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. 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 come from a pamphlet that was published in 1738. In this piece of literature, 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.

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.

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 our physical. The value does not exist as a object, however it is the properties of an object.

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