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A theory of value is any
economic theory 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 analyze ...
that attempts to explain the
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 b ...
or
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 c ...
of
goods In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tr ...
and
services Service may refer to: Activities * Administrative service, a required part of the workload of university faculty * Civil service, the body of employees of a government * Community service, volunteer service for the benefit of a community or a p ...
. 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 Normative generally means relating to an evaluative standard. Normativity is the phenomenon in human societies of designating some actions or outcomes as good, desirable, or permissible, and others as bad, undesirable, or impermissible. A norm in ...
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 (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"——� ...
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 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 e ...
, but believed it did not fully explain price and profit. Instead, he proposed a
cost-of-production theory of value 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 (inc ...
(to later develop into
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 b ...
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 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'' of the Scottish economist and moral philosopher Adam Smith. First published in 1 ...
''. The famous diamond–water 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.
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'' (''Moneta ...
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 In economics, an intrinsic theory of value (also called theory of objective value) is any theory of value which holds that the value of an object or a good or service is intrinsic, meaning that it can be estimated using objective measures. M ...
(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.


Labor theory of value

In classical economics, the
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 e ...
asserts that the
economic value In economics, economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured through units of currency, and the interpretation is therefore "what is the maximum amount of money a spec ...
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, 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 ...
, including the labor necessary for the development of any capital used in the production process. Both
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 m ...
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 ...
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 school of political economic thought. Its foundations can be traced back to Karl Marx's critique of political economy. However, unlike critics of political economy, Marxian ...
, the exchange theory of value, is a description of the dual contrary nature of the labor contained in the
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 ...
. 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 that is 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 momentary states. Physical properties are o ...
, 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 school of political economic thought. Its foundations can be traced back to Karl Marx's critique of political economy. However, unlike critics of political economy, Marxian ...
, especially those associated with the
Neue Marx-Lektüre (German for "New Reading of Marx") or NML is a revival and interpretation of Karl Marx's critique of political economy, which originated during the mid- 1960s in both Western and Eastern Europe and opposed both Marxist–Leninist and soci ...
(New Readings of Marx) such as
Michael Heinrich Michael Heinrich (born 1957, Heidelberg) is a German historian of philosophy, political scientist and mathematician, specialising in the critical study of the development of Marx's thought. Heinrich's work, influenced by Elmar Altvater and the ...
, 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, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production as a stat ...
into its
M-C-M' In classical political economy and especially Karl Marx's critique of political economy, a commodity is any good or service ("products" or "activities") produced by human labour and offered as a product for general sale on the market. Some other ...
circulation, it functions as capital implementing the
capitalist Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private p ...
relation and the exploitation of
labor power Labour power (in german: Arbeitskraft; in french: force de travail) is a key concept used by Karl Marx in his critique of capitalist political economy. Marx distinguished between the capacity to do work, labour power, from the physical act of ...
constitutes the actual presupposition for this incorporation.


Power theory of value

Radical Radical may refer to: Politics and ideology Politics *Radical politics, the political intent of fundamental societal change *Radicalism (historical), the Radical Movement that began in late 18th century Britain and spread to continental Europe and ...
institutional economists
Jonathan Nitzan Jonathan Nitzan is Professor of Political Economy at York University, Toronto, Canada. Work Nitzan is the co-author (with Shimshon Bichler) of ''Capital as Power: A Study of Order and Creorder'', published 2009. Their writings focus of the nature ...
and
Shimshon Bichler Shimshon Bichler is an educator who teaches political economy at colleges and universities in Israel. Along with Jonathan Nitzan, Bichler has created a power theory of capitalism Capitalism is an economic system based on the private ...
(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 value and for Marxists to base the
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 e ...
on quantified abstract labour. Instead of a utility theory of value (like
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 ...
) or a
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 e ...
(as found in
Marxian economics Marxian economics, or the Marxian school of economics, is a heterodox school of political economic thought. Its foundations can be traced back to Karl Marx's critique of political economy. However, unlike critics of political economy, Marxian ...
), 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 Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private pr ...
, 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.
Capitalization Capitalization (American English) or capitalisation (British English) is writing a word with its first letter as a capital letter (uppercase letter) and the remaining letters in lower case, in writing systems with a case distinction. The term a ...
, 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 In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit (or just profit in short). In neoclassical economics, ...
). Nitzan and Bichler label this process
differential accumulation Differential accumulation is an approach for analysing capitalist development and crisis, tying together mergers and acquisitions, stagflation and globalization as integral facets of accumulation. The concept has been developed by Jonathan Nitzan an ...
. 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 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, ...
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 In economics, utility is the satisfaction or benefit derived by consuming a product. The marginal utility of a good or service describes how much pleasure or satisfaction is gained by consumers as a result of the increase or decrease in consumpt ...
, 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 William Stanley Jevons (; 1 September 183513 August 1882) was an English economist and logician. Irving Fisher described Jevons's book ''A General Mathematical Theory of Political Economy'' (1862) as the start of the mathematical method in eco ...
,
Léon Walras Marie-Esprit-Léon Walras (; 16 December 1834 – 5 January 1910) was a French mathematical economist and Georgist. He formulated the marginal theory of value (independently of William Stanley Jevons and Carl Menger) and pioneered the developme ...
, and
Carl Menger Carl Menger von Wolfensgrün (; ; 28 February 1840 – 26 February 1921) was an Austrian economist and the founder of the Austrian School of economics. Menger contributed to the development of the theories of marginalism and marginal utility, ...
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," 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 In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor or ...
.
Marginalism 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. It states that the reason why the price of diamonds is higher than that of w ...
refers to the study of marginal theories and studies within economics. The topics included in marginalism are
marginal utility In economics, utility is the satisfaction or benefit derived by consuming a product. The marginal utility of a good or service describes how much pleasure or satisfaction is gained by consumers as a result of the increase or decrease in consumpt ...
,
marginal rate of substitution In economics, the marginal rate of substitution (MRS) is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. At equilibrium consumption levels (assuming no exte ...
, and
opportunity costs In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
. 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)