Editing Labor theory of value (section)

== Relation between values and prices ==
While the LTV posits that value is primarily determined by labor, it recognizes that the actual price of a commodity is influenced in the short-term by the profit motive<ref>{{Cite report |url=https://econpapers.repec.org/bookchap/oettbooks/prin7.htm |title=Human Society and the Global Economy |last=Taylor |first=Kit Sims |date=2001 |publisher=SUNY-Oswego, Department of Economics |quote=Value lies at the core of the economic adjustment process. If the actual price of something were above the value, the extra profits to be made would attract more firms into that industry leading to a greater supply and – eventually – lower prices; conversely, if the actual price of something were below the value, the losses – or sub-normal profits – would drive firms out of that industry leading to a smaller supply and – eventually – higher prices.}}</ref> and market conditions, including supply and demand<ref>{{Cite web |last=Marx |first=Karl |author-link=Karl Marx |title=Economic Manuscripts: Value, Price and Profit |url=https://www.marxists.org/archive/marx/works/1865/value-price-profit/ch01.htm |access-date=28 January 2024 |via=[[Marxists Internet Archive]] |quote=You would be altogether mistaken in fancying that the value of labour or any other commodity whatever is ultimately fixed by supply and demand. Supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they can never account for the value itself. Suppose supply and demand to equilibrate, or, as the economists call it, to cover each other. Why, the very moment these opposite forces become equal they paralyze each other, and cease to work in the one or other direction. At the moment when supply and demand equilibrate each other, and therefore cease to act, the market price of a commodity coincides with its real value, with the standard price round which its market prices oscillate. In inquiring into the nature of that VALUE, we have therefore nothing at all to do with the temporary effects on market prices of supply and demand. The same holds true of wages and of the prices of all other commodities.}}</ref><ref>{{Cite book |last=Rubin |first=Isaak Ilyich |url=https://books.google.com/books?id=moJGEAAAQBAJ&q=supply+demand+%22socially+necessary%22&pg=PA57 |title=Essays on Marx's Theory of Value |date=2020 |publisher=Pattern Books |isbn=978-3-0340-0472-5 |language=en |quote="...even though the quantity of socially-necessary labor required for the production of one pair of shoes did not change, because of the excessive supply the shoes are sold according to a market price which is below the market-value determined by the socially-necessary labor. The interpreters of Marx ...establish... an 'economic' concept of necessary labor i.e., recognizing that socially-necessary labor changes not only in relation to changes in the productive power of labor but also in relation to changes in the balance between social supply and demand."}}</ref> and the extent of monopolization.<ref>{{Cite web |title=Ernest Mandel: The Labor Theory of Value and "Monopoly Capitalism" (1967) |url=https://www.marxists.org/archive/mandel/1967/03/ltv-mcap.htm |access-date=2024-01-29 |via=[[Marxists Internet Archive]] |quote=The labor theory of value implies that, in terms of value, the total mass of surplus value to be distributed every year is a given quantity. It depends on the value of variable capital and on the rate of surplus value. Price competition cannot change that given quantity (except when it influences the division of the newly created income between workers and capitalists, i.e. depresses or increases real wages, and thereby increases or depresses the rate of surplus value)...It means that the distribution of the given quantity of surplus value is changed, in favor of the monopolists and at the expense of the non-monopolized sectors....Under monopoly capitalism as under “competitive capitalism” the two basic forces explaining capital accumulation remain competition between capitalists (for appropriating bigger shares of surplus value) and competition between capitalists and workers (for increasing the rate of surplus value)."}}</ref> Adherents to the LTV conceptualize value (i.e., socially necessary labour time) as a "center of gravity" for price over the long-term.<ref>{{cite book |doi=10.4337/9781786430649 |title=Value, Competition and Exploitation |date=2018 |last1=Cogliano |first1=Jonathan F. |last2=Flaschel |first2=Peter |last3=Franke |first3=Reiner |last4=Fröhlich |first4=Nils |last5=Veneziani |first5=Roberto |isbn=978-1-78643-064-9 |url=http://qmro.qmul.ac.uk/xmlui/handle/123456789/52466 }}{{pn|date=May 2025}}</ref>{{sfn|Marx|1867}}

In Book 1, chapter VI, Adam Smith writes:
<blockquote>The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command. Labour measures the value not only of that part of price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit.</blockquote>

The final sentence explains how Smith sees value of a product as relative to labor of buyer or consumer, as opposite to Marx who sees the value of a product being proportional to labor of laborer or producer. And we value things, price them, based on how much labor we can avoid or command, and we can command labor not only in a simple way but also by [[Trade|trading]] things for a profit.

The demonstration of the relation between commodities' unit values and their respective prices is known in Marxian terminology as the [[transformation problem]] or the transformation of values into prices of production. The transformation problem has probably generated the greatest bulk of debate about the LTV. The problem with transformation is to find an algorithm where the magnitude of value added by labor, in proportion to its duration and intensity, is sufficiently accounted for after this value is distributed through prices that reflect an equal rate of return on capital advanced. If there is an additional magnitude of value or a loss of value after transformation, then the relation between values (proportional to labor) and prices (proportional to total capital advanced) is incomplete. Various solutions and impossibility theorems have been offered for the transformation, but the debate has not reached any clear resolution.

LTV does not deny the role of supply and demand influencing price, but suggests that value and price are equivalent when supply-demand equilibrium is met. In ''Value, Price and Profit'' (1865), [[Karl Marx]] quotes [[Adam Smith]]:
<blockquote>It suffices to say that if supply and demand equilibrate each other, the market prices of commodities will correspond with their natural prices, that is to say, with their values as determined by the respective quantities of labor required for their production.<ref name="marxprofit">{{cite book |last=Marx |first=Karl |url=http://www.marxists.org/archive/marx/works/1865/value-price-profit/ch02.htm#c6 |title=Value, Price and Profit |date=1865 |chapter=Value and Labour |author-link=Karl Marx |via=[[Marxists Internet Archive]]}}</ref></blockquote>

The LTV seeks to explain the level of this equilibrium. This could be explained by a ''[[cost of production]]'' argument—pointing out that all costs are ultimately labor costs, but this does not account for profit, and it is vulnerable to the charge of [[Tautology (rhetoric)|tautology]] in that it explains prices by prices.<ref>{{cite book |last1=Sraffa |first1=Piero |title=The Works and Correspondence of David Ricardo |last2=Dobb |first2=Maurice H. |date=1951 |publisher=[[Cambridge University Press]] |volume=1 |chapter=General Preface}}</ref> Marx later called this "Smith's adding up theory of value".

Smith argues that labor values are the natural measure of exchange for direct producers like hunters and fishermen.<ref name="ormazabal">{{cite web |last=Ormazabal |first=Kepa M. |date=2006 |title=Adam Smith on Labor and Value: Challenging the Standard Interpretation |url=https://www.ehu.eus/documents/2276258/2294671/il2006_26.pdf |publisher=[[University of the Basque Country]] |archive-url= |archive-date=}}</ref> Marx, on the other hand, uses a measurement analogy, arguing that for commodities to be comparable they must have a common element or substance by which to measure them,<ref name="marxprofit" /> and that labor is a common substance of what Marx eventually calls ''commodity-values''.{{sfn|Marx|1867}}