Question

What is the labor theory of value? What are the problems with this theory?

Answer 1

Labor Theory of Value (LTV) states that the relative price of two different goods , that is the ratio of their prices , is determined by the ratio of the quantities of labour required in their production . In simple words , ratio of prices = ratio of labour requirement . Some assumptions of this theory are : both sectors have same wage and profit rate , capital employed is measured in terms of wages , production period is same .

So LTV says that all goods should be worth the time and labour it took to be produced . So if any profit is generated , it means that labour has been undervalued .

This theory is quite unrealistic . There are other factors like land and capital other than labour . Some goods may not be labour intensive . Surplus value would not always be undervaluing a factor , it may be generated due to some other factor . Labour is heterogeneous in the economy , so wages cannot be equalized .