The labour theory of value is a central concept in classical political economy that asserts that the value of a commodity is largely determined by the amount of socially necessary labour required for its production. Here are the key aspects:

1. Historical Background:
   • Early proponents like Adam Smith and David Ricardo laid the groundwork by arguing that the costs associated with production, particularly labour, dictate the value of goods.
   • Later, Karl Marx expanded on these ideas to critique capitalist production, emphasizing how surplus labour (or surplus value) forms the basis for profit extraction by capitalists, which he argued leads to exploitation.

2. Core Concepts:
   • Socially Necessary Labour Time: The theory posits that the value of a commodity is measured by the average amount of labour time required, considering both the skill level and intensity of work under normal conditions, with available technology and social consensus on efficiency.
   • Exchange Value vs. Use Value: While use value refers to the utility or usefulness of an item, exchange value (or simply value) is defined in terms of the labour required to produce it. This distinction becomes crucial in explaining market phenomena and trade relationships.

3. Implications and Critiques:
   • Price Formation: The labour theory of value attempts to explain price formation on a fundamental level, suggesting that prices gravitate towards the amount of labour embodied in goods, though market factors such as supply, demand, and scarcity can cause deviations.
   • Surplus Value and Exploitation: Marx’s extension of this theory argues that capitalists purchase labour at its value (the cost of reproduction) and then derive profit by extracting surplus labour (work beyond what is needed for wage reproduction). The discrepancy is seen as the root of capitalist exploitation. • Criticisms: Modern economists point out limitations in applying the labour theory of value in complex economies. Critics argue that it underestimates the roles of capital, technology, and market dynamics, and that value is subjective, arising from consumer preferences and marginal utility. Additionally, critics note difficulties in quantifying abstract labour contributions across different sectors.

4. Contemporary Relevance:
   • Although many modern economic theories favor marginal utility for explaining price formation and consumption choices, the labour theory of value remains influential in certain schools of economic thought, particularly within Marxist economics and heterodox critiques of capitalism.
   • Its discussion continues to inspire debates in social theory concerning the distribution of wealth, fairness, and the nature of exploitation in capitalist societies.

In summary, while the labour theory of value offers a framework to understand the origins of value and profit in capitalist economies, it also presents challenges when reconciling with modern market complexities. Its historical significance and ongoing influence make it a fundamental reference point in discussions about economic justice and the critique of capitalist production.

1. Production of a Chair:
   • Imagine two chairs made of similar materials but produced under different conditions. One is handcrafted by a skilled carpenter over several days, and the other is made in a factory using automated machinery and less skilled unskilled labour. According to the labour theory of value, the handcrafted chair would have a higher intrinsic value since it embodies more socially necessary labour time in its production.

2. Cake Baking Example:
   • Consider baking two cakes using the same ingredients. One is made from scratch by an amateur using traditional techniques and might take several hours, while the other is produced in a modern bakery that has optimized the process with better tools and technology. The value of each cake would be determined not only by the ingredients but by the amount of labour normally necessary under prevailing conditions. The bakery’s cake might require less labour time on average, illustrating how productivity and technology impact value.

3. Surplus Value in a Factory Setting:
   • In a capitalist factory, workers produce goods like textiles. The wage paid is based on the cost required to reproduce the labour power (i.e., living expenses). However, if a worker produces output whose value exceeds their wage—say by working extra hours or producing more than what is necessary to cover wages—the additional value is considered surplus labour. This surplus is appropriated by the factory owner as profit, which is a central point in Marx’s critique of exploitation under capitalism.

4. Comparative Goods in Different Economies:
   • Consider two similar items produced in different countries, where the technology and methods vary. In a country with less advanced technology, more labour might be required to produce a comparable commodity. Thus, even if the market price differs due to supply, demand, or capital intensity, the labour theory of value emphasizes that the intrinsic value is largely linked to the amount and quality of labour invested, highlighting how differences in social conditions can alter value computations.

These examples illustrate how the labour theory of value uses the standard of “socially necessary labour time” to assess the worth of a commodity, assess profit generation through surplus labour, and offer insights into variations in value across different production methods and conditions.

The concept of “socially necessary labour time” emerged from classical political economy and was later explicitly formulated by Karl Marx. Early economists like Adam Smith and David Ricardo argued that the labour embedded in a commodity determined its value. However, it was Marx who refined and popularized the term, particularly in his work, Capital.

Marx used “socially necessary labour time” to denote the average amount of labour required to produce a commodity under prevailing social and technological conditions. This idea implies that the value of commodities isn’t based solely on the individual effort of a single producer but on the standardised conditions and methods accepted by society. Such an approach highlights the collective nature of production processes and helps explain how surplus value is generated in capitalist systems through the difference between paid labour time and the labour actually needed to reproduce the value of wages.

Smith and Ricardo typically referred to the value-determining ingredient simply as the “labour time” or the “quantity of labour” required for production. They did not explicitly use the term “socially necessary labour time” but rather focused on the idea that a commodity’s value was measured by the labour spent in its production under ordinary conditions. This notion was later refined by Marx into the concept of “socially necessary labour time,” which emphasizes that it is not any individual labour effort but the average amount of labour time required—reflecting prevailing social and technological norms—that determines value.