Labor Theory Of Value

DEFINITION of 'Labor Theory Of Value '

An economic theory that stipulates that the value of a good or service is dependent upon the labor used in its production. The theory was first proposed by Adam Smith (1723-1790), the founder of modern economics, and was an important concept in the philosophical ideals of Karl Marx. The labor theory of value suggests that goods which take the same amount of time to produce should cost the same.

BREAKING DOWN 'Labor Theory Of Value '

Opponents of the labor theory of value purport that it is not labor that determines the price of a good or service; rather, it is simply a function of supply and demand for a given good or service that determines its price. According to the theory, if the cost of purchasing something is greater than the amount that the purchaser values the time it would take to produce the good, then he will make it himself rather than buy it.

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