The labor theory of value, as stated by Wikipedia, is a theory which argues that the value of a commodity is related to the labor needed to produce or obtain the commodity.  This has been refuted by Eugen von Bohm-Bawerk and the Austrian school of economics.  Austrians believe in the subjective theory of value.

Basically, the subjective theory of value says that things are valued based on the opinions of people.  This whole thing has always kind of puzzled me.  You’re telling me that it took hundreds of years of theorizing to come to this conclusion and even now it is still debated?

For anyone who works in an office, you should know that the labor theory of value is not true.  You might observe someone who sits at his desk all day and seems to work hard.  He may even work overtime.  And yet that person may not be the most productive person in the office.  It can even be the case that there are some people who seem to be hard workers and yet are some of the least productive people.  Bottom line is, productivity is not determined just by how hard someone works.

Of course, there can be a relationship between labor and productivity.  If someone doesn’t work at all, he is not going to produce something of value.  But even for someone who is seemingly productive, it doesn’t mean that what he is producing is of value to anyone else.  That is for other people to determine.

I think the one important thing to take away from the subjective theory of value is that consumers dictate prices.  It doesn’t mean that costs don’t matter.  It doesn’t mean that the labor spent on things doesn’t matter.  But, ultimately, what matters the most is how much consumers are willing to pay.

When a business takes on higher costs (let’s say because of a government regulation or tax), we often hear people say that the business will just pass the cost on to the consumer.  Sometimes this is true.  The business will certainly try to charge more if it thinks it can get more.  But it doesn’t always work this way.  The consumer may not be willing to pay more.  The consumer might find a replacement product or just decide that it is not a necessary item to have.

If oil prices go up, food may or may not go up in price due to higher transportation costs.  If Coke and Pepsi get hit with a new corporate tax or accounting rule that drives up their costs, the price of their products may or may not go up because of this.  There are a lot of things that can contribute to prices, including costs and competition.  However, ultimately, it is the consumer who decides the price by how much they are willing to pay.