economic value
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In
economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
, economic value is a measure of the benefit provided by a
good In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...
or
service 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 ...
to an economic agent. It is generally measured through units of
currency A currency, "in circulation", from la, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...
, 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 Financial compensation, compensation given by one Party (law), party to another in return for Good (economics), goods or Service (economics), services. In some situations, the pr ...
, 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 Market (economics), competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market va ...
. If a
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or Service (economics), services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or bu ...
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 Financial compensation, compensation given by one Party (law), party to another in return for Good (economics), goods or Service (economics), services. In some situations, the pr ...
through the mechanism of exchange. When an economist observes an exchange, two important value functions are revealed: those of the
buyer Procurement is the method of discovering and agreeing to terms and purchasing goods, Service (economics), services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agenc ...
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 Market (economics), competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market va ...
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 Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the beh ...
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 Kingdom of Great Britain, Britain, in the late 18th and early-to-mid 19th century. Its main thinkers ...
, 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 (Marxism), commodity, i.e., an item or service produced for, and sold on the Market (economic ...
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, Critique of political economy, critic of political economy, and socialist revolutionary. His be ...
, 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 Steve Keen (born 28 March 1953) is an Australian economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking ...
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 economy, political economist. He was one of the most influential of the Classical economics, classical economists along with Thomas Robert Malthus, Thomas Malthus, Ad ...
, 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, Critique of political economy, critic of political economy, and socialist revolutionary. His be ...
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 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 (incl ...
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 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 ...
, 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 (Marxism), commodity, i.e., an item or service produced for, and sold on the Market (economic ...
" (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 prices. 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 people, English writer, philosopher, art critic and polymath of the Victorian era. He wrote on subjects as varied as geology, architecture, myth, ornithology, literature, education, b ...
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 nationalism, anti-colonial nationalist Quote: "... marks Gandhi as a hybrid cosmopolitan figure ...
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 ...
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 denied
value theory In ethics Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of morality, right and wrong action (philosophy), behavior".''Internet Encyclopedia of Philosophy'' The field of ...
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, 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 organization, intergovernmental organisation with 38 member countries ...
, May 2012
In philosophy, economic value is a subcategory of a more general philosophical value, as defined in goodness and value theory or in the science of value.


See also

*
Asset pricing In financial economics, asset pricing refers to a formal treatment and development of two main Price, pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but cor ...
* Labour theory of value *
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) agai ...
* Marginal theory of value *
Market price A price is the (usually not negative) quantity of payment or Financial compensation, compensation given by one Party (law), party to another in return for Good (economics), goods or Service (economics), services. In some situations, the pr ...
* Non-extractive economic value * Objective theory of value *
Real versus nominal value (economics) In economics, nominal value (economics), 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 ...
*
Store of value A store of value is any commodity or asset that would normally retain purchasing power into the future and is the function of the asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. The most ...
*
Subjective theory of value The subjective theory of value is an theory of value (economics), economic theory which proposes the idea that the value (economics), value of any good is not determined by the utility value of the object, nor by the cumulative value of components ...
* Theory of value (economics) *
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 ...
*
Utility As a topic of economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses ...
* Value (marketing) *
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 so ...
*
Value network A value network is a graphical illustration of social and technical resources within/between organizations and how they are utilized. The :wikt:node, nodes in a value network represent people or, more abstractly, roles. The nodes are connected by ...


References

{{DEFAULTSORT:Value (Economics) Political economy