That sounds reasonable, and, in fact, that misconception has deceived many great economists, such as Adam Smith and David Ricardo. It is not uncommon throughout history to measure the value of a product or service as a function of labor time. For example, the work acre in medieval English meant the amount of land that could be plowed in one day. The problem with the labor theory of value is that it does not comport with human behavior.

What Makes Your Work Valuable?
You can spend an enormous amount of time digging a hole in your front yard and the price you will command in the marketplace will be zero (if not negative). For comparison, Tom Clancy can write a novel -- for which he has received several million dollars in advance -- in the air-conditioned comfort of his beach house. In the private marketplace, there must be a demand for a good (or service) in order for it to posses any value whatsoever.

Taken to its extreme, the labor theory of value would predict countries that work longer and harder should have higher standards of living. That is demonstrably false: Under that presumption, China should have the highest standard of living (given its large amount of labor hours available).

In fact, what we see throughout the world is countries with less labor inputs and more entrepreneurship have vastly higher standards of living, including shorter hours for workers. The labor theory of value is obviously false on a macro scale, but what about a micro scale -- in other words, the professional firm?

But do those hours spent accurately measure the value provided to the customer? There is no doubt they measure the cost of the labor inputs involved, but cost does not necessarily equate value, especially in the minds of customers.

The Fallacy Behind The Almighty Hour
As the last of the ardent believer in the Almighty Hour, CPAs must face the fact that this theory has been absolutely repudiated by the behavior of customers in the marketplace. For if the labor theory of value were correct, then a diamond found in a mine would be of no greater value than a rock found right next to it, since each took and equal amount of billable hours to locate. Yet how many rocks do you see in your local mall's jewelry store?

For example, when you go to lunch today, perhaps you will have pizza. Under the labor theory of value, you must necessarily value the 15th slice just as much as you valued the first, because each took the same amount of billable hours to produce. The labor theory of value does not take into account the well-established law of diminishing marginal utility, which states that the value to the customer declines with additional consumption of the good in question.

The last television episode of "Seinfeld" aired earlier this year. There are reports out of Hollywood that some people attempted to bribe the cast members in order to learn the contents of this anxiously awaited final show. If the labor theory of value were true, everyone should be equally willing to pay the cast of "Frasier" in order to obtain a script, since each took approximately the same amount of billable hours to produce.

Marx tried to circumvent these dilemmas by proclaiming that only "socially necessary labor" creates value. But how does one determine what is socially necessary? That is where the consumer enters the theory. In the end, socially necessary labor is defined as that for which someone is willing and able to pay. And that is precisely why a new theory must be used by professionals in order to subjectively measure the value of the services they provide.

A New Theory
The best alternative to an incorrect theory is not to do away with the theory and simply rely on common sense. Rather, the best alternative to an incorrect theory is a correct theory. All learning starts with theory, and as W. Edward Demming was fond of saying, "no theory, no learning."

Imagine trying to pass the CPA exam without a theoretical understanding of debits and credits. There is nothing as unenlightening as a fact not illuminated by a theory; we may as well read the phone book.

The alternative to the incorrect labor theory of value is the correct theory of value: Value is subjective. The subjective theory of value concludes that goods and services have no inherent value, that they are only valuable to the extent there is a valuer desiring them. Marx derived his definition of value form the assumption that there must be an equality in two goods which are exchanged - namely, labor hours.

In 1748, Ben Franklin wrote, "Time is money." Over the past 50 years, professionals have taken this statement literally to mean time is value. But even when I was ten years old, my father would not pay me 25 cents an hour to mow the lawn with a BB gun. When Red Adair put out the oil well fired after the Gulf War -- in record time -- I assure you he did not price by the hour, but rather, based upon the value as subjectively determined by his customers.

Effort -- that is, hours spent -- emphatically does not equate to value. Results are what count to the customer. If you doubt this, take your car to a mechanic who takes over a month to fix it, and willingly accept his explanation, "Well, I spent the time."

You could easily double your firm's billable ours tomorrow by simply cutting off everyone's right arm. That way, it will take twice as long (at least) for your people to perform any given task. Think of the activity: Think of the increase in your billable hours. An instant ticket to prosperity.

I am being facetious, of course. But that is the conclusion you must reach if you subscribe to the labor theory of value, of which the hourly billing method is a direct derivative. Your labor costs are sunk no matter if your staff is doing high-level work or making photocopies. That is why I prefer Oscar Wilde's quote to that of Franklin's: "Time is a waste of money." Value is in the eye of the beholder, not the labor time of the seller.

What counts is what your customer is willing and able to pay for your services. By pricing your services as a function of labor time, you are leaving an enormous amount of money on the table. Focus, instead, on the value to the customer in order to reap what you are truly worth. Replace your labor theory of value with the subjective theory of value.

The labor theory of value, like the billable hour, is an idea from the day before yesterday. We need to forge a new paradigm of value for pricing our services as CPAs in the new millennium, and stop ritualistically accepting the false theory proffered by Karl Marx 150 years ago. Let us relegate the billable hour to the ash heap of history (along with carbon paper, the manual typewriter, and the slide rule) right next to Karl Marx's The Communist Manifesto, as an idea whose time has past.