In the history of economic thought few questions have evoked greater controversy than this one:
“What does it truly cost society to produce different goods and services?”
It may come as a surprise to socialists today that Karl Marx was not the first economist to answer:
“The number of hours of labor required to produce a good, both directly and indirectly.”
Both Adam Smith and David Ricardo preached a “labor theory of value” before Marx. As a matter of fact, a labor theory of value was dominant among “classical economists” until the “marginalist revolution” in the final third of the nineteenth century when William Stanley Jevons, Carl Menger, Leon Walras, and Alfred Marshall created “neoclassical economics” which remains dominant today.
Of relevance is that some “political economists” who are critics of neoclassical economic theory argue for a return to a “classical” theory of value in the tradition of Ricardo and Marx, focusing on the amount of labor it takes to make things. And even more to the point, some who elaborate models of socialism today subscribe to the theory that the only real cost of making things is the amount of labor time required, and propose that decisions in a socialist economy be based on that criterion alone1.
However, in truth there are three different categories of real costs which rational economic decision making should take into account, only one of which is the amount of labor time required to make different goods and services. Moreover, since an hour spent doing some kinds of work can be considerably more unpleasant than other kinds of work, not even labor costs can always be adequately accounted for simply in hours.
Labor costs
The number of hours of labor it takes to make different goods and services is an important real cost. It is also necessary to count not only the hours of labor needed directly to bake a cake, for example, but also the number of hours needed indirectly to make the flour and milk and seasonings that go into the cake as well2.
Moreover, if there is little variation in how much less enjoyable one kind of labor is than another, and if all categories of labor are equally scarce, simply measuring labor in hours is sensible. However, if different categories of labor are not equally scarce, and if there are significant differences in how disagreeable it is to perform some kinds of work than others, clearly these issues should be taken into account as well.
Environmental Costs
Different inputs from the natural environment are also required to make different goods and services. For example, the flour required to make a cake not only requires hours of agricultural labor to grow the wheat, it also requires acres of fertile land.
In the nineteenth century it was far more reasonable to ignore environmental costs because land and other natural resources were far less scarce than they are today. But certainly in 2025 when global population is ten times greater, and various environmental assets have been depleted, it is no longer reasonable to ignore these environmental costs of producing different goods and services.
Moreover, at least theoretically, it is as easy to account for necessary inputs from the natural environment, both directly and indirectly, as it is to account for labor inputs. I have shown how to do this in several publications, including in chapter 2 of Income Distribution and Environmental Sustainability: A Sraffian Approach (Routledge, 2017). There I also showed how to account for the fact that often neither inputs from labor nor nature are homogeneous, but heterogeneous. In other words, I have shown how we can take account of different categories of inputs from nature, as well as different categories of labor whenever they are not equally scarce, or in the case of labor not equally unpleasant to perform.
In sum: Not only is human labor necessary to produce different goods and services, inputs from nature are also necessary. Therefore, whenever inputs from nature are scarce, using them is also a real cost to society. Moreover, whenever it matters that either labor or nature is heterogeneous, we must account for this in our calculations of what it truly costs society to produce different goods and services as well. But the good news is that we now know how to do all this… at least in theory.
“Time” costs
This point is more subtle. So let me begin by saying that if the technologies for producing things never changed, we could stop right here. That is, we would have a complete theory of social costs, and know how to go about calculating them, at least in theory. But what if as time passes, we discover more productive technologies? Or to put it more precisely, what if, based on past experience, it is reasonable to assume that we will continue to find more productive technologies going forward?
In effect what this “fact,” if you will, implies is that when goods and services become available matters. Because if technologies improve, in the future we will be able to produce more goods and services with the same inputs from labor and nature. And this implies that having goods and services now is more valuable than having them later when we will presumably have more of them. I know… it’s enough to make a philosopher’s head spin. But what it means is that in addition to real labor costs and real environmental costs there is also a real time cost: If we want something sooner it costs more than if we are willing to wait and get it later.
So, what’s the point?
The point is that labor time is not the only real cost of making different goods and services. There are environmental costs, which along with labor costs, should clearly be accounted for in making decisions in any desirable, twenty-first century successor to capitalism. Moreover, if productive technologies continue to improve, goods which become available sooner also cost more than goods which become available later. The good news is that we have now proposed a system for making decisions in a participatory economy which take account of all three of these real social costs of producing different goods and services. The “indicative prices,” which emerge from our annual, participatory planning procedure take account of both heterogeneous labor and nature. And our participatory investment planning procedure takes account of the likelihood of technological improvements over time.
Footnotes
- For one example see Paul Cockshott and Alin Cottrell: “Labour Value and Socialist Economic Calculation,” Economy and Society (18,1), 1989, Toward a New Socialism. Spokesman Books, 1993, and “Labour Time versus Alternative Value Bases: A Research Note,” Cambridge Journal of Economics (21,4), 1997. ↩︎
- The importance of counting both indirect as well as direct labor was already recognized by the earliest exponents of a labor theory of value, that is Smith and Ricardo as well as Marx. ↩︎
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