Value Theory: Marx, Menger, Ricardo, Say, and Smith

Introduction to Value Theory

Value theory has been interpreted and described in many different ways throughout the course of history. There are classical theorists, early classical theorists and socialists, and even those categorized as late Ricardians. This essay focuses on the definition of value theory as presented by five major economic theorists: Marx, Menger, Ricardo, Say, and Smith. Each presented a slightly different account of 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 together create supply and demand, and any good is only as valuable as the time its producer puts into it. All of the theorists examined here have both strengths and weaknesses in their theories of value, and each school of thought is explored in greater detail below.

Marx and Labor Value

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 invested in its development. His theory was popular among working-class individuals who expended considerable effort creating value in the goods and services they produced.

Marx defined value essentially 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 labor put into them (Isil, 2004). Many have argued against Marx's ideals, in part because of his strong belief that workers who invest significant time creating a product should enjoy the fruits of their labor to a far greater degree than they are typically compensated.

Marx argued that profits belong to the workers who invest large portions of time and effort in creating products. He felt that workers were prevented from reaping the fruits of their labor by capitalists who sought only to accumulate wealth by exploiting that labor (Isil, 2004). By nature, a capitalist society seeks to make money and increase profits — often through whatever means necessary, and irrespective of the efforts of individuals who invest of themselves to help a nation realize economic prosperity.

Marx believed that the elimination of unearned profits was appropriate in cases of earned value. He supported the notion that value is contingent upon many things but is ultimately a 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 theory, arguing that the idea that labor alone determines the value of a product or service is difficult to accept "based upon common sense and experience" (Isil, 2004). There are many objects that provide value without a substantial labor investment.

Menger and Marginal Utility

Carl Menger began what is often referred to as the "modern period" of economic thought. Menger is considered a realist who stated that "we could know what the world is like through both common sense and scientific method" (Younkins, 2004). He believed that exchange was a result of the embodiment of a desire to fill human needs and instincts (Younkins, 2004).

Menger's ideas regarding value theory differed markedly from those of Marx. He developed a system widely credited with establishing the logical foundation of the "marginal utility theory," which argues that social institutions are the undesigned results of preferences and choices made by individuals (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 strive to serve their natural needs, wants, and desires; the more desirable an object, the more value and effort will be invested in its acquisition and ultimately in its creation.

"Life," according to Menger, is the "ultimate standard of value" (Younkins, 2004). He believed that life is a process whereby a person finds the means through which he may satisfy his needs (Younkins, 2004). People are motivated by individual preferences and choices, which are "contextual judgments" made by "economizing men" (Younkins, 2004). Value is a means whereby individuals may change the state in which they exist. Menger's theories concentrated primarily on economic values tied to satisfying basic needs, including food, shelter, wealth, and production (Younkins, 2004).

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 high as the "least urgent use to which it was applied" (Foncesca, 2003). His ideas stand in direct contrast to those of classical theorists such as Ricardo. Menger's version of value theory might therefore be described as a theory of price grounded in subjective preference. One may conclude that, according to Menger, individual choices and social order form the basis for economic decision-making and social expression.