Before offering a brief answer, you can get a better version by finding a copy of R. Wolff and S. Resnick,
Economics: Marxian versus neoclassical. We are working on an updated new version which should by out later this year, but copies of the above are definitely available via Amazon etc.
Many factors combine to shape the price of a commodity: its quality, the intensity of desire for it, the labor needed to produce it, the profits sought by the capitalists in whose enterprises the commodity is produced, the weather on the day the commodity comes to market and countless other factors come into play. What different theories do is focus on one or a few factors since taking them all into account would be impossible since they are quite literally infinite.
Theories differ according to which of the factors shaping price they focus on. Marx and Marxists, for example, focus on the labor needed to produce a commodity. They recognize the other factors, but believe that special insights into the economy and society become available if one uses a labor-focused approach. This approach was first used extensively by Adam Smith and David Ricardo, the founders of economics as a discipline and both avid supporters and even celebrators of capitalism. Marx borrowed (with fullsome praise for them) what they called
the labor theory of value. But Marx used it in ways Smith and Ricardo had not done. Marx used it to show that the value added by the worker when he/she worked was always greater, in capitalism, than the value of the wage paid to the worker for his/her work. That difference between the value added by the worker (realized by the employer when the commodity is sold) and the value paid to that worker is, for Marx and Marxists, the source of profit. They call it a "surplus." Capitalism is thus an economic system founded upon the delivery of a surplus by workers to capitalists and that surplus delivery, Marx and Marxists show, has all sorts of consequences for capitalist societies. The production of surpluses by the majority and their receipt and use by a different group of people, indeed a minority, is what Marx and Marxists call exploitation. They find it unjust, they find its economic and social consequences unjust and wasteful of nature and human resources, and they work to change society in the belief that societies can and should do better than capitalism.
Your "free market advocates" would be more precisely described as devotees of the major theoretical alternative to Marxian economics, namely the
neoclassical economics that comprises the mainstream notion of what economics means today. Knowing where Marx's use of the labor theory of value took him and his followers (to an anti-capitalist politics), the neoclassical economists decided not to quarrel with how he used and developed the labor theory of value. Instead they decided to denounce it and not use it in any form. That's partly why they renamed the "classical economics" of Smith and Ricardo as "neoclassical economics" which was founded in the 1870s in Europe. They focused on a different set of factors shaping prices, namely supply and demand. That is, they focused on individuals' preferences - how much each person wants the different available commodities for sale (the "marginal utility" they derive from each unit of a commodity) and how much each persons wants income from work (the "marginal utility" of each dollar earned) rather than enjoyment from leisure (the "marginal utility" of each hour not having to work). They thought prices depend mostly or even entirely on preferences (marginal utilities) and the rules of technology int terms of how much we can get from the available productive resources. They preferred their approach and supply-demand theory over the labor and needed usually to bash the labor theory.
However, in my view the theories are different ways of thinking about economics. Neither is right and the other wrong. Neoclassical theory leads to the sorts of conclusions advocates of capitalism like: prices reflect how much we all want commodities (they are in that sense sensitive and responsive to what consumers want); wages reflect how much work individuals want to do and what technology enables; profits reflect the demands and supplies of inputs and outputs. And above all, the economy (prices, wages, profits, etc.) is the outcome of all people pursuing the buying and selling they individually find advantageous. No one is ripping anyone else off. There is no exploitation. Its all a great harmony. Marxian theory sees things quite differently. Capitalists exploit workers, getting from them a total value added by their labor greater than what is given back to the workers for the labor they perform. Capitalism sits on a foundation of conflict. Workers resent delivering surpluses in exchange for nothing, seek to work less, join unions, declare strikes. Capitalists seek to save wages by substituting machines or moving production to other places where workers can be had more cheaply. Capitalists use the surpluses they take from their workers to buy politicians to make government favor them. Capitalists make investment decisions about using those surpluses that can and recurringly do produce business cycles that throw masses of workers out of their jobs. Capitalism, the Marxists conclude, using their labor theory of value, is an unstable and unjust system that modern society can and should move beyond.
Which theory you end up using depends on who you are, how you have been educated, your family background and work experiences, and a million other facts about you. In the US, which theory you are likely to use also reflects the fact that the vast majority of schools, mass media, political, civic, cultural, and religious leaders either fear, reject or simply do not know Marxian theory and thus keep others from learning them and actually reaching conclusions on the basis of some actual knowledge of the available theoretical options. To rectify that situation is one goal of this website.
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