The original and primary form of labor income is PROFIT, not wages. Without capitalists, workers producing and selling commodities earn SALES REVENUES, not wages. Without capitalists, there are no wage payments or expenditures for capital goods. Hence, NO COSTS to deduct from sales.
Thus, in the absence of capitalists, 100% of sales revenue is profit. And because without capitalists, accumulated capital in money terms is zero, the rate of profit on capital is infinite.
Capitalists create wage payments and expenditure for capital goods, hence costs to deduct from sales revenues. They also accumulate capital on the balance sheets of their firms. Their activity thus reduces profit both as a percentage of sales and of capital and raises wages.
Capitalists are the primary producers. Wage earners are the capitalists’ HELPERS in producing the CAPITALISTS’ products. Just as we credit Columbus with the discovery of America, and not his crew members, we should credit Ford, Rockefeller, et al. with the products of their firms
It is they who supply the guiding, directing intelligence at the highest level, who set the goals and assemble the means to achieve them. Thus, it is they who are responsible for what is accomplished. The wage earners are fully paid for their help when they receive their wages.
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The labor theory of value has almost zero explanatory value. For proof, see my tweet-thread turned blog post “What's Wrong with the Labor Theory Value…” at http://bit.ly/2GwqB3Q.
A quasi-legitimate application of it, which the Marxists would certainly reject, is that to the extent that the capitalists reduce the quantity of labor required to produce goods, they enable the same quantity of labor to produce more.
This increases the supply of products relative to the supply of labor and thus reduces prices relative to wages, thereby increasing the buying power of wages, i.e., real wages.
This, in turn, enables workers to afford to accept lower paying jobs that offer shorter hours and better conditions of the kind that don’t pay for themselves, and to keep their children home longer.
But don’t expect Marxists ever to acknowledge that capitalism raises real wages, shortens hours, improves working conditions, and abolishes child labor. Hell will freeze over first.
Meanwhile, here’s some more points concerning the inapplicability of the labor theory of value: futures prices, different grades of land and mines, countries with different degrees of economic development, the value of paper money, and land prices.
COMMODITY FUTURES PRICES
This is despite the fact that coming from one and the same harvest, the quantity of labor required to produce wheat or cotton for delivery in the various future months is the same for all of the months.
(Granted, there are extra storage costs for later delivery, but the differences in price substantially exceed the extra storage costs.)
Like that of aged whiskey, this is a case of equal quantities of labor used to produce products but the products’ values permanently differing from one another based on the role of time and the rate of profit in determining value.
The Marxists believe they have an answer to this objection. No, no, they say. It’s not just any labor expended in their production that determines the value of goods. It’s only the “SOCIALLY NECESSARY” labor.
Unfortunately for the Marxists, there can be more than one “socially necessary” labor time required to produce one and the same good—as many as there are different grades of land or mineral deposits necessary to produce a desired quantity of output.
As Ricardo explained in his classic chapter "On Rent,” people first bring into production the most productive land and mineral deposits. If their output is insufficient to meet the demand, people resort to land and mineral deposits of the second quality, and so on.
Each succeeding quality of land and mineral deposits requires more labor per unit of output. That’s what makes them land and mineral deposits of inferior qualities.
Thus, there is no one quantity of labor required to produce a bushel of wheat or pound of cotton, but a range of quantities. And yet all the bushels of wheat or pounds of cotton in a given market at a given time sell for the same price. The different quantities of labor do not result in different prices.
COUNTRIES WITH DIFFERENT DEGREES OF ECONOMIC DEVELOPMENT
The cost of production of the product also tends to be the same in both countries, with differences in the quantity of labor required accompanied by opposite differences in wage rates. Thus, half the quantity of labor tends to go with double the wage rate and vice versa.
Please note: insofar as the prices of products are determined by their cost of production, differences in wage rates are fully as important as differences in the quantity of labor in determining the products’ relative value, irrespective of the labor theory of value.
THE VALUE OF PAPER MONEY
The labor theory of value might appear to have some explanatory value in a hyperinflation, in which the quantity of paper money that had to be given in exchange for a roll of toilet paper at least contained an equal amount of paper and thus, to that extent, perhaps an equal amount of labor.