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In
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
, economic value is a measure of the benefit provided by a good or service to an
economic agent In economics, an agent is an actor (more specifically, a decision maker) in a model of some aspect of the economy. Typically, every agent makes decisions by solving a well- or ill-defined optimization or choice problem. For example, ''buyers' ...
. It is generally measured through units of
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general ...
, 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"? Among the competing schools of economic theory there are differing theories of value. Economic value is ''not'' the same as
market price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...
, nor is economic value the same thing as
market value Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', '' fair value'' or ''fair market value'', although th ...
. If a
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
is willing to buy a good, it implies that the customer places a higher value on the good than the market price. The difference between the value to the consumer and the market price is called "
consumer surplus In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities: * Consumer surplus, or consumers' surplus, is the monetary gain ...
". It is easy to see situations where the actual value is considerably larger than the market price: purchase of drinking water is one example.


Overview

The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods that can be exchanged. From this analysis came the concepts '' value in use'' and '' value in exchange.'' Value is linked to
price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...
through the mechanism of exchange. When an economist observes an exchange, two important value functions are revealed: those of the buyer and seller. Just as the buyer reveals what he is willing to pay for a certain amount of a good, so too does the seller reveal what it costs him to give up the good. Additional information about
market value Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', '' fair value'' or ''fair market value'', although th ...
is obtained by the rate at which transactions occur, telling observers the extent to which the purchase of the good has value over time. Said another way, value is how much a desired object or condition is worth relative to other objects or conditions. Economic values are expressed as "how much" of one desirable condition or
commodity In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...
will, or would be ''given up'' in exchange for some other desired condition or commodity. Among the competing schools of economic theory there are differing metrics for value assessment and the metrics are the subject of a theory of value. Value theories are a large part of the differences and disagreements between the various schools of economic theory.


Explanations

In
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
, the value of an object or service is often seen as nothing but the price it would bring in an open and competitive market. This is determined primarily by the demand for the object relative to supply in a perfectly competitive market. Many neoclassical economic theories equate the value of a commodity with its price, whether the market is competitive or not. As such, everything is seen as a commodity and if there is no market to set a price then there is no economic value. In
classical economics Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam S ...
, the value of an object or condition is the amount of discomfort/labor saved through the consumption or use of an object or condition (Labor Theory of Value). Though
exchange value In political economy and especially Marxian economics, exchange value (German: ''Tauschwert'') refers to one of the four major attributes of a commodity, i.e., an item or service produced for, and sold on the market, the other three attributes ...
is recognized, ''economic value'' is not, in theory, dependent on the existence of a market and price and value are not seen as equal. This is complicated, however, by the efforts of classical economists to connect price and labor value.
Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
, for one, saw exchange value as the "form of appearance" 'Erscheinungsform''of value, which implies that, although value is separate from exchange value, it is meaningless without the act of exchange, i.e., without a market. In this tradition, Steve Keen makes the claim that "value" refers to "the innate worth of a commodity, which determines the normal ('equilibrium') ratio at which two commodities exchange." To Keen and the tradition of
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a ...
, this corresponds to the classical concept of long-run cost-determined prices, what
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...
called "natural prices" and
Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
called "
prices of production Prices of production (or "production prices"; in German ''Produktionspreise'') is a concept in Karl Marx's critique of political economy, defined as "cost-price + average profit". A production price can be thought of as a type of supply price for p ...
." It is part of a cost-of-production theory of value and price. Ricardo, but not Keen, used a " labor theory of price" in which a commodity's "innate worth" was the amount of labor needed to produce it. "The value of a thing in any given time and place", according to
Henry George Henry George (September 2, 1839 – October 29, 1897) was an American political economist and journalist. His writing was immensely popular in 19th-century America and sparked several reform movements of the Progressive Era. He inspired the eco ...
, "is the largest amount of exertion that anyone will render in exchange for it. But as men always seek to gratify their desires with the least exertion this is the lowest amount for which a similar thing can otherwise be obtained." In another classical tradition, Marx distinguished between the "value in use" ( use-value, what a commodity provides to its buyer), labor cost which he calls "value" (the socially-necessary labour time it embodies), and "
exchange value In political economy and especially Marxian economics, exchange value (German: ''Tauschwert'') refers to one of the four major attributes of a commodity, i.e., an item or service produced for, and sold on the market, the other three attributes ...
" (how much labor-time the sale of the commodity can claim, Smith's "labor commanded" value). By most interpretations of his
labor theory of value The labor theory of value (LTV) is a 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. The LTV is usually associated with Marxian ...
, Marx, like Ricardo, developed a "labor theory of price" where the point of analyzing value was to allow the calculation of
relative price A relative price is the price of a commodity such as a good or service in terms of another; i.e., the ratio of two prices. A relative price may be expressed in terms of a ratio between the prices of any two goods or the ratio between the price o ...
s. Others see values as part of his sociopolitical interpretation and critique of capitalism and other societies, and deny that it was intended to serve as a category of economics. According to a third interpretation, Marx aimed for a theory of the dynamics of price formation but did not complete it. In 1860,
John Ruskin John Ruskin (8 February 1819 20 January 1900) was an English writer, philosopher, art critic and polymath of the Victorian era. He wrote on subjects as varied as geology, architecture, myth, ornithology, literature, education, botany and pol ...
published a critique of the economic concept of value from a moral point of view. He entitled the volume '' Unto This Last'', and his central point was this: "It is impossible to conclude, of any given mass of acquired wealth, merely by the fact of its existence, whether it signifies good or evil to the nation in the midst of which it exists. Its real value depends on the moral sign attached to it, just as strictly as that of a mathematical quantity depends on the algebraic sign attached to it. Any given accumulation of commercial wealth may be indicative, on the one hand, of faithful industries, progressive energies, and productive ingenuities: or, on the other, it may be indicative of mortal luxury, merciless tyranny, ruinous chicanery."
Gandhi Mohandas Karamchand Gandhi (; ; 2 October 1869 – 30 January 1948), popularly known as Mahatma Gandhi, was an Indian lawyer, anti-colonial nationalist Quote: "... marks Gandhi as a hybrid cosmopolitan figure who transformed ... anti- ...
was greatly inspired by Ruskin's book and published a paraphrase of it in 1908. Economists such as
Ludwig von Mises Ludwig Heinrich Edler von Mises (; 29 September 1881 – 10 October 1973) was an Austrian School economist, historian, logician, and sociologist. Mises wrote and lectured extensively on the societal contributions of classical liberalism. He is ...
asserted that "value" is a subjective judgment. Prices can only be determined by taking these subjective judgments into account, and that this is done through the price mechanism in the market. Thus, it was false to say that the economic value of a good was equal to what it cost to produce or to its current replacement cost.
Silvio Gesell Johann Silvio Gesell (; 17 March 1862 – 11 March 1930) was a German-Argentine economist, merchant, and the founder of Freiwirtschaft, an economic model for market socialism. In 1900 he founded the magazine ''Geld-und Bodenreform'' (''Monetary ...
denied
value theory In ethics and the social sciences, value theory involves various approaches that examine how, why, and to what degree humans value things and whether the object or subject of valuing is a person, idea, object, or anything else. Within philosophy, ...
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.


Connected concepts

The theory of value is closely related to that of allocative efficiency, the quality by which firms produce those goods and services most valued by society. The market value of a machine part, for example, will depend upon a variety of objective facts involving its efficiency versus the efficiency of other types of part or other types of machine to make the kind of products that consumers will value in turn. In such a case, market value has both objective and subjective components. Economy,
efficiency Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...
and
effectiveness Effectiveness is the capability of producing a desired result or the ability to produce desired output. When something is deemed effective, it means it has an intended or expected outcome, or produces a deep, vivid impression. Etymology The ori ...
, often referred to as the "Three Es", may be used as complementary factors contributing to an assessment of the value for money provided by a purchase, project or activity. The UK National Audit Office uses the following summaries to explain the meaning of each term: *Economy: minimising the cost of resources used or required (inputs) – ''spending less''; *Efficiency: the relationship between the output from goods or services and the resources to produce them – ''spending well''; and *Effectiveness: the relationship between the intended and actual results of public spending (outcomes) – ''spending wisely''.National Audit Office
Assessing value for money
accessed 15 March 2019
Sometimes a fourth 'E',
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the diff ...
, is also added.Jackson, P.
Value for money and international development: Deconstructing myths to promote a more constructive discussion
OECD The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate ...
, May 2012
In philosophy, economic value is a subcategory of a more general philosophical value, as defined in
goodness and value theory In ethics and the social sciences, value theory involves various approaches that examine how, why, and to what degree humans value things and whether the object or subject of valuing is a person, idea, object, or anything else. Within philosophy, ...
or in the
science of value The science of value, or value science, is a creation of philosopher Robert S. Hartman, which attempts to formally elucidate value theory using both formal and symbolic logic. Fundamentals The fundamental principle, which functions as an axiom, ...
.


See also

*
Asset pricing In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspon ...
*
Labour theory of value The labor theory of value (LTV) is a 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. The LTV is usually associated with Marxian ...
*
Law of value The law of the value of commodities (German: ''Wertgesetz der Waren''), known simply as the law of value, is a central concept in Karl Marx's critique of political economy first expounded in his polemic '' The Poverty of Philosophy'' (1847) again ...
* Marginal theory of value *
Market price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...
* Non-extractive economic value * Objective theory of value *
Real versus nominal value (economics) In economics, nominal value is measured in terms of money, whereas real value is measured against goods or services. A real value is one which has been adjusted for inflation, enabling comparison of quantities as if the prices of goods had not c ...
* Store of value *
Subjective theory of value The subjective theory of value is an economic theory which proposes the idea that the value of any good is not determined by the utility value of the object, nor by the cumulative value of components or labour needed to produce or manufacture it, ...
*
Theory of value (economics) 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 com ...
* Use value *
Utility As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosophe ...
*
Value (marketing) Value in marketing, also known as customer-perceived value, is the difference between a prospective customer's evaluation of the benefits and costs of one product when compared with others. Value may also be expressed as a straightforward rela ...
*
Value form The value-form or form of value (german: Wertform) is a concept in Karl Marx's critique of political economy. Marx's account of the value-form is differently adopted in later forms of Marxism, in the Frankfurt School and in post-Marxism. When ...
* Value network


References

{{DEFAULTSORT:Value (Economics) Political economy