Three Cases In Which The Labor Theory of Value Is A Simple Theory Of Price

1.0 Introduction

This post should be mostly uncontroversial. The labor theory of value (LTV) explains prices in certain special cases.

2.0 An Economy of Self-Employed Artisans

First, consider a pre-capitalist economy with no employer and employees. Commodities are manufactured for the market by self-employed artisans. They might have titles like carpenters, weavers, or blacksmiths. In this case, market prices tend to be (proportional to) labor values.

Adam Smith described this case. Karl Marx can be read as presenting this case in chapter 1 of volume 1 of Capital. In that chapter, he has independent producers. He introduces concepts in a certain order. Can you find anything in that chapter about workers being paid wages?

3.0 When the Rate of Profits is Zero

I now turn my attention to a sort of capitalist economy. Employers hire workers for wages. The workers produce commodities for the employers to obtain the revenues from selling them on the markets.

But here the capitalists do not have the ability to generally obtain a profits. Market prices tend towards labor values.

Joseph Schumpeter wrote about this case in The Theory of Economic Development. He has profits being temporary, as innovating entrepreneurs destroy the smooth reproduction of a capitalist economy, until it tends to settle down again.

4.0 When Capital-Intensity Does Not Vary Among Industries

I now consider a capitalist economy in which the capitalists are generally able to obtain a rate of profits. Suppose capital-intensity does not vary among industries. The ratio of the total value of the capital goods used up in production to the labor directly used in producing each commodity is the same, whatever commodity is being produced. You might as well use labor values when adding up capital goods.

Then market prices tend towards labor values.

Karl Marx wrote about this case in much of the first volume of Capital. Obviously, he does not write about eigenvalues and Leontief input-output matrices.

5.0 Conclusion

Modern reformulations of classical political economy, of course, are not confined to the above special cases. I find of particular interest the mathematical dual of the last case. David Ricardo and Karl Marx discuss this dual case - not with that jargon. Ricardo's last essay, unpublished in his lifetime, was about that. Marx discussed this dual case towards the start of the third volume of Capital.

But really their interest was not in a theory of prices. Ricardo and Marx both investigated labor values in their explanations of profits, of the ability of capitalists to obtain returns on their investments.