Labour theory of value

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The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.
Adam SmithThe Wealth of Nations, Book 1, chapter IV.

The labour theory of value (“LTV”) argues that the economic value of a good or service is determined by the total amount of “socially necessary labour” required to produce it. A staple of Marxist theory, the LTV stands in contrast to the neoclassical model of value — the one typically subscribed to by venal capitalist running dogs etc., as as articulated by their spiritual Godfather Adam Smith, above — that the value of a good or service is whatever someone else is prepared to pay for it.

Cue long-winded diatribes, from either side, about those who know the price of everything, the value of nothing, and so forth.

But it seems to me that “price” — an identifiable fact: the number at which you both arrived — and “value”: the buyer’s and seller’s respective opinions about the thing they have just bought and sold — cannot be the same thing; indeed the commercial world depends upon their very difference. The overall rationale for a transaction between rational merchants must be that the seller values the property below the agreed price, and the buyer above it. If monetising an asset, or converting money into an asset[1] is some kind of phase transition, then the process involves a loss of energy, an increase in entropy, and a rational agent would not monetise or assetise at a price exactly equal to its own value assessment. Hence, rational agents will only transact when both of them believe they are creating value.

This beautiful dissonance is why economics is not a zero-sum game. As long as merchants are providing valuable consideration for their exchanges, there should be no tragedy on the commons.[2] Price becomes an interesting factor only where it is the right side of value. If it is the wrong side, there is no trade.

This is not to say price and value are independent — that would be too easy. Merchants are greatly assisted by the irrational psychology of scarcity and desirability: some items — paintings, for example — become more desirable the higher their price.

SaaS and the LTV

In any case, reg tech providers are wont to unexpectedly invoke the labour theory of value on prospective clients by way of justifying the outrageous rent they propose to extract: “this desultory code, which I commissioned from some java programmer in the Balkans I found on UpWork and which he knocked together over a weekend, will save you a million dollars a year in legal fees. Therefore you will be thrilled to hear that your licence is only $500,000 per annum, for up to 100 documents per quarter.”

Does the information revolution validate LTV?

In which your correspondent no doubt goes over the front of his skis. But it seems to me, readers, that the information revolution presents our conventional model of value with a problem. For anything that can be automated can be replicated, algorithmatised, reverse-engineered and widely propagated without cost. However good it is, we know it can be generated cheaply, reliably, and non-exclusively. This is anti-scarcity: it necessarily affects our assessment of its value, and in any case where price is the right side of value that is not the end of it: then you must beat your competitors, all of whom have the same technology and the same ability to generate an equivalent product with minimal cost.

To create value you have to put in some effort. No one is going to turn up to watch a robot playing the guitar, however technically fantastic an achievement that is. Would they show up to see a chap who records iPhone videos of himself playing jazz standards in a music store?

Well, I would.

See also


  1. Why isn’t there a word like “monetisation” for the inverse process? And no, it isn’t “securitisation”. Securitisation is just monetisation using an espievie.
  2. This is just one good argument for freely sharing intellectual property. It is not not an exhaustible resource. What other people do with your IP can benefit everyone.