Tuesday, September 8, 2009

People actually still believe in the Labor Theory of Value!?

Ok... So last night, I sat through an endless string of ad homs, false dilemmas, ad hom tu qoques, question begging, questionable causes and more ad homs.

I got accused of not giving straight answers but 1. I repeated myself dozens & dozens of times giving exactly the answers I intended, and 2. my "opponent" gave me NO answers what-so-ever to a single question I asked, and instead always turned whatever I said around into one of the above mentioned logical fallacies. Typically either calling me stupid or pretending that I was contradicting myself by either rephrasing what I said or re-defining words to alternate meanings. The favorite was re-interpreting the word "value" from a material/monetary sense, to an ethical moral sense... Why I'd be using the word "value" to reference moral character when the entire discussion was about theories of relative monetary value - price structure, essentially - is beyond me.

So for the record, all usages of the term "value" henceforth found in this little essay mean the following (taken from Websters):
1 : a fair return or equivalent in goods, services, or money for something exchanged
2 : the monetary worth of something : market price
My startling intellectual masochism aside, last night's idiot-fest was worth remembering as a lesson to avoid attempting to 'debate" with such folks in the future, and also because I should have a record of why the Labor Theory of Value is completely and utterly silly as a concept on this blog. So here goes.

First off, let me explain the basics of the LTV. According to this theory, all prices should be a result of a person's labor combined with the cost of materials. This is expressed by economists as:

c + L = W

  • c is the constant capital of materials used in 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)
  • L is the quantity of labor time (average skill and productivity) performed in producing the finished commodities during the period
  • W is the value of the product of the period (w comes from the German word for value: wert)
Now, I'll get back to the infinite regression problem with "cost" in a bit, but essentially the important thing here is that the LTV posits that price should be only a reference to labor - and at that, the only "labor" typically recognized is physical (certainly by Marxists - though I'm sure any ancient classical Ricardians are ok with alternatives)...

This is to say, intellectual work, planning, strategizing, marketing, inventing, engineering, and other forms of non-physical productive effort aren't really counted. For example, if you're a composer as I am... Only the manual work you put into actually writing the music down on paper or recording MIDI & audio onto a computer counts. If I'm like many other composers, I spend much more time in the "thinking" and "brainstorming" part of the creative process than I do actually writing anything down, but apparently that's never been worth very much to Marxist LTV'ers... Just in case any LTV types (the 10 of you still around) actually object to this claim, I should remind everyone that Marx' primary critique of Capitalism rests on the idea that the "Capitalists" don't do any of the work. Entrepreneurs and managers, and especially investors willing to risk their earned income on new projects are expressly not counted as part of "labor", so this point is rather important.

But I digress (and we already knew all that anyway). Point being: Their definition of "labor" is necessarily limited to physical work - and this is what gave Marx the impetus to play class warfare games with the working proletariat and the bourgeoisie Capitalist swine(tm).

In truth though most people subconsciously realize that value in all senses of the word (including the moral) is subjective, and nominal/price-value is almost completely independent of labor... That is to say, they realize that the labor applied to create something doesn't necessarily have any relationship to its final price.

I can cite a thousand examples demonstrating this, but just to point out a couple...

Example 1:
Would this painting:

be more valuable to you than this painting?:

If you knew that the first painting was made in 10 minutes and the second painting made in 10 days? If the first painting was made by your five year old daughter and the second painting by a famous artist? If each painting took an identical amount of time, canvas, paint & other "resources" to create, would you still like one more than the other? Do you think everyone in the world would agree with you? Now the real question: Would you be willing to pay a higher price for the first or the second painting? What is that price?

According to LTV; both paintings should cost exactly the same amount if they used the same amount of paint and same number of hours to create. But what if you had no way of knowing (as you often don't) what labor was involved in the construction of each? And perhaps, what if the artists lied about their effort? What if the artist who painted the second wanted you to think he took only minutes, and the artist who painted the first wanted you to believe it took weeks? But what if in truth they were the same amount of work - in LTV, the second would be worth next to nothing compared to the second based on sheer labor hours. But how would you know? And if you didn't know... How would you ascribe value to the paintings?

As it happens, these paintings were done by a 5 year-old & a famous artist (Picasso, for the totally uninitiated).

In truth, the first painting did take less time and less paint than Picasso's La Guernica (which is 11 feet tall and 25 feet wide covering an entire wall in El Museo del Reina Sofia in Madrid). And as it happens, the Picasso is valued at a much higher nominal price than the 5 year-old's. However, I'd stake any claim you want that the mother of that 5 year-old values that little painting as high or higher than anything Pablo Picasso ever signed his name to. I'd also stake any claim you want that the nominal price you might be willing to pay for La Guernica (or for that 5 year-old's painting) is vastly different from the nominal price I might attach to these artworks.

The fact is that every individual will value each painting at a different level, and that value is entirely in the eye of the beholder - the method, the time, & the materials by the creator are essentially irrelevant. Naturally the painter shouldn't accept an offer for less than his costs and his time, like anything - but that doesn't guarantee anyone else will offer more, and that's what this is fundamentally about.
Example 2:
Now, imagine that you and I are both potters and both want to produce coffee mugs.

Imagine further that we each make these mugs in 1 hour. We each use the same tools, and we each use exactly 8 oz. of clay, 4 gallons of water and 1 oz. of paint... And at the end of the process we each use the same kiln to fire our creations. Identical work. Identical costs.

Should mean identical prices right? According to LTV, yes! But does it work that way in reality? No.

But now imagine that my mug has been made poorly - it was deformed a little, not as shapely as yours, and unfortunately has a hole in the side that leaks coffee right out of it if you tried to use it for it's intended purpose. Do you think anyone values my mug equally to yours now? What price would you pay for mine? Would you even trade your functional mug for my non-functional one?

According to the LTV, our mugs command the same price. Remember again that our costs and our labor time creating each mug was identical, and that c + L = W.

Does this seem like a good way to determine price?

***I should note that the guy arguing last night came through with a bitchy re-cap to someone else today, apparently. He was claiming that if the mug wasn't functional or "wanted", then it ceases to be defined as a "product". That's patently idiotic however.

First of all, the cup a "product" regardless of whether or not anyone buys it since someone produced it. Secondly, the whole point of all this is to demonstrate that price is subjective and that even , with a hole in it, I can very likely sell the cup for non-cup-like purposes; for art, pottery, planting, etc. etc. etc. It's unlikely that the price I could convince anyone ot pay would be as high for those purposes as it's original, but failed, attempt at working to hold a beverage, but that's precisely the point! If no one is willing to buy it at the price offered, my option as maker/owner are to either keep the damn thing or lower the price until someone is willing to buy it.

Because value is subjective, most things will find a buyer eventually, depending entirely on the terms offered. The objection raised by the proponent of LTV is interesting though, because if you follow his theory, then there's no way to change the price. It would necessarily be all or nothing. A cup not perfectly identical to all others... A rejected cup, is worthless. Funny though, since that directly contradicts the assertion that value is merely a function of labor & material costs............ If it's just about labor & materials, then whether or not the cup is functional for it's purpose shouldn't actually matter.
In both of the above examples, it should be clear that the price (the monetary representation of value) we ascribe to any object has much more to do with our own relationship to the object and our own needs & desires than any other factor.

At any rate, it should be remembered that money is just a convenient mechanism which we use as a medium of interchange to purchase other goods, but it in and of itself is also a good; in that it is limited, transferable/can be traded and can directly or indirectly increase utility. Money is just one measurement of many which we can use to reflect personal preferences.

Additionally, preferences are not constant or "cardinal" but rather ever changing & ordinal in nature. We value certain things today that we may or may not value tomorrow. You might relatively highly value a coffee mug at 7 am when you're having breakfast and waking up for work, but perhaps not at all if someone offered it to you at midnight when you are going to sleep.

Labor Theory of Value fails to recognize this. With an LTV approach, your changing preferences are of no concern. The mug is worth whatever the labor & costs were to create it at any given time... Of course, in the real world, you express your preferences by refusing to buy the mug unless the price is adequate. Also in the real world, if a producer of a mug set his price at Labor + Cost, and most people don't think the nominal price is "worth it" to them (again pointing towards subjective valuations), then that producer either must change his price or go out of business.

This also makes LTV completely arbitrary in terms of a nominal value. What does "labor" cost anyway? $1 an hour? $10 an hour? $20? $1,000? Who decides and how will they decide? Likewise, who decided what that original "cost" was way back when? How did they decide?

By contrast, subjective valuations may change constantly, but they are anything but arbitrary. Value is something that is placed on a given object by individuals, and is not intrinsic. Individuals ascribe value to things for a reason... No matter how silly some of those reasons may seem, we do not rank objects of their important to us arbitrarily or randomly. If you were starving and dying of thirst in a desert, suddenly water & food move right to the top of your ordinal preference list... To make this even more clear, imagine the following scenario.

Example 3:
Imagine these conditions; The economy of this fictitious world offers 10 types of goods - as follows:
  1. Water
  2. Basic Food
  3. Shelter
  4. Clothing
  5. Weapons/Shields
  6. Transportation
  7. Tools
  8. Entertainment
  9. Junk Food/Candy
  10. Diamonds (money)
Now further imagine that you are one of these three individuals:

Individual A: Has recently eaten & drunk water (1 & 2) and has some saved for later, thus is neither hungry nor thirsty, and is also fully clothed (4), already has a spear and a shield (5) which are currently resting on his horse (6), and he also has a bit of a sweet tooth. Individual A does not have a suitable shelter (3), he has no candy (9), tools (7) or entertainment (8). He has 3 diamonds (10).

Individual B: Lives in a nice shelter (3) in the desert, has no water (1), but did eat recently (2). She has many tools (7), is clothed (4) and a lot of candy (9). She has no entertainment (8), transportation (6) or defense (5). She has 100 diamonds (10)

Individual C: Has marvelous shelter (3), lives in a wooden house which he built with many tools (7), doesn't need transportation because he lives in the jungle rich with food (2) and water (1), and doesn't care much about candy (9) or treats. With his tools, he also created some weapons and means of defending himself (5). However, he does like to be entertained, but has no instruments or toys (8), and unfortunately has no clothes to speak of (4). He has 30 diamonds.

Finally, assume that any of the 10 goods can be acquired at a market that just happens to be centrally located between each of these three people's residences. Also assume that by working for someone else, you can trade your labor for more diamonds (or you can dig them out of the ground if you so choose).

If you were one of these people, what order would you rank your preferences for the 10 possible goods presented above? How much of your labor are you willing to expend for each? If we establish that it's possible to exchange "labor" for some denomination of money, let's say you've earned $1,000 - how much of that $1,000 are you willing to put up for the things you lack and want?

If you were Individual A, perhaps you'd offer to work for Individual C to as an entertainer in exchange for some of his diamonds. If you were Individual B, perhaps you'd gladly trade some of your diamonds to either A or C for water. Ponder what you might do.
Now, I don't know what you'd do for sure, but I think it's safe to say that we can be reasonably certain that the order in which Individuals A, B & C would rank those 10 goods in will be completely different.

If you need water immediately, you're going to probably put it in ordinal position number 1, if you need shelter, but have been well fed, you'll put finding a house at the top, if you have all of your basic needs met, but want to get more enjoyment out of life then you might rank sweet indulgences or entertainment at the top spot. Etc. The point is, of course, that one's preferences change all the time, and that the "value" (as denominated by work hours, diamonds, dollar bills or anything else you want) of each of those goods depends entirely on the individual seeking to obtain them. This is the very essence of the subjectivity of price.

The rankings probably depend largely on Maslow's Heirarchy of Needs, as such:

Now of course, in real life there are thousands of goods, and with the capability of human-kind to invent new things, one might say even an infinite number. There are billions of people on the planet, and each has their own ordinal rankings... And of course, because circumstances change constantly, and new goods crop up constantly, the ordinal rankings are never static.

We live in a wild and dynamic universe. And damn is it cool! Accepting that all value as subjective and then allowing price to fluctuate as ordinal preferences (and thus the nominal prices of goods) change means that the economy gets to adapt to new realities along with people. When people need & value houses more, prices go up and producers move their operations into housing. When we've got enough houses for current demand, prices come down naturally and producers get out of the housing business and into something else. Prices across the board are the result of the interplay between producers & consumers agreeing on terms.

Amusingly, one of the LTV'ers kept trying to say (as all Socialists typically do) that prices are "set" by the capitalists, by the sellers of products, and that they can charge you whatever they want regardless of whether or not it's "fair". This is an old argument, of course, but a very funny one indeed... To paraphrase Thomas Sowell, the seller can be as greedy as he wants, but he can only earn what people are willing to pay... And that, my friends is up to the consumer. In a free-enterprise system, the consumer leads all. By his choices, and the shifting of prices that necessarily results, the economy shifts around the needs and wants of ordinary people... Not around the whims of producers. But it does shift, and constantly!

Alternatively, the Labor Theory of Value is almost entirely static. Cost is whatever it happens to be going back through levels of production... Labor is defined by time, and perhaps calories or joules of energy expended valued at whatever the price is set to be. But that doesn't change, unless we arbitrarily change the rubrics. If there is a standard price for labor per unit of time or energy expended, the LTV'ers never bother to say what that is or how one arrives at the price... But it is telling. Because it also means that someone has to be in charge of setting it and changing it if need be!

If we establish that 1 hour of labor is worth $20, then all prices everywhere include that cost regardless of what is produced, regardless of what aggregate ranking the product fits globally in terms of normal people's preferences, and winds up becoming part of the "cost" of all other goods. If I make 10 coffee mugs in an hour, and my raw materials cost for the whole hour is $30, then of course, $20 + $30 = $50/10 = $5 per mug. Does it matter that you might only want to pay $3 per mug? Does it matter that someone else might find my artistry unique and charming and perfect for her decor and would pay $10 per mug? No. Labor + Costs = Price. That's it. No refunds, no exchanges.

The only way to change that is to re-set the price of labor at something other than $20, but who does that? Me? You? A King?

The LTV people never manage to answer that question. And this is the thing that Marxism never addresses overall, but is just one of hundreds of goods that need to be centrally controlled to maximize their distributive efforts. Marx, ultimately, claimed he was about a stateless anarchy. He was about pure "freedom". Except,because he believed in a positive conception of liberty (that is the "freedom" to have things, like shelter, food, health care, coffee mugs etc.), the only way to achieve that is to take goods from some people and give them to other people. Theft & redistribution. But even if you do that in a group of 10 people and it's all contracted and voluntary and everyone agrees and can leave at any time (unlike the communist or socialist states, obviously) you still need someone to decide how to allocate those goods! That person immediately has 100% authority over the lives of everyone involved. It will always be a mystery to me how people don't realize then that Marxism - by very nature of creating concentrated power & heirarchies where a single person or an oligarchy is necessarily in charge of the redistribution of wealth - leads directly to tyranny. LTV is but a part of that.

So again, if we set some arbitrary value for labor independent of people's ordinal preferences for the goods being produced, someone has to pick what that value will be. And if it's the laborer himself, then what's to stop him from saying; "My time is worth $1,000,000 per minute!"?

Nothing, of course.

Fortunately, unless someone actually forces people to pay the laborers what they demand (*cough* government, *cough* unions!), then everyone is free to disagree with this valuation of labor's value. But again, now we wind up right back at square one where price/value is subjective to the individuals involved in the potential trade, and has no real relationship to the amount of work involved a product took to manufacture.

The value is dependent not on the productive actions themselves, but on our individual preferences and thoughts regarding the action. This is the very definition, of the word "Subjective".

Additionally, as I noted at the beginning of this essay - "Cost" being included in the conception of price for the Labor Theory of Value regresses back and back and back, eventually to the very first trade of all time. And that trade could not have been anything but subjectively valued.

Way back to the very first trade, there's only "labor", and no cost - all materials are just homesteaded/acquired from nature... But the minute our great ancestor trades the product of his labor to someone else *for* something, subjective values are in play! Consider two friendly cavemen, Ungh & Tonga:
Caveman Ungh finds some bones, and then he discovers a nice rough rock. He grinds the bone against the rock for a while and makes a knife.

Tonga watches him do this and sees some use for the knife. He has the opportunity to kill Ungh for the knife, but instead decides to offer up something of value to Ungh in return for the knife instead. Thus was the very first voluntary, mutually beneficial trading relationship formed in human history.

But how does Tonga decide what to offer Ungh, how do they come to an agreement? There's no objective standard of value for the bone or the knife... No one's ever made a knife before and no one's ever offered to offer something of value to the other party in exchange for something of value to them before. So how does the very first "cost" of all time get incurred??

It happens by Tonga understanding that what he offers for what he values (the knife) has to be held in a higher ordinal position in Ungh's scale of value. It happens, through the difference in subjective valuations of what's being given away to what's being gained. When both parties stand to gain (or at least believe they stand to gain), then a trade takes place, otherwise they don't trade.

If Tonga couldn't find something Ungh wanted, then he'd either have to walk away - or kill Ungh and take his knife (the uncivilized, rather evil, anti-social and particularly stupid choice... I mean... Ungh is the one with the knife right now!). So let's say Tonga manages to catch 10 fish, and offer them up to Ungh for the knife and he agrees... What we know from that exchange is that Ungh values the fish more highly than the knife, and Tonga values the knife more than the fish (otherwise they'd each keep what they've already got). Thus... In Ungh's mind the knife is in the #2 slot, fish at #1, and in Tonga's mind the values are switched.
And thus... Subjective!

There is no intrinsic value to either the 10 fish or the knife! The value is only an ascription people impose on it based on their wants and needs which only appears in the act of trading.

So you see, at the bottom of the Labor Theory of Value, is a single subjective evaluation of worth - a subjective price upon which all future prices must inevitably be built. From there, you can have arbitrary valuations of labor, you can change the measurement system from fish, or knives, or diamonds to "Dollars" or "Dinar" or "Pesos" or "Wampum" or whatever you want, but you're still rooting the entire theory, which is intended to provide some kind of "objective" standard of value based on labor on an entirely subjective set of initial valuations. Underneath all that, past a trillion regressions of Labor + Cost = Price, that very first "Cost" was subjectively ascribed, and the very first price chosen for Labor was completely arbitrary, so whatever the LTV hopes to accomplish by removing subjectivity of pricing from the system, the whole theory is predicated on subjectivity of value.

Aren't self-negating philosophies fun? At it's root, the LTV requires subjective valuations. Hilarity!

And it doesn't matter what label we use to measure value either. The point remains the same. In LTV - Value is arbitrary, and must be controlled from a centralized authority in one way or another to be maintained in light of other people's preferences. And that requires force. Force to establish labor prices, force to monopolize an industry to prevent anyone from offering the same good for a non-proscribed price, force to prevent people from bartering or engaging in black-market transactions... And we've been DOWN this road!

The USSR did exactly this (because the Marxist roots of communism are predicated on LTV!) - and they did exactly what I would expect them to do... Arbitrarily set prices by force.

Ironically, the only way they could do this with any sense at all was to look at the free-market pricings based entirely on subjective valuations of various goods and all the complexity and spontaneous organization that implies over here in the US and other "evil" Capitalist/more free nations. Alternatively - if you do not control prices, if you let them develop spontaneously in a free market, they will change constantly and develop based on the subjective valuations of millions of individuals trading with each other. And this is good. Very good!

Free price systems provide incredibly important signals to both consumers & producers (I've covered this many times). Consumers learn what's scarce, what they need to be conserving, and what they can indulge in, producers learn what's valued highly and what they should be directing their productive capabilities towards. Whether it's TVs this year, apples next year, bing cherries in the summer, housing, or mining minerals... It's the ever-changing aggregate of prices moving up or down based on individuals wants & needs that guides that process. A Labor Theory of Value provides none of those signals because prices don't come out of consumer demand, but out of an arbitrary standard of value per undifferentiated physical manufacturing work-hour regressed back ad infinitum.

The Labor Theory of Value fails logically, and is self-refuting at it's very core. The fact that I could meet anyone who still believes in it is shocking.

By contrast, the Subjective Theory of Value is consistent in logic and principle, and much more importantly it's observable in action every day all the time.

Stupid Marxists.

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