Source and Measure of Value
For an economic system to operate, market participants must have a consistent and reliable measure of value. They must know the value in order to allocate resources effectively and efficiently. The need for a consistent measure of value holds true regardless of what economic theory you advocate.
Although I don’t find any of them logically sound, I must acknowledge the other theories of economic value. I will attempt to describe some of those and explain why they are logically flawed.
Intrinsic Value Theory
The idea that goods have intrinsic value— value contained within the good — seems rather appealing, but it runs into severe logical problems. Does a hammer have the same value when you use it as a paperweight as it does when you use it to pound nails? Does the hammer have the same value to a professional carpenter as it does to a do-it-yourselfer? Intrinsic Value Theory would say the hammer always has the same value. But does that really make sense?
Despite its fundamental flaws, the concept of intrinsic value lies at the heart of many other value theories.
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. While attempting to reconcile these handicaps, he made this theory more inconsistent.
Cost of Production Theory
The Cost of Production Theory tends to develop a circular pattern. If 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? Do land and labor each have an intrinsic 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 purpose 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.
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.
A person cannot measure the value of one economic good in terms of the quantity of another economic good accepted for it in exchange (i.e., a money commodity). To be logically consistent, the measurement of anything 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.
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 Subjective Theory of Value says that the subjective judgment of individuals provides the only source of economic value. Without looking at motivation, psychological inclination, or other influences, only individuals can determine value. Individuals provide the source because the judgment as to value comes from nowhere else.
Economic value has no objective, quantifiable measure. The measure of value comes from the preferences of those individuals. Individuals provide the measure because only an individual can establish the relative value of one good over the other. And no one, not even the individual making the value judgment, can quantify that relative value. Keep this important point in mind.
Only the subjective theory of value remains consistent as to source and measure. This theory establishes that always and everywhere individuals provide the source and the measure of value.
I have provided only brief explanations for some of the more popular theories of value. You can research these theories independently if you want to understand them thoroughly.
Only the Subjective Theory of Value holds up to logical scrutiny.
In future posts, I will return to this theory frequently and in greater detail. Even people who can state the Subjective Theory of Value often do not fully understand its importance.