Value theory has been interpreted and described in many different manners throughout the course of history. There are classical theorists, early classical theorists and socialists, and even those who are categorized as late Ricardians. This essay will focus on the definition of value theory as defined by the following theorists: Marx, Menger, Ricardo, Say and Smith. Each of these economic theorists presented a slightly different take on how value is derived in an economic environment. For some, value is created from labor exerted by workers. For others supply creates demand and subsequent value. Some have argued that value is created in the marketplace, as consumers exchange goods and services; buyers and sellers create demand supply and demand, and any good is only as valuable as the time the producer puts into it. All of the theorists explored have both positive and negative aspects related to their theory of value. Each of these schools of thought is explored in greater detail below.
Marx claimed that value is a physical and social substance or "social labor" (Kim, 1998). Marx's value theory asserts that "the value of an object is solely a result of the labor expended to produce it" (Isil, 2004). Marx also suggests that an object is worth more relative to the amount of labor or time that is put into its development. His theory was popular at the time among working class individuals who exuded a lot of effort creating value in the goods and services they produced.
Marx defines value in essence as "consumed labor time" meaning that goods are simply a product of the labor that goes into producing them, and only as valuable as the value of the labor put into them (Isil, 2004). There are many that have argued against Marx's ideals, in part because of his strong beliefs that workers who invest a significant amount of time creating a product should enjoy the fruits of their labor to a much greater degree than they are often compensated.
Marx in fact believed and argued that profits belong to the workers who invest a large portion of time and effort creating products; he felt that workers were prevented from reaping the "fruits of their labors" by capitalists who sought only to make large amounts of money by abusing the labors of profits (Isil, 2004). By nature the definition of a capitalist society is a society that seeks to make money and increased profits, often through whatever means necessary, and irrespective of the efforts of individuals who invest of themselves to help a nation realize such economic prosperity.
Marx believed that an elimination of profits in the case of earned value was appropriate. Marx believed in a theory that supported the notion that value is contingent upon many things, but is in reality a result and product of consumer judgments; he felt that value is not "inherent" in objects but rather is "a product of many different consumer judgments" (Isil, 2004). Many subsequent theorists object to Marxist theorists; the idea that labor is solely responsible for determining the value of a product or service is hard to accept "based upon common sense and experience" (Isil, 2004). There are many objects that provide "value" without a substantial labor investment.
There are many other theories that relate to labor theory that vary significantly however, from Marx's, and these are examined in greater detail below.
Menger began what is often referred to as the "modern period" of economic thought. Menger is considered realist, who stated that "we could know what the world is like through both common sense and scientific method" (Younkins, 2004). Menger believed that exchange was a result of the "embodiment" of a desire to fill human needs and instinct (Younkins, 2004).
Menger's ideas regarding labor theory were very different from those of Marx. He created a system that is well-known as developing and creating the logical foundation of what is referred to as the "marginal utility theory" which argues that social institutions are the "undersigned results or outcomes" of preferences and choices made by humans (Younkins, 2004).
Menger believed that economic activity served as a means to satisfy human needs and wants; whether biological or teleological in nature (Younkins, 2004). Value is created as human beings aspire to serve their natural needs, wants and desires; the more an object is desirable, the more value and time will be invested in its acquisition and ultimately in its creation.
Life" according to Menger, is the "ultimate standard of value" (Younkins, 2004). Menger believed that life is a process whereby a person finds the means through which he may satisfy his needs (Younkins, 2004). People are in essence, motivated by individual preferences and choices, which are "contextual judgments" made by "economizing men" (Younkins, 2004). Value is a means whereby man an change the state in which they exist. Menger's theories concentrated primarily on economic values to satisfy an individuals desires for satisfying of basic needs including food, shelter, wealth and production (Younkins, 2004).
Carl Menger is sometimes referred to as a leader of the "Marginalist Revolution"; he believed in a marginalist value theory, "using the concept of subjective value to underpin all of economics" (Foncesca, 2003). The value of a good, according to Menger, would be only as valuable as the "least urgent use to which it was applied" (Foncesca, 2003). His ideas are the exact opposite of those supported by classical theorists such as Ricardo. Menger's version of value theory might be defined as a theory or price.
One may conclude therefore that according to Menger, individual choices and social order are the basis or framework for economic decision and social expression.
Ricardo is often considered a pioneer of thought, particularly of value theory. He attempted to describe price "in terms of embodied labor" (Kim, 1998). Ricardo is distinguished by his attempts to build a model that related price as proportional to labor (Kim, 1998).
Value is determined purely from a cost perspective in large part according to the Ricardian school of thought (Foncesca, 2003). Ricardo's theory is often referred to as the "classical system" (Foncesca, 2003). Ricardo suggests that an excess supply of all goods, sometimes referred to as the "general glut" exists within an economy (Foncesca, 2003; Arestis, 1992).
Ricardo is well-known for publishing Essay on Profits, but his value theory came about out of the work "Principles of Political Economy and Taxation" where his theory was "labor-embodied" sometimes referred to as LTV, where he argues that the "relative natural prices of commodities" are determined by the "relative hours of labor" that are used in the production of those goods (Foncesca, 2003). He did not support the notion that value is a function of wages, rather he argues that value is independent of distribution (Foncesca, 2003). His theory only would work however if the capital-intensity was the same across all sectors (Foncesca, 2003); therefore, Ricardo suggested that firms apply capital proportional to the amount of labor invested (Foncesca, 2003). As an alternative solution, Ricardo proposed that an invariable standard of value exist, where one can find a commodity which as the "average capital per worker" and price therefore reflects labor-embodied value (Foncesca, 2003).
Jean Baptiste Say
Say- Jean Baptiste Say believed that value resulted from the interaction between the utility theory of demand and the cost theory of supply, which can be attributed to Smith's school of thought (Foncesca, 2003). Say's ideas might be summed up as Say's Law of Markets, which state that "supply creates its own demand" which implies that temporary overproductions will adjust themselves as sellers work harder to decrease the surplus output resulting from overproductions; thus supply is creating demand for a product (Hart, 1004).
Say concludes that in an economy where division of labor is evident, the "means available" for anyone to acquire goods and services is simply the power to produce those same goods and services (Blaug, 1978). Say assumes that production increases the supply of goods but also creates, by "virtue of the requisite cost payment to the factors of production" demand to purchase the very same goods (Blaug, 1978). Products therefore, are paid for by themselves, or by products, via domestic and foreign trade (Blaug, 1978).
Say's value theory supposes that it would be impossible for all goods to be produced in excess because as overproduction occurs, sellers aspire to reduce the overabundance thus creating adequate demand (Blaug, 1978).
Smith suggested the following related to value theory:
Value theory assumes that "surplus comes from production." Smith argued that surplus stems from the process of production, and supported the notion that both "agriculture and industry create wealth." (Brumback, 2003).
Social labor creates wealth" - According to Smith, wealth is produced via social labor, and not through traditionally defined mechanisms such as trade or amassing valuable metals (Brumback, 2003).
Smith claimed that the development and expansion of "the division of labor" was the key to accumulating wealth (Brumback, 2003).