The Labor Theory is Wrong

Most non-economists and all Marxist economists, bless ‘em, believe in the “labor theory of value.”  You do, probably.  Bless you also.

The labor theory says that the value or price of everything, such as your flat or car or ice cream, consists of the human labor put into it once upon a time.  Nothing else.  The land or capital used to make things are not real value.  Only past effort by humans matters.

You show that you believe the labor theory when you say things like, “Striking workers making a new passenger jet at Embraer in São José dos Campos deserve a raise.  After all, they make the things!” Or “Nurses at Hospital das Clínicas da Universidade de São Paulo deserve a raise, too.  After all, what would happen if they all resigned tomorrow?!” 

Such indignant statements show also a generous spirit.  Good for you.  You want poor people to do well.  (So do all economists, by the way.)  Attributing all output to the poor workers seems only just, fair— even obvious.  It seemed so even to the Blessed Adam Smith, and to all the “classical” economists before the 1870s, such as the English economist David Ricardo, who invented the correct theory of international trade, and Karl Marx, the German economist who invented the incorrect theory of how we became rich.

By the 1870s, though, economists had suddenly grasped why the labor theory is all wrong.  Economics and economic choices are always about present decisions causing future outcomes.  They’re not about history.  You can’t “decide” about the past.  Fixed costs are already spent.  Economics is about what you should do next.  Therefore, the correct theory of value is the “marginal product” that is, the future product we get from a tiny bit more of labor, capital, and land.  Inputs already spent don’t figure.

The news has not arrived yet among Marxist economists, such as nowadays Mariana Mazzucato, who therefore give bad advice. Marx died in 1883, after the “Marginal Revolution.”  But he didn’t acknowledge it, leaving his devout followers in the dark, still.  In the old USSR for example, the input of capital was ignored, resulting in gross mistakes in production, such as a tractor factory two kilometers long producing wretched tractors.

Don’t follow Karl.

Weekly column in Folha de São Paulo, Brazil
Translated into Portuguese for the newspaper.