The labor theory of value states that the value of a commodity is determined by the amount of labor that went into producing it (and not, for instance, by the fluctuating relationship of supply and demand). Marx defines a commodity as an external object that satisfies wants or needs and distinguishes between two different kinds of value that can be attributed to it. Commodities have a use-value that consists of their capacity to satisfy such wants and needs. For the purposes of economic exchange, they have an exchange-value, their value in relation to other commodities on the market, which is measured in terms of money. Marx asserts that in order to determine the relative worth of extremely different commodities with different use-values, exchange-value, or monetary value, must be measurable in terms of a property common to all such commodities. The only thing that all commodities have in common is that they are a product of labor. Therefore, the value of a commodity in a market represents the amount of labor that went into its production.
The labor theory is important in Marx’s work not because it gives special insight into the nature of prices (economists today do not use this theory to explain why commodities are priced as they are) but because it forms the foundation of Marx’s notion of exploitation. In the simplest form of exchange, people produce commodities and sell them so that they can buy other commodities to satisfy their own needs and wants. In such exchanges, money is only the common medium that allows transactions to take place. Capitalists, in contrast, are motivated not by a need for commodities but by a desire to accumulate money. Capitalists take advantage of their power to set wages and working hours to extract the greatest amount of labor from workers at the lowest possible cost, selling the products of the workers at a higher price than the capitalists paid for them. Rather than buy or sell products at their true exchange-value, as determined by the labor that went into making them, capitalists enrich themselves by extracting a “surplus-value” from their laborers—in other words, exploiting them. Marx pointed to the abject poverty of industrial workers in places like Manchester for proof of the destructive effects of this exploitative relationship.