The article below is one part of my introduction to a book I have translated entitled Marx's Theory of the Genesis of Money by the Japanese Marxist economist Samezo Kuruma. My discussion of the labor theory of value below is part of my overview of Kuruma's book so it might be a bit difficult to follow, but I think it more or less stands on its own. — MS
The labor theory of value presents its own difficulties, certainly, but they do not stem from the unfamiliarity of the theoretical question itself. That question, which economists prior to Marx had already pondered, basically comes down to identifying the factor that commodities have in common which determines their "exchange-value" or "worth." The Classical school of political economy, starting with Adam Smith, arrived at an answer in asserting that the level at which a commodity will be exchanged is generally determined by the quantity of human labor necessary to produce it.
Marx adhered to this labor theory of value, but had a far more precise understanding of the labor that is the "substance" of value, defining it as the quantity of abstract human labor socially necessary to produce a commodity. Yet, perhaps because the merits of the labor theory of value were so clear to him, Marx did not belabor his own explanation of it in Chapter 1 of Capital, where he simply says: "If then we leave out of consideration the use-value of commodities, they have only one common property left, that of being products of labor" (Capital vol. 1, p. 128). It is this common trait among commodities—as the product of labor—that Marx identifies as the basis of their value.
This matter-of-fact conclusion may seem less than convincing to many readers, given the existence of phenomena that run directly counter to the labor theory of value. There are commodities, for instance, that are the product of little or no labor, yet fetch higher prices than labor-intensive ones; we also know that commodities have other factors in common, whether it be their physical attributes or more abstract qualities such as being desired objects. This all contributes to the impression that Marx is engaging in some sort of intellectual sleight of hand, where he limits his discussion to commodities that are the product of labor and then "discovers" that labor determines a commodity's value. Eugen von Böhm-Bawerk, an early critic of Marx, described his intellectual foe as "one who urgently desiring to bring a white ball out of an urn takes care to secure this result by putting in white balls only." Subsequent critics, following Böhm-Bawerk's lead, have seized on this apparent flaw at the basis of the labor theory of value in an effort to discredit Marx's entire critique of political economy. However, this idea that Marx's logic is circular overlooks important premises of the labor theory of value—which are firmly rooted in reality.
One key premise is the vital need, in any form of society, to produce material wealth. It is the continual production of that wealth, via human labor, that sustains any society and its members. "Every child knows, " Marx wrote to his friend to Ludwig Kugelmann in the summer of 1868, "that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish" (Marx, 1988, p. 68). We also know that under capitalism the bulk of this crucial material wealth takes the form of "commodities" (i.e., products bought and sold on the market), which Marx points out in the first sentence of Capital: "The wealth of societies in which the capitalist mode of production prevails presents itself as an immense accumulation of commodities" (Collected Works vol. 43, p. 125). It is the commodity in this fundamental sense, as the capitalistic form of material wealth (= products of labor), that Marx analyzes in the first chapter of Capital—rather than the "commodity" in the purely formal sense as anything that is bought and sold. From this perspective, it is quite natural for Marx to identify labor as the factor that commodities have in common which determines their value.
Marx raises a second important premise of the labor theory of value in that same letter, pointing out to Kugelmann that "every child knows, too, that the amounts of products corresponding to the differing amounts of needs demand differing and quantitatively determined amounts of society's aggregate labor" (Collected Works vol. 43, p. 68). What Marx means—for it is doubtful that even the most precocious child would use those exact terms—is that there is an obvious need, again in any social form, to allocate the total labor of society to the various spheres of production in line with the products required (just as there is a need to then distribute those products throughout society in one way or another). The labor theory of value takes this reality as its starting point and seeks to explain the distinctive manner in which labor is allocated (and products distributed) in a capitalist society. Specifically, the theory explains what regulates the exchange of commodities that mediates this allocation of labor. Here, just as in the case of the commodity in the "fundamental" sense, the reality of labor and its foundational role in any form of society is premised.
Those who overlook these two important premises are likely to view the idea of labor as the "substance" of value as a circular argument—an empty assertion. Not surprisingly, Marx's opponents have aimed much of their criticism at the supposed inadequacy his "proof" of the labor theory of value in Chapter 1. In his own day, Marx encountered similar criticism and derisively wrote of how "the chatter about the need to prove the concept of value arises only from complete ignorance both of the subject under discussion and of the method of science" (Collected Works vol. 43, p. 68). The "subject under discussion" he is referring to is the need in any society for labor allocation and product distribution, while the "method of science" involves explaining the specific way that is carried out in the case of capitalism. The "proof" of the labor theory of value—although the term seems somewhat inappropriate—is thus found within the aforementioned premises, which is why Marx adds that "even if there were no chapter on 'value' at all in [Capital], the analysis I give of the real relations would contain the proof and demonstration of the real value relation" (Collected Works vol. 43, p. 68). We need, then, to understand the nature of the commodity analyzed and appreciate what the labor theory of value actual sets out to explain, in order to properly understand that theory.
Once equipped with that basic understanding, it should be clear that the labor theory of value cannot be refuted by simply noting the existence of other "commodities" that are not the product of labor. Not only is such criticism entirely beside the (theoretical) point, it does not adequately acknowledge that Marx was well aware of the existence of such "formal" commodities. Already in Chapter 3 of Capital, for instance, he mentions that "things which in and for themselves are not commodities, such as conscience, honor, etc., can be offered for sale by their holders, and thus acquire the form of commodities through their price" so that "a thing can, formally speaking, have a price without a value" (Capital vol. 1, 197). And later Marx analyzes commodities that lack intrinsic value, such as land or interest-bearing capital. However, in the case of these "formal commodities" there is often an indirect relation to the concept of value, so they cannot not be adequately explained until value has been elucidated via the analysis of the commodity in its fundamental sense.
Marx ridiculed those who expected him to explain everything at the same time, noting that "if one wanted to 'explain' from the outset all phenomena that apparently contradict the law, one would have to provide the science before the science" (Collected Works vol. 43, p. 68). Many of the doubts of Marx's impatient critics—who he describes as "clinging to appearances and believing them to be the ultimate"—are answered later in Capital, at a different stage in his analysis of capitalism. If Marx had followed his critic's advice by attempting to explain every sort of commodity at once, rather than drawing a distinction between the commodity in the formal sense and the commodity in its fundamental sense, his analysis would not have advanced very far: he would never have been able to explain how commodity exchange is regulated (thereby mediating the allocation of labor and distribution of goods); nor would he have been able to elucidate the concept of money. We would have been left with nothing more than a description of the commodity as a something with a price attached.
A quick look at some of the alternatives to the labor theory of value, to conclude this section, further underscores the strength of Marx's position. There is, for instance, a common view that the value of a commodity is determined by supply and demand. This factor does of course account for fluctuations in the prices of commodities, as Marx readily accepted, but it does not explain why the price of a particular type of commodity will tend to fluctuate around a certain level. Another erroneous theory of value is the idea that that a commodity's value is the sum of the value of the materials and wages expended on its production plus average profit. This is clearly a tautological theory that fails to explain what determines the value of those component elements. Finally, there have been theories where value is in the eye of the beholder, so that it is explained as the fruit of subjective evaluations on the part of buyers and sellers. Fanciful scenarios have been thought up to "prove" this assertion, such as the story of a man dying of thirst in the desert who would gladly exchange a fistful of diamonds for a glass of water. However, even if this factor accounts for the high price of some rare item or work of art, it does not tell us much about the continual production (= reproduction) that is the basis for the continued existence of any society or the specific reality of capitalist commodity production. In sum, these "alternatives" to the labor theory of value do not adequately address the theoretical question at hand regarding how commodity exchange is regulated.
 Marx also distinguished between various usages of the term "labor." He drew a distinction between the "concrete labor" that creates a commodity's use-value and the "abstract labor" that produces its value; labor in an active state in the labor process ("living labor") versus labor embodied in the commodity as a result of production ("dead labor"); as well as drawing a distinction between "labor" in all of those senses and the concept of the "labor-power" (or the capacity to labor), which the worker sells as a commodity on the labor market in return for a wage and whose value is determined by the value of the commodities that worker must consume to reproduce that capacity to labor. In contrast, Smith and Ricardo had used the blanket term "labor" to refer to all of these different cases.
 Marx offers the following insight on supply in demand in his pamphlet Wages, Prices and Profit:
"Supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they will never account for that value itself. Suppose supply and demand to equilibrate, or, as the economists call it, to cover each other. Why, the very moment these opposite forces become equal they paralyze each other, and cease to work in the one or the other direction. At the moment when supply and demand equilibrate each other, and therefore cease to act, the market price of a commodity coincides with its real value, with the standard price round which its market prices oscillate. In inquiring into the nature of that value, we have, therefore, nothing at all to do with the temporary effects on market prices of supply and demand." (Marx, 1996, pp. 26-27 — Marx's emphasis)