Unlike individual labour hours in the classical labour theory of value formulated by Adam Smith and David Ricardo, the Marxian value is conceived as a fraction (or 'aliquot part') of society's labour-time.
Marx did not define this concept in mathematically exact terms, and he suggests it may be interpreted in various ways, because it connects average levels of labour productivity to social needs expressed as monetarily effective market demand.
In a market economy, labour expenditures producing outputs and the market demand for those outputs are constantly adjusting to each other. This is a complex process, in which enterprises operating at varying levels of productivity and unit-costs compete with each other in responding to the expansion and contraction of total market demand for their output. In the third volume of Das Kapital, Marx discusses how the market value (or "regulating price") of a commodity may be determined under different conditions of demand and productivity.
A given mass of new value is produced in a given time, but how this new value will be realised and distributed as income is finally established only after products are sold at specific market prices. If the market for a commodity is oversupplied, then labour-time was expended in excess of what was socially necessary. If the market for a commodity is under-supplied, nearly all the labour-time expended on its production is socially necessary.
The simplest definition of socially necessary labour time is the amount of labour time performed by a worker of average skill and productivity, working with tools of the average productive potential, to produce a given commodity. This is an "average unit labour-cost", measured in working hours.
If the average productivity is that of a skilled worker, and a skilled worker produces a commodity in one hour, and an unskilled worker produces a commodity in four hours; then, the unskilled worker will have only contributed one hour's worth of value in terms of socially necessary labour time. The excess hours worked by the unskilled worker do not produce social value.
But the production of any commodity generally requires both labour and some produced means of production (or capital goods), like tools and materials. The amount of labour so required is called the direct labour input into the commodity. Yet the required capital goods have in their turn been produced (in the past) by labour and other capital goods; and so on for these other capital goods, and so on. The sum of all the amounts of labour, that were direct inputs into this backwards-stretching series of capital goods produced in the past, is called the indirect labour input into the commodity. Putting together the direct and indirect labour inputs, one finally gets the total labour input into the commodity, which may also be called the total embodied labour in it, or its direct and indirect labour contents.
However, it ought to be said that by "socially necessary labour" Marx refers specifically to the total labour-time which on average is currently required to produce an output. It is this current labour cost which determines the value of output.
If producers produce products below the socially average labour-cost for those products, they obtain extra profit when those products are sold at the ruling market prices. A constant incentive therefore exists to reduce labour-costs by increasing the productivity of the labour force.
This can be done through higher exploitation, economising on costs and better equipment. The long-run effect is that it takes less and less labour-time to produce a product. Enterprises cannot do very much about reducing their fixed input costs usually, because these are rarely under their control. But they can always try to reduce their labour costs.
"Socially necessary labour" therefore refers to at least three economic relationships:
In other words, we have to distinguish between
The former determines the unit value of commodities, hence their production price, and the latter determines the discrepancy between actual supply and effective demand, hence the discrepancy between market price and production price.
Marxist value theory treats economic value as an attribute of labour-products which exists by virtue of social relations of production. Thus, value is a purely social characteristic of labour-products. The substance of the value of a commodity is a determinate quantity of social labour.
That is, the existence of value presupposes social relations between people organised into a society. 'Socially necessary labour time' encapsulates this essential 'relatedness' of value - it is labour time assessed in relation to social needs, not merely labour time performed.
This distinction demarcates Marx from other political economists, but is often overlooked in accounts of Marx's value theory. Marx understood that the casual reader might mistakenly treat his category as interchangeable with its Ricardian predecessor, and in later editions and the Afterword to the Second German Edition implores readers to pay particular attention to the mediations between that old category and the one his own theory sought to establish. Marx's concept of value is not intended to be an equilibrium price. He does not assume market equilibrium, but aims to explain how the process of convergence between supply and demand practically occurs.
Marx's interpretation of value from the point of view of a society as whole proved elusive for many critics. Marx took a swipe at them, in a letter to a friend, Dr. Louis Kugelmann:
"All that palaver about the necessity of proving the concept of value comes from complete ignorance both of the subject dealt with and of scientific method. Every child knows that a nation which ceased to work, I will not say for a year, but even for a weeks, would perish. Every child knows, too, that the masses of products corresponding to different needs require different and quantitatively determined masses of the total labour of society. That this necessity of the distribution of social labour in definite proportions cannot possibly be done away with by a particular form of social production but can only change the mode of its appearance, is self evident. No natural laws can be done away with. What can change in historically different circumstances is only the form in which these laws assert themselves. And the form in which this proportional distribution of labour asserts itself, in a state of society where the interconnection of social labour is manifested in the private exchange of the individual products of labour, is precisely the exchange value of these products" [Marx, letter to Dr Kugelmann, July 11, 1868, in Marx/Engels Selected Correspondence, p. 209 ].
Despite these comments, Marx has been criticised strongly for adding the "socially-necessary" qualification to labour time by the libertarian philosopher Robert Nozick, in his influential Anarchy, State and Utopia, for whom it is an unjustified 'bolt-on' aspect of Marx's theory.
One debate in Marxian economics concerns the question of whether the product-values formed and traded include both direct and indirect labor, or whether these product-values refer only to current average production costs (or the value of current average replacement costs).
Mirowski (1989) for example accuses Marx of vacillating between a field theory (labour-time currently socially necessary) and a substance theory of value (embodied labour-time). Marx's theory is probably best interpreted as a field theory, but modelling the determination of value by socially necessary labour time mathematically is admittedly a difficult exercise.