Value of Theory
Theory of value is a generic term which encompasses all the theories within economics that attempt 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). Theories of value fall into two main categories: Intrinsic (objective) theories: Intrinsic theories, as the name implies, hold that the price of goods and services is not a function of subjective judgements. Subjective theories: Subjective theories hold that for an object to have economic value (a non-zero price), the object must be useful in satisfying human wants and it must be in limited supply. This is the foundation of the marginalist theory of value. In the context of explaining price, the marginal utility theory is not a normative theory of value (W. J. Samuels 2006)
- Adam Smith was the founder of the model concept of the ‘value theory’.
In 1776 economics took a huge step as there was the first paperback book containing economic theories and ideas. Adam Smith had compiled a book which looked into many factors such as how a products value is determined. There were Five editions of The Wealth of Nations and were published during Smith’s lifetime: in 1776, 1778, 1784, 1786, and 1789. “But, whether exchange is mediated through money or not, what is it that determines the rate at which different products are exchanged? The word value has two meanings – one is value in use, the other is value in exchange. Water is extremely useful, but has almost no exchange value, while a diamond is largely useless but has enormous exchange value. Explaining the principles that determine exchange value, the components of this price, and the factors that cause it to fluctuate, is no easy matter.” (Smith, A. 1776).
Indeed it is not. It takes Smith several chapters of The Wealth of Nations to do it, specifically Book I,. Today we might solve the diamonds and water problem with marginal utility theory: since diamonds are so rare, an additional one is a great prize, but since water is so plentiful, an extra cupful is actually of little use to us. Or we might use demand analysis. But such tools did not exist in Smith’s time. (Smith, A. 1776).
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Karl Marx’s approach to value was essentially Ricardo’s labour theory of value. According to Marx the values of “All commodities are only definite masses of congealed labour time.” (Marx, K 2001). As an advocate of Ricardo’s original theory, he also followed and built on his solutions to the labour value theory’s inherent deficiencies. Although Marx used the classical concepts of value he applied his vast philosophical and sociological knowledge to reach conclusions in Capital that diverged radically from them. In his labour theory, he developed his original rate of exploitation (s’=s/v) and its resulting critique of capitalism-“Derriere le phenomene du profit se cache la realite do surtravail.” Like Aristotle, exchange of value or more appropriately exchange of ‘just’ value had for Marx, moral and judicial implications as well as economic ones. (Fogarty, M. 1996).
The theory of value was developed by many different economists to improve and contradict theories, in time recognised economists had inputted there opinion on the value of theory.
The theory of value first bought to the attention of the economic world in 1776, established a foundation where economists could build on. It bought a new way of thinking as it gave a reason to why certain prices for products were given. Adam smith attempted to find out what determines a products exchange value in the wealth of nations. He distinguished between two key areas, the value in use and the value in exchange. This meant that which product was more valuable compared to the other product. The theory of value was the basis and many economists expanded on why certain prices were given to products. One of the first expansions on the theory of value was made by Karl Marx when he talked about the labour theory of value which he later broadened to the exchange value. The labour theory value is established around the grounds that, whatever labour is required to obtain the product, determines its price. This meant that the amount of workers required obtaining a product or the amount of time taken to make the product. Marx believed that people were only willing to pay what they believed was socially necessary.
Another expansion made on the theory of value was made by the neoclassical thought of William Stanley Jevons. Jevons was one of three economists who were credited with the view of Subjective Theory of Value (Clark & John, 2001). Subjective theories hold that for an object to have economic value (a non-zero price), the object must be useful in satisfying human wants and it must be in limited supply. This is the foundation of the marginalist theory of value. In the context of explaining price, the marginal utility theory is not a normative theory of value. (W. J. Samuels 2006). Jevons theory contradicted Marx’s theory as he believed labour has nothing to do with the price of a commodity but what determines the price is how much the consumer desires the product.
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Ricardo’s labour theory of value required several assumptions: Both sectors have the same wage rate and the same profit rate; The capital employed in production is made up of wages only; The period of production has the same length for both goods.
Ricardo himself realized that the second and third assumptions were quite unrealistic and hence admitted two exceptions to his labour theory of value: Production periods may differ; The two production processes may employ instruments and equipment as capital and not just wages, and in very different proportions.
Karl Marx tried to develop on Smith’s value of theory and based most of his theories on labour. He believed that the only determinant of the exchange value was due to labour. Marx deduced from his research the link between the labour and time. He came up with a ratio which involved the production of two goods and their exchange values. Marx believed that people were only willing to pay what they believed was socially necessary. This meant that people would pay however long they thought it would take the manufacturers to make the product. He believed that the degree of value in exchange depends on the quantity of labour-time consumed in producing the thing; Marx declined factors such as different kinds of labour. The higher labour needs more training, and for this a greater expenditure of food, clothing, and such articles as require for their production, and embody, ordinary labour is demanded, this higher labour may be equated to so much ordinary labour, and all value reckoned in terms of homogeneous labour-time (Joseph 1910). This was not the only problem with this view as he was also criticised on exchange value.
John Stuart Mill mainly known for his Principles of Political Economy, the first published in 1848 and the last and 7th edition in 1871. Classical economists identified a key area when they determined the exchange value and Mill touched upon this subject. In his 3rd book he addressed the topics of exchange and value; he identified value in terms of supply and demand. Mill saw value as relative, since it depended on the quantity of another thing (Barnes & Noble 2007). Mill believed that strength and elasticity combined with the demand and supply of a product determined the exchange. For example the more demand there is for a product and the less supply, the product will tend to cost more and therefore the exchange value of the product will rise.
The value of theory improved economics drastically and developed the political economy specifically. It helped to create a basis to why customers buy certain products and why certain products are given certain values. For example Adam Smith attempted to find out what determines a commodities exchange value. Many economists developed on this idea as discussed before but the value of theory is now a core subject in modern economics. This theory has helped influence the amount of imports and exporting are done within an economy. For example using the labour theory value, many businesses use cheap labour in other countries to try and gain a maximum profit. Another way at looking at how the value theory has affected the economy is looking at the oil shocks. Countries such as Saudi Arabia have countless barrels of oil and that is why oil costs cheaper than water there, but in England the price for a litre of oil is always on the rise and extremely expensive.
The main reason why value theory is so important to economics is because it enabled many great economists, such as, David Ricardo, Karl Marx and many more to come out and enlighten the economic world of their thoughts and findings. Value of theory was the basis of many theories and findings that many economists still study today.