounting rather than something with embodied labor. Marx actually posits something similar to this in Critique of the Gotha Programme during his outline on distribution in the first-stage communist society, the only differences being that what he was talking about does not circulate and is not subjected to distortions from supply and demand because the market does not exist: "[The worker] receives a certificate from society that he has furnished such-and-such an amount of labor (after deducting his labor for the common funds); and with this certificate, he draws from the social stock of means of consumption as much as the same amount of labor cost." Fiat currency within this framework could be something which while not having value still represents it.