labor theory of value
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Financial Definition of LABOR THEORY OF VALUE
What It Is
The labor theory of value says that the value of a finished good correlates solely with the number of labor hours required to produce it.
How It Works
Economist Adam Smith, the founder of the idea of modern capitalism, first conceived of the labor theory of value in the second half of the 18th century -- the time of the industrial revolution. By the mid-1800s, political economist Karl Marx, the founder of communism, suggested that the marked-up price of goods above and beyond their labor cost resulted in the exploitation of workers.
Marx touted the labor theory of value as the exclusive basis for determining the market price of goods. In other words, any two goods requiring an identical number of labor hours to produce them should have the same market price. For example, if an 18-karat gold filigree bracelet and an electronic toy car each require 10 hours to complete, both should have the same price.
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