Economic Theory of Value

Early economic writers—such as David Ricardo, John Stuart Mill, William Stanley Jevons, and Alfred Marshallitheorized value differently in their own approaches, yet influenced each others work, In his renowned work, On the Principles ofPoiiticaI Economy & Taxation, Ricardo’s theory of value claims that the exchange value of a good is derived from the amount of labor required in its production, including raw materials and equipment, in addition to labor (Medema and Samuels 269) Ricardo cautions that this should also be modified for rarities, variable labor quality, presence and duration of fixed capital, and profit thereon (Medema and Samuels 268).

He combats Adam Smith‘s assertion that capital accumulation and land utilization relieves the labor quantity from determining the price of goods (Mederna and Samuels 273).

Ricardo argues that the durability of capital needs to be considered for profits to directly affect prices, or exchange values of goods, and goes on to assert that labor quantity within the production of goods and commodities is what determines exchange value (Medema and Samuels 270) He sees this trumping Smith’s argument that capital accumulation had to increase to allow profits, thus labor quantity did not determine the exchange value of goods and commodities (Medema and Samuels 269), In Principles ofPoiitical Economy, John Stuart Mill illustrates his value concept in a way that both builds upon and partially refutes that of Ricardo, He dismisses labor as the commodity value determinant, largely contrasting Ricardo’s value theory, as Mill is rather concerned with exchange value and relative prices, as described by Andy Blunden in his article on economic theories of value (Blunden).

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Mill bisects the concept of value into use-value and exchange value (Blunden) He describes use-value as what one would pay for a good or service, and exchange value as the relative market value of a good or service in an exchange (Blunden). Mill states that

exchange value “is proverbially fluctuating , , , whether there be any fixed point above which it oscillates, which it has a tendency always to approach to, and to remain at.” (Medema and Samuels 354), Mill develops his theory of exchange value focusing on production cost, stating value “depends on the cost of its acquisition in that place; which, in the case of an imported article, means the cost of production of the thing which is exported to pay for it,” (Medema and Samuels 353). Mill gives some exceptions to this: he described that in trading within one nation, the price of a commodity would equal production cost, as prices would move towards costs through competition (Medema and Samuels 353).

However, when trading internationally, competition is unable to smooth prices towards production cost (Medema and Samuels 353) Thus, international prices rely solely on supply and demand rather than production cost (Medema and Samuels 353) This is built upon Ricardo’s explanation of two countries with different cost ratios. Ricardo explains that both countries benefit from specialization in producing a commodity, but this benefit is derived from an international ratio of exchange (Medema and Samuels 353), Mill took this idea and identified the real determinant of international exchange value, relying again “upon an antecedent law, that of supply and demand.” (Medema and Samuels 353), Economist William Stanley Jevons introduces a subjective theory of value in his work, The Theory ofPoliticul Economy, which persists into our modern value theory A clear departure from labor~based valuation, Jevons asserts, “value depends entirely upon utility” (Medema and Samuels 434) He acknowledges factors in addition to utility, such as “wealth, value, commodity, labor, land, [and] capital” that are elements of the subject of value; however, he refutes earlier claims of labor being the cause or origin of value (Medema and Samuels 434). Jevons insists that utility is the true origin of value (Medema and Samuels 434), Jevons identifies pleasure and pain

as the drivers of utility, and acknowledges that their levels are influenced by factors including intensity, duration, level of certainty, and “propinquity or remoteness” (Medema and Samuels 435), Jevons criticizes Mill‘s claim that nothing is left to “clear up” about the laws and theories of value and that “the subject is complete” (Medema and Samuels 444), He retorts Mill’s conclusion, stating, “it would be rash to say of any of the sciences”, and warned of the misleading nature of use-value and exchange value as terms (Medema and Samuels 444)i Jevons says Mill claimed value as a relative term, and that “the value of a thing means the quantity of some other thing . t t which it exchanges for“ (Medema and Samuels 444), Jevons asserts with certainty that exchange value means “a circumstance of an object”, rather than just an object (Medema and Samuels 444)

He proclaims that, though valuable commodities have several different inherent qualities that affect its value, value “merely expresses the circumstance of its exchanging in a certain ratio for some other substance” (Medema and Samuels 444) Reproaching earlier economists’ assertions that value is generated by applications of labor, Jevons declares that this doctrine holds no truth, and is “directly opposed to facts” (Medema and Samuels 459), Jevons points out that Ricardo contradicts this faulty doctrine, referencing commodities solely valued on scarcityisuch as rare books, coins, treasures, and similar luxuries (Medema and Samuels 459), A rare historic artifact, such as an ancient biblical artifact would not be valued at all by labor, as there would probably be none, yet it would command exceptionally high exchange value resulting from the scarcity, or the one-of-a-kind quality it would bring to a potential buyer. He explains these commodities‘ values are independent of inputted labor, and are valued only on the level of desire and utility of those who demand them (Medema and Samuels (459), Jevons elaborates, claiming exchange value is only a ratio, and it would not make sense to use the term in any other way (Medema and Samuels 444).

Jevons identifies three meanings of value that he warns are often confused: “value in use”, which is “total utility”; “esteem”, which is “final degree of utility”; and “purchasing power”, which is “ratio of exchange” (Medema and Samuels 446) Referencing Adam Smith’s diamond and water paradox, he points out that Smith refers to “water in abundance” as holding great use-value but no exchange value (Medema and Samuels 445) Jevons says that Smith fails to clarify the exchanged quantity of goods in his use- value analogy, and thus Jevons asserts, “the word value is often used in reality to mean intensity of desire or esteem for a thing” (Medema and Samuels 445).

As water would not be something commonly associated with high exchange value, .levons points out that someone desperate for waterisuch as someone stranded in a desertiwould value water very highly and much more than diamonds in the first number of units needed to survive (Medema and Samuels 445), Thus, water would hear “exceedingly great purchasing power” in those first units, and naturally would hold rapidly decreasing purchasing power, or ratio of exchange, when in excess quantities that eliminate the immense necessity (Medema and Samuels 445). This leads Jevons to claim, “the word value is often used in reality to mean intensity of desire or esteem for a thing” (Medema and Samuels 445).

Jevons’ influence shifts value theory from an objective, to the more subjective approach employed today In his article on economic theories of value, Andy Blunden also identifies several characteristics that make Alfred Marshall’s theory of value unique from preceding economists (Blunden), It is Marshall‘s theory that price is determined by the joint effort of “marginal utility on the demand side and marginal effort on the supply side“, according to Blunden (Blunden) Refraining from using “value“ excessively as a term seen in previous theories, Marshall instead explores the idea of “price at equilibrium of a specific market” (Blunden) Ragnar Frisch also illustrates various aspects of Marshall’s value theory in his publication in The Quarterly Journal ofEconamics (Frisch), Frisch identifies a central focus of the “various orders of change“ (Frisch 496).

He explains that Marshall’s theory consists of three parts in which the effects of marginal measures of supply and demand on value or natural price are evaluated: “temporary equilibrium”, “normal equilibrium with reference to short periods”, and “normal equilibrium with reference to long periods” (Frisch 496) Frisch notes that Marshall explains a “continuous transition” between the time periods of these three parts (Frisch 496).

Marshall’s use of equilibrium can be viewed similar to a natural price, or a true “value” in comparison to other economists’ theories. In his Principles ofEconomics piece, Marshall concludes “as a general rule, the shorter the period which we are considering, the greater must be the share of our attention which is given to the influence of demand on value; and the longer the period, the more important will be the influence of cost of production on value” (Medema and Samuels 540).

Marshall’s theory introduces the focus of supply and demand in determining price—a model instrumental in modern economic education. Jevons quotes Mill, with disapproval, as proclaiming “there is nothing in the laws of Value which remains . . . to clear up; the theory of the subject is complete”, though it is fair that Jevons and Marshall’s extensive contributions hold their weight in rebuttal (Medema and Samuels 444). As value theory evolves through the theories of economists David Ricardo, John Stuart Mill, William Stanley Jevons, and Alfred Marshall, economic thought experiences a shift over time, from rudimentary and narrow-focused emphases of labor as a value determinant, to a more subjective, marginal, utility»based approach evaluating supply and demand—among other factors—comprising a comprehensive guide to value It is to each of these influential economists that we owe our appreciation for the comprehensive modern value Lheory we utilize today.

Works Cited

1. Blunden, Andy. “Theories of Value.” Marxistsorg, Marxists Internet Archive, www.marxists.org/reference/subject/philosophy/help/Value,htm‘
2. November 2017‘ Medema, Steven G., and Warren J. Samuels. The History of EconomiC Thought: A Reader. London New York: Rotttledge, 2013‘ Print, Frisch, Ragnar.
3. “Alfred Marshall’s Theory of Value.” The Quarterly Journal ofEconomics, vol. 64, no, 4, 1950, pp‘ 495—524 Print.