Since the beginning of economics as a specialized study, economist have realized that the concept of value lies at the core of economic theory. They have developed several value theories over the years but most of those theories have suffered from fatal flaws. The only theory that holds up to logical scrutiny is the Subjective Theory of Value. Before I address the Subjective Theory of Value I would like to mention some of the primary value theories that have been advocated over the years:
Intrinsic Value Theory
The idea that goods have intrinsic value— value contained within the good — seems rather appealing on the surface, but it runs into some severe logical problems. Does a hammer have the same value when being used as a paperweight as it does when it’s being used to pound nails? Intrinsic Value Theory would say the hammer always has the same value. But does that really make sense?
Despite its fundamental flaws the idea of intrinsic value lies at the heart of many other value theories.
The Labor Theory of Value
The Labor Theory of Value — associated primarily with Karl Marx — advocates that an economic good has value based on the amount of labor required to create it. Again, this sounds appealing. But, do identical cabinets have different values if one cabinetmaker takes twice as long to create his cabinet?
This theory obviously relies on the belief that labor has some sort of intrinsic value. Based on that premise one could argue, for example, that all workers should receive the same pay.
Marx had some clever ways to get around the handicaps of this theory. In the process of attempting to reconcile these handicaps he made this theory more inconsistent.
The Cost of Production Theory
The Cost of Production Theory tends to develop a circular pattern. If, for example, the value of a good offered to a consumer depends on the accumulated costs involved in its production, from where do those costs originate? This assumption leads back to the question about intrinsic value. Goods somewhere in the higher levels of the production structure must have an intrinsic value. Without that assumption no justification exists for costs at lower levels.
Where then do the original factors of production — land and labor — acquire their value?
Exchange Theory of Value
The Exchange Theory of Value argues that economic goods produced or held for the purpose of exchange have an exchange value separate from their utility value — or their usefulness to a consumer.
But why should the same economic good have two separate value attributes? If someone owns a chainsaw for the purposes of cutting wood, does that chainsaw’s value suddenly change when they exchange it for a Cadillac?
The exchange theory implies that any economic good has competing values based on what the owner intends to do with them. This idea makes it a rather inconvenient theory at best.
And, how do you measure a good’s value?
Monetary Theory of Value
The Monetary Theory of Value argues that value appears only in the form of monetary prices. This argument, however, has one fatal flaw.
The value of one economic good cannot be measured in terms of the quantity of another economic good (i.e. a money commodity) accepted for it in exchange. The measurement of anything, to be logically consistent, must share a common unit at any place or time. A mile represents the same distance anywhere on the earth. A pound weighs the same anywhere on the earth. A dollar, on the other hand, does not have the same value at all times and in all locations.
I have elaborated earlier on why money cannot act as a measure of value.
Power Theory of Value
The Power Theory of Value incorporates the influence of politics into market exchanges. Market prices, therefore, derive not from utility but from the relative power of the parties involved in the exchange. The ownership of capital represents the primary source of power.
We will see in our discussion of the Subjective Theory of Value that most value theories have the market power structure inverted. Power emanates from the consumer and not from the producer.
Subjective Theory of Value
The elegance of the Subjective Theory of Value lies in its 1) simplicity and 2) ubiquity.
- Economic value has only one source: the subjective judgments of individuals.
- This source applies to all economic goods in all situations at all levels of production.
The subjective theory provides the only consistent “measure” of value in any place at any time. That measure consists of the relative preferences of the individual judging the value. In the mind of any individual one economic good always has relatively more or less value than any other economic good.
No objective measure exists for economic value. It is only in the process of exchange, in the revealing of price, that any hint of that relative value becomes exposed.
I have provided only brief explanations for some of the more popular theories of value. If you want to understand them thoroughly, you can research these theories on your own.
Only the Subjective Theory of Value holds up to logical scrutiny. I will discuss this theory in greater detail in my next post.