Using labor to figure out pricing is not useful

During a recent podcast by Dr. Richard Wolff, most probably in his Economic Update podcast, he mentioned that Karl Marx never tried to deal with how prices are set in the market place. But, that this question has dominated Capitalist Economic theory for centuries.

The Labor Theory of Value is not trying to explain why prices fluctuate or why a consumer is willing to pay a certain price. It is dealing with how a product is produced and who benefits from it. Whereas Value-based pricing concerns itself with what price the consumer is willing to buy rather than any cost that went into the product. These are mutually exclusive views.

The work of pricing for the Value the Buyer is willing to pay is a radical departure from adding up the cost of the materials and labor put into the product. If the Value to the Buyer is less than the “time and materials” that cost to produce the product, then the product is not worth making and needs to be removed from the market. Unless there is a need that will need to be met in an economy away from money, such as charity, government services, mutual aid, or cooperatives.

If the Value to the Buyer is greater than the cost of the production of the product, then there is a valid marketplace. This is where Value-based pricing allows for the feed back loop of need in the marketplace to be expressed. If one company has a greater risk exposure and immediate need for a product over another company, then they should be allowed to pay a higher price in order to incentivize the market.

Written on November 2, 2020