Theory of value (economics)
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A theory of value is any
economic theory Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant life and a bran ...
that attempts to explain the
exchange value In political economy Political economy is the study of production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the a ...
or
price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or b ...

price
of
goods In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant ...
and
services Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administrative service, a required part of the workload of Faculty (academic staff), university faculty * Civil service, the body of employees of a governm ...
. Key questions in economic theory include why goods and services are priced as they are, how the
value Value or values may refer to: * Value (ethics) In ethics Ethics or moral philosophy is a branch of philosophy Philosophy (from , ) is the study of general and fundamental questions, such as those about Metaphysics, existence, reason, E ...
of goods and services comes about, and—for
normative Normative generally means relating to an evaluative standard. Normativity is the phenomenon in human societies of designating some actions or outcomes as good or desirable or permissible and others as bad or undesirable or impermissible. A Norm (p ...
value theories—how to calculate the ''correct'' price of goods and services (if such a value exists).


History

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 used 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.
Adam Smith Adam Smith ( 1723 – 17 July 1790) was a Scottish economist, philosopher as well as a moral philosopher Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and ...

Adam Smith
agreed with certain aspects of
labor theory of value The labor theory of value (LTV) is a theory of value that argues that the economic value In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, ...
, but believed it did not fully explain price and profit. Instead, he proposed a
cost-of-production theory of value In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant l ...
(to later develop into
exchange value In political economy Political economy is the study of production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the a ...
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. The
utility theory of value In economics, utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a Goods (economics), good or Service (economics), service describes how much pleasure or satisfaction is gained from an increase in C ...
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 ''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 's ''The Creation of Adam ''The Creation of Adam'' () is a fresco Fresco (pl ...

The Wealth of Nations
''. The famous
diamond–water paradox The paradox of value (also known as the diamond–water paradox) is the contradiction that, although water Water (chemical formula H2O) is an , transparent, tasteless, odorless, and , which is the main constituent of 's and the s of al ...
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.
Silvio Gesell Johann Silvio Gesell (; 17 March 1862 – 11 March 1930) was a German-Argentine German Argentines (german: Deutschargentinier, es, germano-argentinos) are Argentine people, Argentine citizens of German ancestry. They are descendants of Germa ...
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.


Theories


Intrinsic theory of value

According to the
intrinsic theory of value An intrinsic theory of value (also called theory of objective value) is any theory of value in economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred ...
(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. 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, but is the properties of an object. The value is created through the valuer’s 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?


Labor theory of value

In
classical economics Classical economics or classical political economy is a school of thought A school of thought, or intellectual tradition, is the perspective of a group of people who share common characteristics of opinion or outlook of a philosophy ...
, the
labor theory of value The labor theory of value (LTV) is a theory of value that argues that the economic value In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, ...
asserts that the
economic value In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the beh ...
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 In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...
, including the labor necessary for the development of any
capital Capital most commonly refers to: * Capital letter Letter case is the distinction between the letters Letter, letters, or literature may refer to: Characters typeface * Letter (alphabet) A letter is a segmental symbol A symbol ...
used in the production process. Both
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British Political economy, political economist, one of the most influential of the Classical economics, classical economists along with Thomas Malthus, Adam Smith and James Mill. He was ...
and
Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher A philosopher is someone who practices philosophy Philosophy (from , ) is the study of general and fundamental questions, such as those about reason, M ...

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. 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 transaction, or when a price is set in some price fixing regime.


Exchange theory of value

In
Marxian economics Marxian economics, or the Marxian school of economics, is a heterodox In religion, heterodoxy (from Ancient Greek Ancient Greek includes the forms of the Greek language used in ancient Greece and the classical antiquity, ancient world f ...
, the exchange theory of value, is a description of the dual contrary nature of the labor contained in the
commodity In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...
. The commodity has at the same time, both a subjective material
use value Use value (german: Gebrauchswert) or value in use is a concept in classical political economy and Marxist economics. It refers to the tangible features of a commodity (a tradeable object) which can satisfy some human requirement, want or need, or ...
and an objective exchange value or social value. The use value is the value of a material by the utility, use or consumption, and in which a thing meets human needs. 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 sunlight, 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 A physical property is any Property (philosophy), property that is Measurement, measurable, whose value describes a state of a physical system. The changes in the physical properties of a system can be used to describe its changes between momenta ...
, as in the uses to which the object can be put to work on, also tie in with the use value.


Monetary theory of value

Critics of traditional
Marxian economics Marxian economics, or the Marxian school of economics, is a heterodox In religion, heterodoxy (from Ancient Greek Ancient Greek includes the forms of the Greek language used in ancient Greece and the classical antiquity, ancient world f ...
, especially those associated with the Neue Marx-Lektüre (New Readings of Marx) such as Michael Heinrich, emphasize 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." Similarly to the exchange theory, this theory emphasizes value as being socially determined, rather than having a physical substance. According to this analysis, when money incorporates
production Production may refer to: Economics and business * Production (economics) Production is the process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (output). It is the act of ...
into its
M-C-M' In classical political economy and especially Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist and socialist revolutionary. Born in Trie ...
circulation, it functions as
capital Capital most commonly refers to: * Capital letter Letter case is the distinction between the letters Letter, letters, or literature may refer to: Characters typeface * Letter (alphabet) A letter is a segmental symbol A symbol ...
implementing the
capitalist Capitalism is an economic system An economic system, or economic order, is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, ...
relation and the exploitation of
labor power Labour or labor may refer to: * Childbirth Childbirth, also known as labour or delivery, is the ending of pregnancy where one or more babies leaves the uterus by passing through the vagina or by Caesarean section. In 2015, there were about 13 ...
constitutes the actual presupposition for this incorporation.


Power theory of value

Radical Radical may refer to: Arts and entertainment Music *Radical (mixtape), ''Radical'' (mixtape), by Odd Future, 2010 *Radical (Every Time I Die album), ''Radical'' (Every Time I Die album), 2021 *Radical (Smack album), ''Radical'' (Smack album), 1988 ...
institutional economist Institutional economics focuses on understanding the role of the evolutionary Evolution is change in the Heredity, heritable Phenotypic trait, characteristics of biological populations over successive generations. These characteristics are t ...
s Jonathan Nitzan and Shimshon Bichler (2009) argue that it was never possible to separate economics from politics. This separation is required to allow for neoclassical economics to base their theory on Utility, utility value and for Marxists to base the labour theory of value on quantified labour power, abstract labour. Instead of a
utility theory of value In economics, utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a Goods (economics), good or Service (economics), service describes how much pleasure or satisfaction is gained from an increase in C ...
(like neoclassical economics) or a labour theory of value (as found in
Marxian economics Marxian economics, or the Marxian school of economics, is a heterodox In religion, heterodoxy (from Ancient Greek Ancient Greek includes the forms of the Greek language used in ancient Greece and the classical antiquity, ancient world f ...
), 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. 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. Market capitalization, 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 and marginalism

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. The consumer places a value on an item by determining the marginal utility, or additional satisfaction of one additional good, of that item and deciding what that means to them. The modern subjective theory of value was created by William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century. The subjective theory contradicted Karl Marx's labor theory which stated an item's value depends on the labour that goes into production and not the ability to satisfy the consumer. The subjective theory of value helped answer the "
diamond–water paradox The paradox of value (also known as the diamond–water paradox) is the contradiction that, although water Water (chemical formula H2O) is an , transparent, tasteless, odorless, and , which is the main constituent of 's and the s of al ...
," 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. The subjective theory is useful for explaining supply and demand. 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. 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.


References


External links

* {{DEFAULTSORT:Theory Of Value (Economics) Theory of value (economics),