Information about Value (economics)

In general, the economic value of something is how much a product or service is worth to someone relative to other things (often measured in money).

It can be either an assessment of what it could or should be the price (valuation), or an explanation of its actual market value (price).

There are various ways to give those valuations or explanations. They are the subject of the "Theory of Value."

The various explanations

In neoclassical economics, the value of an object or service is often seen as nothing but the price it would bring in an open and competitive market. This is determined primarily by the demand for the object relative to supply. Other economists often simply equate the value of a commodity with its price, whether the market is competitive or not.

In classical economics, price and value were not seen as equal. In this tradition, to Steve Keen "value" refers to "the innate worth of a commodity, which determines the normal ('equilibrium') ratio at which two commodities exchange."^[1] To Keen and the tradition of David Ricardo, this corresponds to the classical concept of long-run cost-determined prices, what Adam Smith called "natural prices" and Karl Marx called "prices of production." It is part of a cost-of-production theory of value and price. Ricardo, but not Keen, used a "labor theory of price" in which a commodity's "innate worth" was the amount of labor needed to produce it.

In another classical tradition, Marx distinguished between the "value in use" (use-value, what a commodity provides to its buyer), "value" (the socially-necessary labour time it embodies), and "exchange value" (how much labor-time the sale of the commodity can claim, Smith's "labor commanded" value). By most interpretations of his labor theory of value, Marx, like Ricardo, developed a "labor theory of price" where the point of analyzing value was to allow the calculation of relative prices. Others see values as part of his sociopolitical interpretation and critique of capitalism and other societies, and deny that it was intended to serve as a category of economics. According to a third interpretation, Marx aimed for a theory of the dynamics of price formation, but did not complete it.

In 1860 John Ruskin published a critique of the economic concept of value from a moral point of view. He entitled the volume Unto This Last, and his central point was this: "It is impossible to conclude, of any given mass of acquired wealth, merely by the fact of its existence, whether it signifies good or evil to the nation in the midst of which it exists. Its real value depends on the moral sign attached to it, just as strictly as that of a mathematical quantity depends on the algebraic sign attached to it. Any given accumulation of commercial wealth may be indicative, on the one hand, of faithful industries, progressive energies, and productive ingenuities: or, on the other, it may be indicative of mortal luxury, merciless tyranny, ruinous chicanery." Gandhi was greatly inspired by Ruskin's book and published a paraphrase of it in 1908.

Economists such as Ludwig von Mises asserted that "value," meaning exchange value, was always the result of subjective value judgements. There was no price of objects or things that could be determined without taking these judgements into account, as manifested by markets. Thus, it was false to say that the economic value of a good was equal to what it cost to produce or to its current replacement cost.

Value in the most basic sense can be referred to as "Real Value" or "Actual Value." This is the measure of worth that is based purely on the utility derived from the consumption of a product or service. Utility derived value allows products or services to be measure on outcome instead of demand or supply theories that have the inherent ability to be manipulated. Illustration: The real value of a book sold to a student who pays $50.00 at the cash register for the text and who earns no additional income from reading the book is essentially zero. However; the real value of the same text purchased in a thrift shop at a price of $0.25 and provides the reader with an insight that allows him or her to earn $100,000.00 in additional income is $100,000.00 or the extended lifetime value earned by the consumer. This is value calculated by actual measurements of ROI instead of production input and or demand vs. supply. No single unit has a fixed value. Value is intrinsically related to the worth derived by the consumer. [Burke(2005)].

Connected concepts

The theory of value is closely related to that of allocative efficiency, the quality by which firms produce those goods and services most valued by society. The market value of a machine part, for example, will depend upon a variety of objective facts involving its efficiency versus the efficiency of other types of part or other types of machine to make the kind of products that consumers will value in turn. In such a case, market value has both objective and subjective components.

In philosophy, economic value is a subcategory of a more general concept of value, as defined in goodness and value theory or in the science of value.

References

See also

• Labour theory of value
• Marginal theory of value
• Objective theory of value
• Real versus nominal value
• Subjective theory of value
• Store of value
• Value (marketing)
• Value network

External links

• On Allocative Efficiency
• Current Valuation of Index Components