Utility Theory versus Labor Theory of Value

Abstract

Among three different theories of value suggested by nineteenth century economists, namely, two versions of labor theory (labor-embodied theory and labor-commanded theory) and marginal utility theory, only the last one served as a basis for modern neo-classical explanation of price-determination. In Samuelson's Economics, price is explained in terms of demand-and-supply theory, with price (p) as a parameter, i.e. D=f(p), S=g(p), and f(p)=g(p), where the quantity demanded (0) is derived from a utility-maximizing behavior of consumers, and an equilibrium price is determined at such a level that the quantity demanded is equal to the quantity supplied(S) at market equilibrium. In this book, labor theory of value, whatever the version is, is treated as an ancient theory that is proved to be erroneous by an advanced theory. A historical re-examination, however, reveals that a neo-classical view of the labor theory of value is misleading. In our view, the marginal utility theory is compatible with the labor theory of value. In other words, the explanation of unequal exchange in labor-commanded terms is exactly equivalent to the marginal utility theory of value, and labor-embodied theory which holds true under equal exchange can be regarded as a special case of labor-commanded theory of value.