Theory of value (economics)

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"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).


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 assigned 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 agreed with certain aspects of labor theory of value, but believed it did not fully explain price and profit. Instead, he proposed an ‘Adding-up Theory’ (or cost-of-production theory, to later develop into exchange value 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. The famous “water-diamond” 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.[1]

Intrinsic theory of value[edit]

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.[2] 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, however it is the properties of an object.[3]

The value is created through the valuers 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.[4]

Labor theory of value[edit]

The labor theory of value asserts that the economic value 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, including the labor necessary for the development of any capital used in the production process. Both David Ricardo and 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.[5]

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

Power theory of value[edit]

The power theory of value has to do with the material sphere of production and consumption. The quality of power in a price tag is not the consequences of external laws, but entirely private to society. Power is the governing principles as rooted in the centrality of private ownership.[citation needed]

Capitalization is a measure of power, brightened through the present discounted value of the future earnings. It is the determination of earning more than the competition. The power theory of value needs to be differential accumulation where some owners rate of growth of capitalization is quicker than the average pace of capitalization.[6]

Subjective theory of value[edit]

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.[7] The consumer places a value on an item by determining the marginal utility, or additional satisfaction of one additional good,[8] of that item and deciding what that means to them.[9]

The modern subjective theory of value was created by William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century.[10] The subjective theory contradicted Karl Marx’s Labour Theory which stated an items value depends on the labour that goes into production and not the ability to satisfy the consumer.[11]

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.[11]


Marginalism refers to the study of marginal theories and studies within economics. The topics included in marginalism are marginal utility, marginal gain, marginal rates of substitution, and opportunity costs.[12] 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.

Exchange theory[edit]

The exchange theory is used to interpret interactions between people that are based on estimates of rewards and punishments. According to the exchange theory our interactions are determined by the expected positive or negative outcomes that we can expect.[13]

Use value theory[edit]

The use value is a subcategory of the theory of value. The use value is the value of a material by the utility, use or consumption, and in which a thing meets human needs.[14] 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 the sun, or something like gravity both which humans need to survive but don’t 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, as in the uses to which the object can be put to work on, also tie in with the use value.[15] Different Use-Values have different measures depending on their physical characteristics; for example, dozens of watches, yards of linen, or tons of iron. The value also depends on the labor needed to make the material and the quantity/quality of the object.[citation needed]

See also[edit]


  1. ^ Hunt, E.K. (2015). History of Economic Thought: A Critical Perspective. London: Routledge. 
  2. ^ Zimmerman, Michael (2014). "Intrinsic vs Extrinsic value". 
  3. ^ Gray, James (2011). "FAQ on Intrinsic Value". Ethical Realism. 
  4. ^ Webfinace. "Intrinsic Value". Investor words. 
  5. ^ e.g. see Junankar, P. N., Marx's economics, Oxford : Philip Allan, 1982, ISBN 0-86003-125-X or Peach, Terry "Interpreting Ricardo", Cambridge: Cambridge University Press, 1993, ISBN 0-521-26086-8
  6. ^ Vulgar, Philistine (2013). "Power theory of value". rev 
  7. ^ Staff, Investopedia (2011-01-20). "Subjective Theory Of Value". Investopedia. Retrieved 2017-03-02. 
  8. ^ Staff, Investopedia (2003-11-23). "Marginal Utility". Investopedia. Retrieved 2017-03-02. 
  9. ^ "What is utility theory? definition and meaning". Retrieved 2017-03-02. 
  10. ^ Stigler, George J. (1950-01-01). "The Development of Utility Theory. I". Journal of Political Economy. 58 (4): 307–27. doi:10.1086/256962. JSTOR 1828885. 
  11. ^ a b "Austrian school of economics". Encyclopedia Britannica. Retrieved 2017-03-02. 
  12. ^ Staff, Investopedia (2008-02-13). "Marginalism". Investopedia. Retrieved 2017-03-02. 
  13. ^ "How Social Exchange Theory Explains Social Interaction". Education. Retrieved 2017-03-02. 
  14. ^ "Use Value". Marxists Internet Archive. 
  15. ^ "Use-value, exchange value, value". libcom. February 20, 2016.  |first1= missing |last1= in Authors list (help)

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