B.K. Marcus on Value
Like Austrian value theory itself, B.K.'s comments are mostly valid and unexceptional--as far as they go.
Here's one thing I'd take exception to, though:
Smith seems to have started the tradition of objective value theory. Somehow labor was supposed to impart an intrinsic, objective value on the products of labor. Smith and Ricardo and others are referred to as the British Classical School. Marxism and all other western 19th-century socialisms come from this tradition. The labor theory of value is the basis for leftist exploitation theory and the secular attacks on "usury".
Although neither the classical political economists nor the socialists made it as clear as they should, the labor theory was at least implicitly rooted in a subjective understanding of human nature. Labor conferred exchange-value on a commodity, in a unique way, because human labor was the one factor of production that had to be persuaded to "contribute" its "services" to the production process. The LTV, like other cost theories, is based on the need to provide sufficient compensation to make it worth the producer's while to produce.
This is clear from both classical and socialist discussions of the functioning of a competitive market, and of the role a market price system operating through supply and demand, in the movement of price toward labor-value. Marx's writing contained a lot of mystical Hegelian crap about the law of value operating on man as a "species-being," as an expression of the character of "social labor" established "behind the backs" of individual market actors. But in his economic writing on the functioning of price and value in an actual competitive market, Marx sounded a lot more like a good Ricardian. Marx started out as a good Left-Hegelian, and only later turned to the British political economists for further insight. A reading of the Economic and Philosophical Manuscripts of 1844, in comparison with his later critique of Proudhon in The Poverty of Philosophy, bears this out. Like Ricardo and the classicals, Marx makes it clear that it is only through the laws of supply and demand, and the decisions of producers to increase or reduce supply in response to price signals, that the law of value operates.
So although the classicals sound at times like "value" is an intrinsic characteristic, there was clearly an implicit understanding that it resulted from the need to persuade producers to bring their goods to market. This was especially true of Smith, with his "toil and trouble" understanding of labor as the source of exchange-value. Although Bohm-Bawerk challenged Smith's deer and beaver example of exchange on the basis of labor-value for its supposed lack of a theoretical basis, James Buchanan did an excellent job of explaining labor-value as the basis of exchange in simple commodity production. The explanation was the nature of man as a utility-maximizing (and disutility-minimizing) being:
Even in so simple a model, why should relative costs determine normal exchange values? They do so because hunters are assumed to be rational utility-maximizing individuals and because the positively valued "goods" and the negatively valued "bads" in their utility functions can be identified. If, for any reason, exchange values should settle in some ratio different from that of cost values, behavior will be modified. If the individual hunter knows that he is able, on an outlay of one day's labor, to kill two deer or one beaver, he will not choose to kill deer if the price of a beaver is three deer, even should he be a demander or final purchaser of deer alone. He can "produce" deer more cheaply through exchange under these circumstances.... Since all hunters can be expected to behave in the same way, no deer will be produced until and unless the expected exchange value returns to equality with the cost ratio. Any divergence between expected exchange value and expected cost value in this model would reflect irrational behavior on the part of the hunters.
So the labor theory of value, ultimately, is rooted in an axiomatic understanding of human nature--much like that of praxeology. The Austrians themselves admit that labor differs from other "factors," because its expenditure carries a positive disutility. The value of the "cost" or "sacrifice" of providing land and capital, on the other hand, is entirely relative to the available rates of return from alternative uses.
More important than this area of disagreement, though, is the material in B.K.'s post that I agree with as far as it goes:
What marginality reveals is that the price of X is determined by the lowest valued use of X, given the available supply.
That's technically correct--as Lionel Hutz says, the best kind of correct. But "available supply" is determined by whether compensation to the producer is enough to persuade him to bring his goods to market. When a good is elastic in supply, and there are no market entry barriers, the available supply will rise or fall until the price of the last unit produced equals production cost.
Menger and Jevons were saying pretty much the same thing as Ricardo and Mill--only the marginalists took the price model that the classicals used for scarce goods, and applied it to all goods by artificially treating them as fixed in supply at the point of exchange. To quote Buchanan again,
The development of a general theory of exchange value became a primary concern. Classical analysis was rejected because it contained two separate models, one for reproducible goods, another for goods in fixed supply. The solution was to claim generality for the simple model of exchange value that the classical writers had reserved for the second category. Exchange value is, in all cases, said the marginal utility theorists, determined by marginal utility, by demand. At the point of market exchange, all supplies are fixed. Hence, relative values or prices are set exclusively by relative marginal utilities.
When supply is treated as a dynamic factor, the classicals and marginalists are saying pretty much the same thing, in different ways. The "revolutionary" significance of Austrian value-theory, as a break from the older classical theories, is based largely on the straw-man treatment of them by Austrian thinkers from Menger to Rothbard. The advantage of subjective approach is that it provides a unified and misleadingly simple schema that applies equally to goods in elastic and fixed supply. From the standpoint of capitalist apologetics, it also has the advantage of studiously avoiding the kinds of questions the classical political economists dealt with, on issues of class power, distribution, and ownership of the factors of production. And like Newspeak, it reduces the range of critical thought by rendering inaccessible any theoretical basis for left-wing exploitation theory.
If you don't see the latter as an advantage, though, there's something to be said for rehabilitating the classical tradition in political economy, retaining it as an organizing framework, and incorporating into it the genuinely new insights and contributions of the marginalists. Marginalism and subjectivism do not, in fact, challenge the general laws of value described by the classicals. They do, however, do an excellent job of describing their functioning from the subjective standpoint of the market actor. Once this framework of analysis is accepted, there is still a great deal of use for a free market critique of usury, treating usury and rent as monopoly returns on artificially scarce "factors of production." When the general theoretical framework of classical political economy is restored, free market analysis is also restored as the revolutionary political weapon against privilege that it was in the days of Smith and Ricardo, before "vulgar political economy" shifted into defensive mode.
If you're not already paralyzed with boredom, and you actually want more discussion of these issues, you can find my at-length treatment of the value-wars between subjectivists and classicals in Chapter One of Studies in Mutualist Political Economy. My examination of the subjective roots of labor-value in the disutility of labor is developed in Chapter Two. For an examination of Austrian time-preference theory from the LTV perspective, check out Chapter Three.