The most fundamental flaw in Marx's theory of value is the premise that the value of goods is determined by their cost of production alone. This fallacy was pointed out as early as 1871 by Carl Menger, who observed that the value of a diamond is the same whether it was found by accident or whether it was found as a result of a thousand days of a miner's labour.

The model becomes even less robust in the context of the modern knowledge economy, where the commodity being traded is principally intellectual property. When I employ someone to write me an iPhone app, the value of it relates almost entirely to the demand which is subsequently generated for it. If I pay my developer $1500 to write the app and it takes him a week, then I promote it and sell it to a million people for a dollar each, was his labour worth a million dollars? Or was most of the value in the idea I had and my skill in selling it? If I fail to sell it at all, was his labour therefore worthless?

This leads on to the next problem with Marx's theory of value which is it that it does not attribute any value to the risk taken by the entrepreneur. The entrepreneur risks his capital, time and reputation in order to provide a stable wage for the employee. Consider a Silicon Valley startup in which the developers are paid a good wage over a period of several years to work on an application or website which generates no revenue. If the venture can monetize then the entrepreneur may gain a huge payout, but it is also highly likely that the venture will fail. Eventually the capital will all be burned and the workers will be made redundant, but not until they have enjoyed a considerable period of gainful employment producing something of no realizable value.

Marx proposed that only labour could add value. The corollary of this is that labour-intensive industries (such as the cotton mills of Victorian Manchester which so inspired Marx's work) should return higher profits than less labour-intensive industries, but there is no evidence to support this. Indeed, in the modern economy, and perhaps ironically as a consequence of Marx's work, the reverse is more likely to be true.

Underlying all of this is Marx's prediction that profit will diminish over time and that capitalism is therefore a finite phase which must inevitably give way to something else. Here the premise is partly correct in that within any given industry, provided there is an effective level of competition, total profit will tend towards zero as the industry matures. However, this is actually the fundamental strength of capitalism rather than its weakness, because as mature industries become more optimized and less resources are required to fulfill production within them, the pursuit of profit will lead entrepreneurs to discover new opportunities and develop new industries.