The substance of bourgeois theory, supply and demand, is important for understanding some things about the economy: price fluctuations, inflation, etc. But if we want to understand deeper issues about the economy we need other tools that are able to pierce through this surface substance to the underlying meanings. That is what the labor theory of value is all about.
All societies coordinate human labor in order to produce things. The total social product is divided about society.
When societies began producing a surplus ... who controls the surplus?
Under feudalism the social surplus was extracted from peasants by landlords. In slavery- from slaves by slave owners.
In both of these examples the economic act in which the surplus is passed from worker to exploiter is easy to see.
In both types of society it is clear to all involved that human labor is producing these goods and that it is the products of labor that are being appropriated by the dominant class.
Under capitalism the process of exchange makes it harder to see the passing of the surplus from exploited to exploiter. But it's still there. Workers are still producing the entire social product and another class, this time the capitalist class, is taking the surplus from them, selling it back to them and getting rich off it.
But what we see is money. We work and we are paid money for it. The capitalist sells the commodities we made and he gets money for it.
In this way. money- or the process of exchanging goods and services in a "free" market- obscures the underlying reality that what is really going on at a basic, societal level is that a dominant class is extracting the social surplus from a subordinate class.
This is basically what the labor theory of value is saying.
Economists going all the way back to Ben Franklin realized that this theory helped answer a perplexing question in economic theory: why do heterogeneous commodities exchange?
Commodities are heterogeneous: They have different physical properties, different uses. Why is it that they can all be exchanged in the free market? What explains the ratios of their exchange?
The theory went on to postulate- all these commodities must be made up of a common substance, something that they all have to a greater or lesser degree, something that gives them value. This thing is their "embodied labor time".
The act of exchange obscures the underlying labor value of commodities.
Though the labor value of a commodity may be the underlying substance to an economic interaction, it is the way this value is expressed through a money price that really effects the economic decisions people make. When you go to a store to buy something you want to know how much money it costs, not how much labor went into it. But the act of buying something with money implies the existence of value, whether or not you are aware of it.
Specific money prices are determined by supply and demand. I'll assume that that concept is simple enough that I don't need to explain it here. Money prices fluctuate- clothes and entertainment commodities come in and out of style, supplies of food temporarily change due to droughts, etc. But underneath this day to day fluctuation lies a general equilibrium price- a price related to the amount of labor embodied in commodities.
Money prices are mathematical, quantifiable, observable things. We see dollar signs hanging off of price tags and they have a real effect on us. Not so with labor value: We don't see the people who make those commodities. Even if we could see them, quantifying the amount of labor time in a commodity is next to impossible: we'd have to figure out not just how much work went into a specific commodity in each stage of its making (and some commodities go through a lot of stages, through many firms, contain parts from all over the world, etc,) but also the labor behind each tool and machine used in the making of the commodity. (and divide the labor value of the machines by the amount of commodities produced over the life of the machine, etc.) It's virtually impossible.
Though there have been countless attempts to quantify this theory, labor value will never be as quantifiable as price is. This is because labor value only really find its expression in money. It would be impossible to have a capitalist economy where goods were traded according to exact measurements of labor time. Capitalist economies require flexibility, and they require liquidity. Money provides this. But in providing this flexibility money also deviates from being an exact measurement of labor time. It is, at best, an approximation.
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