Theory of value (economics)

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A theory of value is any economic theory that attempts to explain the exchange value or price of goods and services. Key questions in economic theory include why goods and services are priced as they are, how the value of goods and services comes about, and—for normative value theories—how to calculate the correct price of goods and services (if such a value exists).

Exchange value attribute of a commodity

In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market. The other three aspects are use value, economic value, and price. Thus, a commodity has:

Price quantity of payment or compensation given by one party to another in return for goods or services

A price is the quantity of payment or compensation given by one party to another in return for one unit of goods or services. A price is influenced by both production costs and demand for the product. A price may be determined by a monopolist or may be imposed on the firm by market conditions.

Service (economics) intangible offering inseparable from its creators labor, which brings utility value to their client

In economics, a service is a transaction in which no physical goods are transferred from the seller to the buyer. The benefits of such a service are held to be demonstrated by the buyer's willingness to make the exchange. Public services are those that society as a whole pays for. Using resources, skill, ingenuity, and experience, service providers benefit service consumers. Service is intangible in nature.



A major question that has eluded economists since the earliest of publications was one of price. As commodities began to be exchanged for currency, economic thinkers have constantly been trying to decipher how prices are determined. “Value” was the general term assigned to indicate the relative price of a good or service. One of the earliest predecessors of classical views on value theory comes from a pamphlet that was published in 1738. In this pamphlet, it is discussed how labor is the most important measurement tool when considering value. This idea stemmed from pre-monetary views of price, where labor was exchanged for other labor services. While this was an accepted idea, it was not without its critics.

Theory of value has evolved over time due to the work of several economic theorists. St. Thomas Aquinas created a theory that states the value of a commodity depends on both the subjective utility and the cost of production. Scientific advancements in the seventeenth and eighteenth centuries inspired English economist William Petty in developing his labor theory of value where the amount of labor that goes into producing or supplying a product determines the value no matter the product. English economist Nicholas Barbon developed what he called a ‘time and place’ value that returned to subjective utility theory explaining that a product with no use has no value, making it dependent on the time and place it is being produced. Scottish economist John Law was the first economist to use both supply and demand in determining value in his attempt to outline the water/diamond paradox. During his work on the labor theory of value, British philosopher and political economist John Stuart Mill contributed the idea that supply and demand have a tendency to reach an equilibrium. Economists William Stanley Jevons, Carl Menger, and Léon Walras, all individually but simultaneously developed a marginal utility theory stating that value depends solely on the value that comes from a human’s mind and used this subjective theory to explain the water-diamond paradox. Walras also contributed a mathematical model that allowed economists to make predictions on how markets should behave. Alfred Marshall used Walras’ model and created a model that accounted for how time and changes in the economy affect the market.

Thomas Aquinas Dominican scholastic philosopher of the Catholic Church

Thomas Aquinas was an Italian Dominican friar, philosopher, Catholic priest, and Doctor of the Church. An immensely influential philosopher, theologian, and jurist in the tradition of scholasticism, he is also known within the latter as the Doctor Angelicus and the Doctor Communis. The name Aquinas identifies his ancestral origins in the county of Aquino in present-day Lazio, Italy. He was the foremost classical proponent of natural theology and the father of Thomism; of which he argued that reason is found in God. His influence on Western thought is considerable, and much of modern philosophy developed or opposed his ideas, particularly in the areas of ethics, natural law, metaphysics, and political theory.

William Petty English scientist, philosopher, statistician and economist

Sir William PettyFRS was an English economist, physician, scientist and philosopher. He first became prominent serving Oliver Cromwell and the Commonwealth in Ireland. He developed efficient methods to survey the land that was to be confiscated and given to Cromwell's soldiers. He also remained a significant figure under King Charles II and King James II, as did many others who had served Cromwell.

The labor theory of value (LTV) is a heterodox theory of value that argues that the economic value of a good or service is determined by the total amount of "socially necessary labor" required to produce it.

Adam Smith agreed with certain aspects of labor theory of value, but believed it did not fully explain price and profit. Instead, he proposed an ‘Adding-up Theory’ (or cost-of-production theory, to later develop into exchange value theory) that explained value was determined by several different factors, including wages and rents. This theory of value, according to Smith, best explained the natural prices in the market. While an underdeveloped theory at the time, it did offer an alternative to another popular value theory of the time.

Adam Smith 18th-century Scottish moral philosopher and political economist

Adam Smith was a Scottish economist, philosopher and author as well as a moral philosopher, a pioneer of political economy and a key figure during the Scottish Enlightenment, also known as ''The Father of Economics'' or ''The Father of Capitalism''. Smith wrote two classic works, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter, often abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. In his work, Adam Smith introduced his theory of absolute advantage.

The utility theory of value was the belief that price and value were solely based on how much “use” an individual received from a commodity. However, this theory is rejected in Smith’s work The Wealth of Nations . The famous “water-diamond” paradox questions this by examining the use in comparison to price of these goods. Water, while necessary for life, is far less expensive than diamonds, which have basically no use. Which value theory holds true divides economic thinkers, and is the base for many socioeconomic and political beliefs. [1]

<i>The Wealth of Nations</i> 1776 work on economics by Adam Smith

An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith. First published in 1776, the book offers one of the world's first collected descriptions of what builds nations' wealth, and is today a fundamental work in classical economics. By reflecting upon the economics at the beginning of the Industrial Revolution, the book touches upon such broad topics as the division of labour, productivity, and free markets.

Silvio Gesell denied value theory in economics. He thought that value theory is useless and prevents economics from becoming science and that a currency administration guided by value theory is doomed to sterility and inactivity. [2]

Silvio Gesell German merchant, theoretical economist, social activist, anarchist and founder of Freiwirtschaft

Silvio Gesell was a German merchant, theoretical economist, social activist, Georgist, anarchist, libertarian socialist, and founder of Freiwirtschaft. In 1900 he founded the magazine Geld-und Bodenreform, but it soon closed for financial reasons. During one of his stays in Argentina, where he lived in a vegetarian commune, Gesell started the magazine Der Physiokrat together with Georg Blumenthal. In 1914, it closed due to censorship.

Intrinsic theory of value

According to the intrinsic theory of value (also called "theory of objective value"), intrinsic value characterizes—in terms of the value—that something has “in itself”, or “its own sake”, or “in its own right”. It is an express to a concept other than the one just discussed. It is the value that an entity has in itself as well, for what it is, or as an end. [3] This value is not physical, saying that this value is physical is the same as saying our minds are physical. The value does not exist as an object, however it is the properties of an object. [4]

An intrinsic theory of value is any theory of value in economics which holds that the value of an object, good or service, is intrinsic, meaning that it can be estimated using objective measures. Most such theories look to the process of producing an item, and the costs involved in that process, as a measure of the item's intrinsic value.

The value is created through the valuers attitude or judgements. Moral judgement and decisions is a crucial part in this value. Intrinsic value actually cuts off our logical decision and makes us think only about what feels right to us, not anybody else because it is what we make it to be. If something has intrinsic value it has properties or features in virtue of which it is valuable, separated of anyone's attitudes or judgements. It includes other variables such as brand name, trademarks, and copyrights that are usually difficult to calculate and sometimes not accurately reflected in the market price. Intrinsic value is not what the investors are willing to pay, however, it is what the object is really worth. [5]

Labor theory of value

In classical economics, the labor theory of value asserts that the economic value of a good or service is determined by the total amount of socially necessary labor required to produce it. When speaking in terms of a labor theory of value, value without any qualifying adjective theoretically refers to the amount of labor necessary for the production of a marketable commodity, including the labor necessary for the development of any capital used in the production process. Both David Ricardo and Karl Marx attempted to quantify and embody all labor components in order to develop a theory of the real, or natural, price of a commodity. [6]

In either case, what is being addressed are general prices—i.e., prices in the aggregate, not a specific price of a particular good or service in a given circumstance. Theories in either class allow for deviations when a particular price is struck in a real-world market transactions, or when a price is set in some price fixing regime.

Exchange theory of value

In Marxian economics, the exchange theory of value, proposed by I. I. Rubin (1927), [7] is a description of the dual contrary nature of the labor contained in the commodity. The commodity has at the same time, both a subjective material use value and an objective exchange value or social value. [8]

The use value is the value of a material by the utility, use or consumption, and in which a thing meets human needs. [9] An example of this is if someone wants to build a wooden shed they would need a certain quantity and quality of wood and nails. Some use value takes no effort to attain, for example the sun, or something like gravity both which humans need to survive but do not need to do anything to obtain and still have value. Other use values do require effort to attain, increasing their use value. The needs an object fulfills and the physical properties, as in the uses to which the object can be put to work on, also tie in with the use value. [10]

Monetary theory of value

Marxian economist John Milios (2003) argues for a monetary theory of value, where "Money is the necessary form of appearance of value (and of capital) in the sense that prices constitute the only form of appearance of the value of commodities." [11] According to this analysis, when money incorporates production into its M-C-M' circulation, it functions as capital implementing the capitalist relation and the exploitation of labor power constitutes the actual presupposition for this incorporation. [12]

Power theory of value

Radical institutional economists Jonathan Nitzan and Shimshon Bichler (2009) argue that it was never possible to separate economics from politics. [13] This separation is required to allow for neoclassical economics to base their theory on utility value and for Marxists to base the labour theory of value on quantified abstract labour. Instead of a utility theory of value (like neoclassical economics) or a labour theory of value (as found in Marxian economics), Nitzan and Bichler propose a power theory of value. The structure of prices has little to do with the so-called "material" sphere of production and consumption. The quantification of power in prices is not the consequence of external laws—whether natural or historical—but entirely internal to society.

In capitalism, power is the governing principle as rooted in the centrality of private ownership. Private ownership is wholly and only an act of institutionalized exclusion, and institutionalized exclusion is a matter of organized power. [14] [15] And since the power behind private ownership is denominated in prices, Nitzan and Bichler argue, there is a need for a power theory of value. There is, however, a causality dilemma to their argument that has drawn criticism: power is based on the ability of firms to set monopoly prices yet the ability to set prices is based on firms possessing a degree of power in the market.

Capitalization, in their theory, is a measure of power, as illuminated through the present discounted value of future earnings (while also taking into account hype and risk). This formula is basic to finance which is the overarching logic of capitalism. The logic is also inherently differential as every capitalist strives to accumulate greater earnings than their competitors (but not profit maximization). Nitzan and Bichler label this process differential accumulation. In order to have a power theory of value there needs to be differential accumulation where some owners' rate of growth of capitalization is faster than the average pace of capitalization.

Subjective theory of value

The subjective theory of value is a theory of value that believes that an item’s value depends on the consumer. This theory states that an item’s value is not dependent on the labor that goes into a good, or any inherent property of the good. Instead, the subjective theory of value believes that a good’s value depends on the consumers wants and needs. [16] The consumer places a value on an item by determining the marginal utility, or additional satisfaction of one additional good, [17] of that item and deciding what that means to them. [18]

The modern subjective theory of value was created by William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century. [19] The subjective theory contradicted Karl Marx’s Labour Theory which stated an item's value depends on the labour that goes into production and not the ability to satisfy the consumer. [20]

The subjective theory of value helped answer the "diamond–water paradox," which many believed to be unsolvable. The diamond-water paradox questions why diamonds are so much more valuable than water when water is necessary for life. This paradox was answered by the subjective theory of value by realizing that water, in total, is more valuable than diamonds because the first few units are necessary for life. The key difference between water and diamonds is that water is more plentiful and diamonds are rare. Because of the availability, one additional unit of diamonds exceeds the value of one additional unit of water. [20]

Marginalism refers to the study of marginal theories and studies within economics. The topics included in marginalism are marginal utility, marginal rate of substitution, and opportunity costs. [21] Marginalism can be applied to the subjective theory of value because the subjective theory takes into account the marginal utility of an item in order to put a value on it.

See also

Related Research Articles

Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.

Léon Walras French mathematical economist

Marie-Esprit-Léon Walras was a French mathematical economist and Georgist. He formulated the marginal theory of value and pioneered the development of general equilibrium theory.

In economics, capital consists of assets that can enhance one's power to perform economically useful work. For example, in a fundamental sense a stone or an arrow is capital for a caveman who can use it as a hunting instrument, while roads are capital for inhabitants of a city.

<i>Principles of Economics</i> (Menger) book by Carl Menger

Principles of Economics is a book by economist Carl Menger which is credited with the founding of the Austrian School of economics. It was one of the first modern treatises to advance the theory of marginal utility.

Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. The reason why the price of diamonds is higher than that of water, for example, owes to the greater additional satisfaction of the diamonds over the water. Thus, while the water has greater total utility, the diamond has greater marginal utility.

In economics, the cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production and taxation.

Commodity fetishism

In Karl Marx's critique of political economy, commodity fetishism is the perception of the social relationships involved in production not as relationships among people, but as economic relationships among the money and commodities exchanged in market trade. As such, commodity fetishism transforms the subjective, abstract aspects of economic value into objective, real things that people believe have intrinsic value.

The subjective theory of value is a theory of value which advances the idea that the value of a good is not determined by any inherent property of the good, nor by the amount of labor necessary to produce the good, but instead value is determined by the importance an acting individual places on a good for the achievement of his desired ends. The modern version of this theory was created independently and nearly simultaneously by William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century.

Use value or value in use is a concept in classical political economy and Marxian economics. It refers to the tangible features of a commodity which can satisfy some human requirement, want or need, or which serves a useful purpose. In Karl Marx's critique of political economy, any product has a labor-value and a use-value, and if it is traded as a commodity in markets, it additionally has an exchange value, most often expressed as a money-price.

Paradox of value

The paradox of value is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market. The philosopher Adam Smith is often considered to be the classic presenter of this paradox, although it had already appeared as early as Plato's Euthydemus. Nicolaus Copernicus, John Locke, John Law and others had previously tried to explain the disparity.

Economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured relative to units of currency, and the interpretation is therefore "what is the maximum amount of money a specific actor is willing and able to pay for the good or service"?

Criticisms of Marxism

Criticisms of Marxism have come from various political ideologies and academic disciplines. These include general criticisms about a lack of internal consistency, criticisms related to historical materialism, that it is a type of historical determinism, the necessity of suppression of individual rights, issues with the implementation of communism and economic issues such as the distortion or absence of price signals and reduced incentives. In addition, empirical and epistemological problems are frequently identified.

Commodity (Marxism) in Marxism, good or service produced by human labour and offered as a product for general sale on the market

In classical political economy and especially Karl Marx's critique of political economy, a commodity is any good or service produced by human labour and offered as a product for general sale on the market. Some other priced goods are also treated as commodities, e.g. human labor-power, works of art and natural resources, even though they may not be produced specifically for the market, or be non-reproducible goods.

In economics, utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a goods or service is the change in the utility from an increase in the consumption of that good or service.

Criticisms of the labor theory of value affect the historical concept of labor theory of value (LTV) which spans classical economics, liberal economics, Marxian economics, neo-Marxian economics, and anarchist economics. As an economic theory of value LTV is central to Marxist social-political-economic theory and later gave birth to the ideologically motivated concepts of exploitation of labour and surplus value. LTV criticisms therefore often appear in the context of economic criticism, not only for the microeconomic theory of Marx, but also for Marxism, according to which the working class is exploited under capitalism.

Marxian economics school of economic thought

Marxian economics, or the Marxian school of economics, is a heterodox school of economic thought. Its foundations can be traced back to the critique of classical political economy in the research by Karl Marx and Friedrich Engels. Marxian economics comprises several different theories and includes multiple schools of thought, which are sometimes opposed to each other, and in many cases Marxian analysis is used to complement or supplement other economic approaches. Because one does not necessarily have to be politically Marxist to be economically Marxian, the two adjectives coexist in usage rather than being synonymous. They share a semantic field while also allowing connotative and denotative differences.

Criticism of value-form

There are five main lines of scholarly criticism of Marx's idea of the form of value.


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