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Tuesday, September 8, 2015
Labor theory of value is a textbook application of supply and demand theory
I really do not see what austrians dislike about the labor theory of value. As it was explained to me by a marxist professor, it simply made sense. I don't see how one can reject it without rejecting the whole of supply and demand theory. Austrians usually say things like: "value can only be subjective" as if what was meant by value was always the subjective determination of personal preferences by individual. However, one can also talk about value as the objective factor behind market price. The fact that there is such a thing as "objective value" does not negate marginal theory. How it works: Prices shift according to the forces of supply and demand. If, for a moment, people start buying more of a commodity, they are bidding up the price of that commodity, which results in more profit for the firms producing it. As a result, firms start producing more of the same commodity which brings its price back down. In the same way, if consumers stop buying a commodity, its price will go down which will tell entrepreneurs to lower their output, which will again bring the price to equilibrium level. Until here, this is just standard equilibrium theory. What this tells us is that prices do not fluctuate wildly in a random manner. The price of a specific commodity will always gravitate around a specific price. This is because, in the long run, supply will accomodate demand. The price around which this equilibrium occurs is the commodity's cost of production. If the market price of a commodity is lower than its cost of production, it is not produced, because it results in a net loss. Entrepreneurs need to make a profit but competition prevents them from deviating too much from the cost of production. Finally, the cost of production of a commodity is determined by the amount of labor that is needed to make it. Entrepreneurs have to pay for labor, and they have to pay for production goods. However, these production goods are also the result of labor and goods of a higher order. The price of each of these production goods is determined in the same way by the labor and higher order goods needed to make it. The scarcity of raw materials means that more labor is needed to provide it.