Reasons Why Labor Creates Wealth

why labor creates wealth

Many have studied the reasons why labor creates wealth. There are many economic theories–some in vogue, some not–that address this issue.

Karl Marx And The Value Of Labor

Karl Marx and other economic theorists including Adam Smith and David Ricardo believed in something known as the labor theory of value, which Investopedia describes as the notion that “the value of a commodity was determined by and could be measured objectively by the average number of labor hours necessary to produce it”.

Investopedia references an economic idea that follows up on the labor theory of value–the subjective theory of value, which essentially puts the valuation of a good or service into an “eye of the beholder” situation. “…(E)xchange value is based on individual subject evaluations of the use value of economic goods. Value emerges from human perceptions of usefulness. People produce economic goods because they value them.”



Two Types Of Value

Regardless of the economic theory you gravitate toward (there are many, the two examples listed here do NOT constitute an “either/or” proposition) it’s important to note that value is created through labor both in the product or service AND the end result of making such available for a price. Labor creates wealth because there is value in the end result of that labor.

Why Labor Creates Wealth

Labor creates wealth when the costs of production don’t overwhelm the operation. The “overhead” of the business can’t exceed the income of the business. That’s a fairly obvious thing to point out. But what’s not so obvious is the answer to a very important question–WHO does labor create wealth FOR?

Essentially, if you work for someone else, you may create a small amount of wealth for yourself (or a larger amount depending on the job, your qualifications, and experience), but you the laborer create a MUCH LARGER amount of wealth for the OWNER of the company. The question for many people is often whether or not they are satisfied earning the lesser amount of money and investing their sweat equity to enrich somebody else’s bottom line.

Alternatives

That is why so many Americans try their hand at small businesses, side hustles where they work for themselves, freelancing, etc. These Americans are fed up with being given what are sometimes viewed as economic scraps from a much larger and more profitable table. The person who works in the corporate coffee shop as a barista gets their hourly wage, some tips, and some free coffee. But the corporation rakes in a lot more cash.

And those who get fed up with this proposition often launch out on their own–in this example starting an independent coffee shop would be a very logical choice for those who want a bigger piece of the economic pie.

Not everyone is cut out to start their own business and not all have the desire to do so. But it’s important to understand these economic realities and decide how you feel about your place in them. Labor DOES create wealth, but depending on circumstances, it can be on a sliding scale depending on whether you own your labor or lease it to someone else for an hourly wage or a salary.

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