Labor Theory of Value

The Labor Theory of Value sprang from Adam Smith 's work, the Wealth of Nations. The Labor Theory of Value was one of the most important contributions and influences Adam Smith introduced.

About the Labor Theory of Value

The "labor theory of value" was a daring point of view at the time, since most governments, and especially England, were based on what's called a "mercantile system" - that is, the wealth of a community was believed to rely only on favorable trade.

In a society like that, an individual could gain his money and power mostly by cornering a market which held the most highly saleable goods - such as spices for instance. The government, in turn, assumed it should concentrate on those goods which are always sure to find a market; and the commodity in demand was the means of exchange itself: gold. As a result, countries would horde their gold and any ruler or government who hoarded the most, had the most power.

Mercantilism and the balance of trade

Because of this system, mercantilism always meant that countries were striving for a balance of trade - that is, more being exported than imported so a net gain in gold was made. To prevent the outgo of gold, governments passed stringent laws that prohibited foreign luxuries and sometimes forbade the export of gold altogether. They also used tariffs and direct prohibitions to prevent the country from being flooded with foreign goods. The aim of mercantilism had nothing to do with raising the standard of living of its own people, nor contributing to the well being of other countries. Its only aim was to regulate commerce and industry so that the power of the state was greater than that of other nations. This was the system that Adam Smith attacked in The Wealth of Nations.

To Adam Smith, people create wealth, and people create it by work. Therefore, the wealth of a community increases by the amount of work it puts out, not by the money it hoards. It was his theory that the greatest physical wealth results from the greatest economic liberty. Adam Smith called for an end to:

• feudal tolls,
• guild restrictions,
• government regulations, and
• industrial or commercial monopolies,

All of the above limited the freedom of individuals to work, spend, save, buy and sell at their pleasure - the actions that keep production and distribution in motion. This view is called laissez-faire economics, a phrase coined by others before Adam Smith. It was originally the motto of a group of French economists led by Françcois Quesnay, a physician to Madame Pompadour, mistress of Louis XV.  Adam Smith had met Quesnay in Paris and was strongly influenced by him.