Labour Theory of Value

Labour Theory of Value, theory that the value of a good or a service derives from the amount of labour that goes into it. Adam Smith considered that labour was the fundamental measure of value, though not the determinant of prices. Just over 25 years after Adam Smith's death, David Ricardo developed the labour theory of value in Principles of Political Economy and Taxation, asserting that all production costs were effectively labour costs, either paid directly or accumulated in the form of capital (machinery produced as a result of the efforts of workers, for example). It was therefore argued that prices would be proportional to the input of labour they embodied. The flaw in the theory was that if one of two goods with identical labour input had been produced with more capital, the producer of the more capital-intensive good would need to have that greater capital element recognized in the price in order to earn an equal rate of profit to that earned by the producer of the less capital-intensive good. Nevertheless, the labour theory of value became central to the economic thinking of Karl Marx, who took the view that only labour can create value.