Many people are uneasy with the free market. I think that’s because they subscribe, implicitly if not explicitly, to the labor theory of value. Workers, people lament, seem not to reap the full and just reward for their labors. Belief in the labor theory puts adherents in good company. Adam Smith and his successor, David Ricardo, were labor theorists. Fédéric Bastiat held a variant of the labor theory.

Of course, labor theorists are also in some bad company, like Karl Marx, a true enemy of the people in whose name hundreds of millions have been murdered. In fairness, it should be acknowledged that Marx did not subscribe to a naïve labor theory, as it is sometimes assumed. He would not have thought a mud pie that took an hour to make would or should fetch the same price as a cherry pie that took as long. Marx wrote in Capital, “A thing cannot have value, if it is not a useful article. If it is not useful, then the labor it contains is also useless, does not count as labor and hence does not create value.” (Austrian economist Eugen von Böhm-Bawerk reproduced this quote in Karl Marx and the Close of His System.)

Nevertheless, the labor theory was the basis of Marx’s influential exploitation theory. In the market, so it is said, bosses get away with paying workers less than the value of their product, leaving them to toil for subsistence wages. Never mind the mind-blowing rise in workers’ living standards since the Industrial Revolution. Who are you going to believe, Marx or your own eyes? Hey, didn’t another guy named Marx say that? (Hint: It wasn’t Groucho.)

The evidence of our senses aside, if you refute the labor theory, you also refute the exploitation theory. If the market price of a good is higher than what the workers were paid per unit, the reason is not that their boss screwed them. The chief reason is that time is valuable. Workers want to be paid now, not later, when and if the goods are sold. The employer is willing to wait and take the risk. His return includes, among other things, the implicit interest rate that permeates intertemporal human action.

Opposing the labor theory of value is the subjective theory of value, which has been most consistently developed by the Austrian school. As I noted in a previous article, subjectivism in economics is not the same as subjectivism in philosophy. It means that when economists analyze markets, they must take as given the personal preferences that human beings demonstrate by their actions, which by nature entail choice. This view need not conflict with philosophical objectivism (or Objectivism, for that matter).

Carl Menger radically shifted economics from the labor theory to the subjective marginal utility theory. (People choose among units of goods “on the margin.”) We are forever in his debt. Here’s some of what he had to say in Part III of his landmark work, Principles of Economics:

When I discussed the nature of value, I observed that value is nothing inherent in goods and that it is not a property of goods. But neither is value an independent thing. There is no reason why a good may not have value to one economizing individual but no value to another individual under different circumstances. The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. While one economizing individual esteems equally a given amount of one good and a greater amount of another good, we frequently observe just the opposite evaluations with another economizing individual. Hence not only the nature but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals.

Economics, then, is about how mortal, fallible individuals peacefully cooperate in a world of time and scarcity to obtain the things they believe will improve their lives. The arrangement is imperfect, but the coercively utopian conjurings of Marx, Lenin, Trotsky, Mussolini, Stalin, Hitler, Mao, Castro, and even Richard Wolff don’t even qualify as alternatives. Read some economic history and trust your own eyes.