The Labor Theory of Value in Everyday Life: The Soylent Brown Fallacy

The labor theory of value stipulates, in a nutshell, that the value of a product on the market represents the value of the labor input in the course of its production (plus evil, pilfered, bourgeois profits if you're an old-fashioned Marxian).  This theory, though it is intuitive and attractive on its surface, is fundamentally flawed.  This doesn't stop it from being applied in everyday life, especially by the common layman who has never heard of the formal theory.  For example:

1. I once had a coworker who, fresh out of his undergraduate schooling, declared all advertising to be wasteful.  Therefore, he claimed, it would be better for the government to distribute all relevant product information and for advertising to be illegal.  The primary driving force behind his thinking was that embedded in the price of goods that are advertised is a unit related to advertising costs, and if that were to be removed, the savings could be passed along to the customers.
2. Similar to the previous notion is the often heard proposition that generic grocery items cost less because the companies that produce them don't have to pay for advertising.   
3. The development of costs in grant proposals is usually based in part on a number of employees at a percentage of effort for a fixed period of time.  
4. The bottom line on your invoice from the auto shop or your contractor includes "parts" and "labor".

This is not to say that the going rate of labor an other inputs is not involved in the calculus of prices paid.  These activities simply contribute to the misguided notion as to the origin of value.  Consider the following:

Imagine that you intended to open a restaurant based on the sale of reconstituted  excrement.  Of course, assume that you have developed a laborious and expensive technique to sterilize the manure through a process involving intense heat.  Assume also that this process has been approved by the various regulating bodies and that you have obtained contracts with local farms and sewage agencies to acquire the raw material at a fire sale price.  How do you arrive at a list price for your various incarnations of, for lack of a better name, Soylent Brown.  You would probably start by adding up the cost of the raw material, shipping charges, labor expenses for you and your employees, a function of your rent on the building and a percentage markup that you think is reasonable and that you expect to represent your profit.

Now it's all a matter of raking in the dough.  Will the product sell?  I haven't done any market research, but probably not.  You think that maybe your list price was too high; perhaps you are too far up the demand curve for anyone to be interested in your curried excrement over rice.  You then might decide to invest in an advertising campaign to get the word out about your new lower priced delicacy.   You've had to cut into your potential profits to do this because raising your prices is clearly not an option.  Still, in spite of your efforts, you are not successful.  What to do?

Inspiration strikes!  You decide to sell your product to local ranchers who are less squeamish about what they feed their livestock than the average soccer mom is about what to feed her children.  You realize that this must be done at a lower price point and that you have the opportunity to sell a larger volume, so you ditch the expensive rent for a restaurant downtown in favor of a small factory on the outskirts.  You let your sandwich artisans go in favor of lower paid and less skilled workers.  You scale back your operation by eliminating hoagie buns and guacamole from your inventory, and you finally settle into an operation that can return a profit selling the region's lowest form of refuse to a couple of cheapskate farmers.

Admittedly, this is an unlikely scenario and a business plan that I wouldn't recommend, but I hope it illustrates the origin of the value of your product.  It wasn't some intrinsic value in your labor (how wonderfully circular that would be) or the quantity of it.  It wasn't the money you spent advertising your low-priced fecal sundaes.  It was the subjective valuation of your product given by those farmers.  Your profits, were you be lucky enough to have them, were not milked out of your employees or reaped from operant conditioning of the masses through clever advertisement but from your hard-earned knowledge of what someone valued and how to deliver it to them.    


Related Post: Starship Mises