Cost of Production Value Theory

Probably the most popular concept of value incorporates the cost of production. The idea here is that any economic good, whether a consumer good or production good, has value based on the sum of the costs of resources used to produce it. A loaf of bread, for example, would have the value of the sum of the cost of the labor to produce it, a portion of the cost of the stove used to cook it, all the costs associated with producing the flour, and presumably the cost of the land on which the wheat was grown.

Source

As appealing as the cost of production theory of value may seem, it does not hold up when you trace costs back to their origin. The production of all goods derive ultimately from combinations of land and labor — land provides all the resources used in production, and labor provides the original source of effort. Here we run head-on into the problem of intrinsic value. From where does land derive its value? Also, as mentioned above and in “Labor Theory of Value”, from where does labor derive its value?

This leads us again to the question of how do we measure the cost of production for any good?

Measure

It seems reasonable, on the surface, to sum the cost of the factors that contribute to the production of a good—labor, materials, and machinery—and use that as a representation of value. But, yet again, we run into some unresolved questions.

How do you measure the cost to produce the original factors of production—land and labor? I have addressed in “Labor Theory of Value” the difficulty in finding a satisfactory unit of measure for labor. Then, what unit do you use to measure the value of land?

Well, of course, we use the cost to the producers (what’s given up to acquire the land). But, if you work your way back to the original homesteader, what cost did he bear? And, did subsequent buyers and sellers make no profit or suffer no loss as the land got transferred to the present owner?

In addition to the difficulty of coming up with units of measure for land or labor individually, what unit do we use for both land and labor that we can sum to a meaningful total? You cannot add hours of labor and acres of land to arrive at the number of acre-hours as a unit of value. If you will forgive a touch of sarcasm, I simply wish to point out the difficulty of identifying a uniform unit for the measure of value—even for original factors of production.

This problem increases exponentially (I admit that I cannot suggest a unit of measure for the problem—consider it a figure-of-speech) with the introduction of multiple factors of production from different sources. Consider the consistency of establishing a uniform measure for the many parts used in automobile production. Many identical parts come for different parts of the country that have significantly different costs for land, labor, and lower level factors applied to them. Do Chevrolets with different parts, have different values?

You can see that using the cost of production does not provide a uniform source or a uniform measure for value.


Before I move on to discuss the only plausible theory of economic value, I want to take a brief detour to address a question that many people seem to take as obvious: don’t we use money as a measure of value?

Money cannot act as a measure of value and I will give a few of the many reasons in my next post: Money Not a Measure of Value