labour theory of value


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labour theory of value

a doctrine developed by the classical economists (particularly Adam SMITH and David RICARDO) that states that the value of a GOOD is determined by the amount of LABOUR input needed to produce that good. Thus, the ratio of the equilibrium prices of two commodities is directly proportional to the ratio of labour required to produce them.

Smith was the first to tentatively suggest a labour theory of value, although he acknowledged that the value of a good must be determined by a number of input costs: RENT, WAGES and PROFIT, even if labour did constitute the greatest part of final value. Ricardo accepted that profits and rent may have to be taken into account but that it did not detract from his main argument of relative values between two goods being fundamentally determined by labour cost. Karl MARX developed Ricardo's ideas, decomposing labour value into three constituent parts. The three parts are ‘constant capital’ (the capital used up in production),‘variable capital’ (human labour input), and ‘surplus value’ (the excess value over and above labour and capital used in the production process). Where surplus value exists, there is exploitation of the labour input insomuch as they are being paid less than their full input value.

The labour theory of value was replaced towards the end of the 19th century by the MARGINAL PRODUCTIVITY THEORY OF DISTRIBUTION, which took into account the contribution of all factor inputs into the production process, not just labour. See CLASSICAL ECONOMICS.

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