I shall refute here the proposition that “the economic value of all goods and services is derived from the cost of their production and ultimately from the labor expended on their creation-be it measured in terms of the time, effort, or disutility required to produce the goods or services in question-and the labor expended on the creation of goods necessarily endows them with economic value.” This proposition is the essence of the labor theory of value, a false view nonetheless embraced by such notable thinkers as Thomas Aquinas and Adam Smith and used by Karl Marx to justify socialism. I shall then argue that the utility theory, which views economic value as identical to the benefits gained by individuals from goods and services, is a superior explanation of economic value.
Refutations of the Erroneous Theory
Refutation 1: Argument from Naturally Occurring Valuable Goods: There are economically valuable goods which do not require nearly any labor to produce. These goods are given to man by nature yet are still scarce and not available to every man equally. Wild berries and fruit are an example; let us presume that Person X is walking in a forest and picks up an apple that had fallen from a tree. Picking up the apple involved almost no labor on X’s part. There are no further apples to be picked up in the vicinity. Person Y approaches X and wishes to purchase his apple. X can legitimately charge a price for the apple greatly in excess of the minuscule amount of labor required to obtain it. Thus, the economic value of X’s apple greatly exceeds the labor expended in procuring it.
Refutation 2: Argument from Useless Labor: There can be activities on which immense labor is expended yet which yield little or no economic value to anyone. For instance, digging a large hole and filling it in both require extensive manual labor-yet the net result of the procedure benefits nobody and improves nothing.
Refutation 3: Argument from Excessive Exertion: A laborer who works hard to create goods for sale can often expend in their creation labor far exceeding their actual economic value. For instance, an individual who spends years writing by hand a single copy of a book might be able to sell the book for the prevailing market price of books, but he will have expended far more effort on the book than the returns to him justify. The demand for his single handwritten book simply does not suffice to compensate him for his labor. Thus, the economic value of goods can be less than the labor expended on their production.
Refutation 4: Argument from Non-Exertion: Some economic value can be created without little or no deliberate individual effort. A would-be entrepreneur might take a walk and notice-without prior intention-that in one part of the city, a good sells for less than it does in another part. This effortless recognition could enable him to-using minimal labor- purchase the cheaper goods and re-sell them in the other part of the city, thereby enhancing their economic value by an amount far exceeding the labor expended. Likewise, the entrepreneur could inform a fellow businessman of his idea in exchange for a cut of the profits-in which case the entrepreneur himself, through his idea alone, has created economic value which required virtually no labor on his part.
Refutation 5: Argument from Unequal Ability: Individuals differ in skills and abilities-and using the same amount of labor, some can create more economic value than others. Let us posit two carpenters, A and B. A can make a table in one hour, whereas B can make two identical tables in one hour; both A and B must exert equal effort to accomplish this, and both experience equal disutility from their labor. Yet if A and B take their tables to market, B will earn twice as much as A, other things equal, because he has provided twice as many valuable goods. Among different occupations and different types of production, the discrepancies among individuals will be even greater; the president of a corporation-whose ideas animate the productive activities of thousands of people-can generate millions of times more economic value than an ordinary day laborer during the same time period.
Refutation 6: Argument from Incentive: If the economic value of the products of labor were exactly equal to the disutility imposed by the labor, there would be no incentive for the laborer to produce the good or service in the first place. He would have no reason to undertake an effort merely to compensate himself for his costs, for doing nothing would achieve the same result in less time. Unless the economic value-and hence the economic returns-of an activity exceed the disutility of performing it, individuals will overall be strongly discouraged from undertaking it.
Refutation 7: Argument from the Unequal Uses of Purchased Goods: Two otherwise identical goods-with the same amounts of labor expended on them-can have dramatically differing economic values. If a guitar is purchased by a musician, it can generate immense economic value if the musician plays it or records himself playing it and sells the recording. If, however, purchased by a musically illiterate person, the same guitar will be idle and not generate that value.
Refutation 8: Argument from Diminishing Marginal Utility: Two otherwise identical goods, within the possession of the same person, can have dramatically different economic values. For instance, a person possessing two units of the same water might use the first to prevent himself from dying of thirst, while using the second to wash himself. The former bottle saved his life, while the latter only preserved his cleanliness. If both units of water required identical labor to be created, their economic value-even to the same person-is not identical. If he were asked to sell the water, he might charge a substantial price for the second unit, and would likely refuse to sell the first at any price-unless he were compensated sufficiently to be assured of his life’s continuance. This illustrates the law of diminishing marginal utility: that the value to an individual of each subsequent use of an identical good in his possession will be less than the value of the previous use-assuming that the individual puts the first goods in his possession to his most highly-valued uses and devotes subsequent goods to meet his priorities in descending order.
The Utility Theory of Value
Having refuted the labor theory, I propose a superior explanation for economic value: the utility theory, which states that “the value of economic goods and services is identical to the benefits it confers on the individuals employing them.” Rather than equating value with individuals’ costs, i.e., what they lost in producing the goods and services, we can more accurately equate it with what they gain from the existence of those goods and services-for it is the gains that the goods and services are produced to achieve.
I shall show that the utility theory is immune to the above refutations of the labor theory of value:
Immunity to Refutation 1: A naturally found good requiring little labor to produce it can still confer benefits on the individuals who find it and use it; those benefits are the root of the economic value of such goods and justify their sometimes substantial market prices.
Immunity to Refutation 2: Useless labor-like digging a hole and filling it in again-confers no benefits on anyone and therefore is not a source of economic value, according to the utility theory.
Immunity to Refutation 3: Excessive exertion results in producing goods which benefit people less than the creator’s cost in time, effort, and disutility. According to the utility theory, these goods have value exactly in proportion to the benefits they confer-irrespective to how much labor was exerted in their creation.
Immunity to Refutation 4: Little or no exertion-as in spontaneously arriving at ideas or noticing facts that can be turned to individuals’ economic advantage-can produce tremendous benefits for large numbers of people, despite the little effort involved in the initial discoveries. Thus, the utility theory explains why such acts of little or no exertion can create economic value.
Immunity to Refutation 5: The utility theory accounts for the discrepancy of individual abilities and states that the economic value of their actions is exactly equal to the benefits they confer on themselves and others-which implies that some individuals can create far more value than others while expending similar amounts of time and effort.
Immunity to Refutation 6: The utility theory requires that an economically productive activity generate more in benefits than it costs. Thus, there exists an incentive to undertake activities that generate value-because the prudent and foresighted creators of valuable economic goods and services will be compensated beyond the cost of their labor.
Immunity to Refutation 7: The utility theory accounts for the same goods’ different values when they are put to unequal uses-since the benefits they confer on the users differ depending on the uses to which they are put.
Immunity to Refutation 8: The utility theory incorporates the law of diminishing marginal utility and explains that the greater benefits conferred by the first units of good in an individual’s possession cause that individual to value these first units more than subsequent units.