Value (economics)
Encyclopedia
An economic value is the worth of a good or service as determined by the market.
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 which can be exchanged. From this analysis came the concepts value in use
and value in exchange
.
Wealth maximization predicts that a person will choose to obtain the good or service in the place where it is cheapest, where the amount given up is the least.
Value is linked to price
through the mechanism of exchange
. When an economist observes an exchange, two important value functions are revealed: those of the buyer 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 value 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 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.
, 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
. 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
, 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
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
, 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
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
, this corresponds to the classical concept of long-run cost-determined prices, what Adam Smith
called "natural prices" and Karl Marx
called "prices of production
." It is part of a cost-of-production theory of value
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
, "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, what a commodity provides to its buyer), "value" (the socially-necessary labour time it embodies), and "exchange value
" (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
, Marx, like Ricardo, developed a "labor theory of price" where the point of analyzing value was to allow the calculation of relative price
s. 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
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 was greatly inspired by Ruskin's book and published a paraphrase of it in 1908.
Economists such as Ludwig von Mises
asserted that "value," meaning exchange value, was always the result of subjective value judgements. There was no price of objects or things that could be determined without taking these judgements into account, as manifested by markets. 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.
Value in the most basic sense can be referred to as "Real Value" or "Actual Value." This is the measure of worth that is based purely on the utility derived from the consumption of a product or service. Utility derived value allows products or services to be measured on outcome instead of demand or supply theories that have the inherent ability to be manipulated.
Illustration: The real value of a book sold to a student who pays $50.00 at the cash register for the text and who earns no additional income from reading the book is essentially zero. However; the real value of the same text purchased in a thrift shop at a price of $0.25 and provides the reader with an insight that allows him or her to earn $100,000.00 in additional income is $100,000.00 or the extended lifetime value earned by the consumer.
This is value calculated by actual measurements of ROI instead of production input and or demand vs. supply. No single unit has a fixed value. Value is intrinsically related to the worth derived by the consumer. [Burke(2005)].
, 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.
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
.
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 which can be exchanged. From this analysis came the concepts value in use
Use value
Use value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...
and value in exchange
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...
.
Wealth maximization predicts that a person will choose to obtain the good or service in the place where it is cheapest, where the amount given up is the least.
Value is linked to price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
through the mechanism of exchange
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
. When an economist observes an exchange, two important value functions are revealed: those of the buyer 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 value 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 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
Theory of value (economics)
"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...
." Value theories are a large part of the differences and disagreements between the various schools of economic theory.
The various explanations
In neoclassical economicsNeoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
, 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
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
. 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 economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
, 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)
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
.
Though exchange value
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...
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 Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
, 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
Steve Keen is a Professor in economics and finance at the University of Western Sydney. He classes himself as a post-Keynesian, criticizing both modern neoclassical economics and Marxian economics as inconsistent, unscientific and empirically unsupported...
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
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
, this corresponds to the classical concept of long-run cost-determined prices, what Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
called "natural prices" and Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
called "prices of production
Prices of production
Prices of production refers to a concept in Karl Marx's critique of political economy. It is introduced in the third volume of Das Kapital, where Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money and...
." It is part of a cost-of-production theory of value
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...
and price. Ricardo, but not Keen, used a "labor theory of price
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
" 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
Henry George was an American writer, politician and political economist, who was the most influential proponent of the land value tax, also known as the "single tax" on land...
, "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, what a commodity provides to its buyer), "value" (the socially-necessary labour time it embodies), and "exchange value
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...
" (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
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
, Marx, like Ricardo, developed a "labor theory of price" where the point of analyzing value was to allow the calculation of relative price
Relative price
A relative price is the price of a commodity such as a good or service in terms of another; i.e., the ratio of two prices. A relative price may be expressed in terms of a ratio between any two prices or the ratio between the price of one particular good and a weighted average of all other goods...
s. 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
John Ruskin was the leading English art critic of the Victorian era, also an art patron, draughtsman, watercolourist, a prominent social thinker and philanthropist. He wrote on subjects ranging from geology to architecture, myth to ornithology, literature to education, and botany to political...
published a critique of the economic concept of value from a moral point of view. He entitled the volume Unto This Last
Unto This Last
Unto This Last is an essay on economy by John Ruskin, first published in December 1860 in the monthly journal Cornhill Magazine in four articles. Ruskin says himself that these articles were "very violently criticized", forcing the publisher to stop the publication after four months. Subscribers...
, 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 was greatly inspired by Ruskin's book and published a paraphrase of it in 1908.
Economists such as Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
asserted that "value," meaning exchange value, was always the result of subjective value judgements. There was no price of objects or things that could be determined without taking these judgements into account, as manifested by markets. 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.
Value in the most basic sense can be referred to as "Real Value" or "Actual Value." This is the measure of worth that is based purely on the utility derived from the consumption of a product or service. Utility derived value allows products or services to be measured on outcome instead of demand or supply theories that have the inherent ability to be manipulated.
Illustration: The real value of a book sold to a student who pays $50.00 at the cash register for the text and who earns no additional income from reading the book is essentially zero. However; the real value of the same text purchased in a thrift shop at a price of $0.25 and provides the reader with an insight that allows him or her to earn $100,000.00 in additional income is $100,000.00 or the extended lifetime value earned by the consumer.
This is value calculated by actual measurements of ROI instead of production input and or demand vs. supply. No single unit has a fixed value. Value is intrinsically related to the worth derived by the consumer. [Burke(2005)].
Connected concepts
The theory of value is closely related to that of allocative efficiencyAllocative efficiency
Allocative efficiency is a theoretical measure of the benefit or utility derived from a proposed or actual selection in the allocation or allotment of resources....
, 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.
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
Science of Value
The science of value, or value science, is a creation of philosopher Robert S. Hartman, which attempts to formally elucidate value theory using both formal and symbolic logic.-Fundamentals:...
.
Economic values
- Labour theory of value
- Marginal theory of value
- Objective theory of value
- Real versus nominal value (economics)
- Subjective theory of valueSubjective theory of valueThe subjective theory of value is an economic theory of value that identifies worth as being based on the wants and needs of the members of a society, as opposed to value being inherent to an object....
- Store of valueStore of valueA recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....
- Theory of value (economics)Theory of value (economics)"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...
- Value (marketing)Value (marketing)The value of a product is the mental estimation a consumer makes of it. Formally it may be conceptualized as the relationship between the consumer's perceived benefits in relation to the perceived costs of receiving these benefits...
- Value networkValue networkA value network is a business analysis perspective that describes social and technical resources within and between businesses. The nodes in a value network represent people . The nodes are connected by interactions that represent tangible and intangible deliverables. These deliverables take the...