Value of Theory

Theory of value is a generic term which encompasses all the theories within economics that attempt to explain the exchange value or price of goods and services. Key questions in economic theory include why goods and services are priced as they are, how the value of goods and services comes about, and for normative value theories how to calculate the correct price of goods and services (if such a value exists). Theories of value fall into two main categories: Intrinsic (objective) theories: Intrinsic theories, as the name implies, hold that the price of goods and services is not a function of subjective judgements. Subjective theories: Subjective theories hold that for an object to have economic value (a non-zero price), the object must be useful in satisfying human wants and it must be in limited supply. This is the foundation of the marginalist theory of value. In the context of explaining price, the marginal utility theory is not a normative theory of value (W. J. Samuels 2006)

• Adam Smith was the founder of the model concept of the ‘value theory’.

In 1776 economics took a huge step as there was the first paperback book containing economic theories and ideas. Adam Smith had compiled a book which looked into many factors such as how a products value is determined. There were Five editions of The Wealth of Nations and were published during Smith’s lifetime: in 1776, 1778, 1784, 1786, and 1789. “But, whether exchange is mediated through money or not, what is it that determines the rate at which different products are exchanged? The word value has two meanings – one is value in use, the other is value in exchange. Water is extremely useful, but has almost no exchange value, while a diamond is largely useless but has enormous exchange value. Explaining the principles that determine exchange value, the components of this price, and the factors that cause it to fluctuate, is no easy matter.” (Smith, A. 1776).

Indeed it is not. It takes Smith several chapters of The Wealth of Nations to do it, specifically Book I,. Today we might solve the diamonds and water problem with marginal utility theory: since diamonds are so rare, an additional one is a great prize, but since water is so plentiful, an extra cupful is actually of little use to us. Or we might use demand analysis. But such tools did not exist in Smith’s time. (Smith, A. 1776).

Karl Marx’s approach to value was essentially Ricardo’s labour theory of value. According to Marx the values of “All commodities are only definite masses of congealed labour time.” (Marx, K 2001). As an advocate of Ricardo’s original theory, he also followed and built on his solutions to the labour value theory’s inherent deficiencies. Although Marx used the classical concepts of value he applied his vast philosophical and sociological knowledge to reach conclusions in Capital that diverged radically from them. In his labour theory, he developed his original rate of exploitation (s’=s/v) and its resulting critique of capitalism-“Derriere le phenomene du profit se cache la realite do surtravail.” Like Aristotle, exchange of value or more appropriately exchange of ‘just’ value had for Marx, moral and judicial implications as well as economic ones. (Fogarty, M. 1996).

The theory of value was developed by many different economists to improve and contradict theories, in time recognised economists had inputted there opinion on the value of theory.