The labor theory of value (LTV) was an early attempt by economists to explain why goods were exchanged for certain relative prices on the market.

It suggested 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. In the labor theory of value, the amount of labor that goes into producing an economic good is the source of that good's value.

The labor theory of value suggested that two commodities will trade for the same price if they embody the same amount of labor time, or else they will exchange at a ratio fixed by the relative differences in the two labor times. For instance, if it takes 20 hours to hunt a deer and 10 hours to trap a beaver, then the exchange ratio would be two beavers for one deer.

The labor theory of value leads to obvious problems theoretically and in practice. 

1 It is possible to expend a large quantity of labor time on producing a good that ends up having little or no value.

2 Goods that require the same amount of labor time to produce often have widely different market prices on a regular basis

3 The observed relative prices of goods fluctuate greatly over time, regardless of the amount of labor time expended upon their production, and often do not maintain or tend toward any stable ratio (or natural price). According to the labor theory of value, this should be impossible, yet it is an easily observed, daily norm.

However, market price and value are two different (although closely-related) concepts. While market price is driven by the immediate supply and demand for a commodity, these prices act as signals to both producers and consumers. When prices are high, it incentivizes producers to make more (increasing the supply) and discourages buyers (reducing demand), or vice-versa. As a result, over the long run, prices should tend to fluctuate around the value.
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