Value (economics)
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In economics, economic value is a measure of the benefit provided by a good or service to an economic agent, and value for money represents an assessment of whether financial or other resources are being used effectively in order to secure such benefit. Economic value is generally measured through units of currency, and the interpretation is therefore "what is the maximum amount of money a person is willing and able to pay for a good or service?” Value for money is often expressed in comparative terms, such as "better", or "best value for money",[1] but may also be expressed in absolute terms, such as where a deal does, or does not, offer value for money.[2]
Among the competing schools of economic theory there are differing
Economic value is not the same as market price, nor is economic value the same thing as market value. If a consumer is willing to buy a good, it implies that the customer places a higher value on the good than the market price. The difference between the value to the consumer and the market price is called "consumer surplus".[3] It is easy to see situations where the actual value is considerably larger than the market price: purchase of drinking water is one example.
Overview
The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods that can be exchanged. From this analysis came the concepts value in use and value in exchange.
Value is linked to
Additional information about market value is obtained by the rate at which transactions occur, telling observers the extent to which the purchase of the good has value over time.
Said another way, value is how much a desired object or condition is worth relative to other objects or conditions. Economic values are expressed as "how much" of one desirable condition or
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.[citation needed] This is determined primarily by the demand for the object relative to supply in a perfectly competitive market. Many neoclassical economic theories equate the value of a commodity with its price, whether the market is competitive or not. As such, everything is seen as a commodity and if there is no market to set a price then there is no economic value.
In
In this tradition, Steve Keen makes the claim that "value" refers to "the innate worth of a commodity, which determines the normal ('equilibrium') ratio at which two commodities exchange."[4] 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 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.
"The value of a thing in any given time and place", according to Henry George, "is the largest amount of exertion that anyone will render in exchange for it. But as men always seek to gratify their desires with the least exertion this is the lowest amount for which a similar thing can otherwise be obtained."[5]
In another classical tradition, Marx distinguished between the "value in use" (
In 1860,
Economists such as Ludwig von Mises asserted that "value" is a subjective judgment. Prices can only be determined by taking these subjective judgments into account, and that this is done through the price mechanism in the market. 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.
Silvio Gesell denied value theory in economics. He thought that value theory is useless and prevents economics from becoming science and that a currency administration guided by value theory is doomed to sterility and inactivity.[6]
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.
Economy,
- Economy: minimising the cost of resources used or required (inputs) – spending less;
- Efficiency: the relationship between the output from goods or services and the resources to produce them – spending well; and
- Effectiveness: the relationship between the intended and actual results of public spending (outcomes) – spending wisely.[7]
Sometimes a fourth 'E', equity, is also added.[7][8]
In philosophy, economic value is a subcategory of a more general
Theories
Adam Smith agreed with certain aspects of labor theory of value, but believed it did not fully explain price and profit. Instead, he proposed a cost-of-production theory of value (to later develop into exchange value theory) that explained value was determined by several different factors, including wages and rents. This theory of value, according to Smith, best explained the natural prices in the market. While an underdeveloped theory at the time, it did offer an alternative to another popular value theory of the time.
The
Silvio Gesell denied value theory in economics. He thought that value theory is useless and prevents economics from becoming science and that a currency administration guided by value theory is doomed to sterility and inactivity.[10]
Labor theory of value
In classical economics, the labor theory of value asserts that the economic value of a commodity is determined by the total amount of socially necessary labor required to produce it. When speaking in terms of a labor theory of value, value without any qualifying adjective theoretically refers to the amount of labor necessary for the production of a marketable commodity, including the labor necessary for the development of any capital used in the production process. Both David Ricardo and Karl Marx attempted to quantify and embody all labor components in order to develop a theory of the real, or natural, price of a commodity.[11]
In either case, what is being addressed are general prices—i.e., prices in the aggregate, not a specific price of a particular good or service in a given circumstance. Theories in either class allow for deviations when a particular price is struck in a real-world market transaction, or when a price is set in some price fixing regime.
Monetary theory of value
Critics of traditional Marxian economics, especially those associated with the Neue Marx-Lektüre (New Readings of Marx) such as Michael Heinrich, emphasize a monetary theory of value, where "Money is the necessary form of appearance of value (and of capital) in the sense that prices constitute the only form of appearance of the value of commodities."[12] Similarly to the exchange theory, this theory emphasizes value as being socially determined, rather than having a physical substance.
According to this analysis, when money incorporates
Power theory of value
In capitalism, power is the governing principle as rooted in the centrality of private ownership. Private ownership is wholly and only an act of institutionalized exclusion, and institutionalized exclusion is a matter of organized power.[15][16] And since the power behind private ownership is denominated in prices, Nitzan and Bichler argue, there is a need for a power theory of value. There is, however, a causality dilemma to their argument that has drawn criticism: power is based on the ability of firms to set monopoly prices yet the ability to set prices is based on firms possessing a degree of power in the market.
Capitalization, in their theory, is a measure of power, as illuminated through the present discounted value of future earnings (while also taking into account hype and risk). This formula is basic to finance which is the overarching logic of capitalism. The logic is also inherently differential as every capitalist strives to accumulate greater earnings than their competitors (but not profit maximization). Nitzan and Bichler label this process differential accumulation. In order to have a power theory of value there needs to be differential accumulation where some owners' rate of growth of capitalization is faster than the average pace of capitalization.
Subjective theory of value and marginalism
The
Subjectivist or marginalist theories of value were created by
See also
- Asset pricing
- Labour theory of value
- Law of value
- Marginal theory of value
- Market price
- Non-extractive economic value
- Objective theory of value
- Paradox of value
- Real versus nominal value (economics)
- Store of value
- Subjective theory of value
- Theory of value (economics)
- Use value
- Utility
- Value (marketing)
- Value form
- Value network
Further reading
- W. G. Langworthy Taylor. 1985. "Some Important Phases in the Evolution of the Idea of Value". Journal of Political Economy. 3 (4): 414–433.
- New International Encyclopedia(1st ed.). New York: Dodd, Mead.
References
- ^ Department of Finance (Northern Ireland), Definition of best value for money, endorsed by the Northern Ireland Executive on 22 March 2011, accessed 8 December 2023
- ^ BBC News, Ferry to be built at Ferguson yard despite not being 'value for money', published 16 May 2023, accessed 8 December 2023
- ^ "Consumer Surplus" (PDF). p. 7-1, 7-2.
- OCLC 45804669
- ^ "The Science of Political Economy, Chapter 8". Politicaleconomy.org. Retrieved 2012-04-17.
- ^ "The Natural Economic Order/Part III/Chapter 3 – Bibliowiki". Archived from the original on 2017-12-10.
- ^ a b National Audit Office, Assessing value for money, accessed 15 March 2019
- ^ Jackson, P., Value for money and international development: Deconstructing myths to promote a more constructive discussion, OECD, May 2012
- ^ Hunt, E.K. (2015). History of Economic Thought: A Critical Perspective. London: Routledge.
- ^ Silvio Gesell (1916, trsl. 1929), The Natural Economic Order, Part III. Chapter 3. So-called "Value"
- ISBN 0-521-26086-8.
- ^ Milios, John (2003). "Marx's Value Theory Revisited. A 'Value-form' Approach." (PDF). Proceedings of the Seventh International Conference in Economics. Ankara: METU. p. 9. Retrieved 2015-01-12.
- ^ John Milios, "Marx's Monetary Theory of Value, Fictitious Capital and Finance", 6 November 2015, p. 6.
- ^ Jonathan Nitzan and Shimshon Bichler, Capital as Power: A Study of Order and Creorder, Routledge, 2009, p. 10.
- ^ Jonathan Nitzan and Shimshon Bichler, Capital as Power: A Study of Order and Creorder, Routledge, 2009, p. 228.
- ^ "Capitalism as a Mode of Power interviewed by Piotr Dutkiewicz". Retrieved 1 February 2014.
- ^ Staff, Investopedia (2011-01-20). "Subjective Theory Of Value". Investopedia. Retrieved 2017-03-02.
- ^ Staff, Investopedia (2003-11-23). "Marginal Utility". Investopedia. Retrieved 2017-03-02.
- ^ "What is utility theory? definition and meaning". BusinessDictionary.com. Retrieved 2017-03-02.
- ^ Staff, Investopedia (2008-02-13). "Marginalism". Investopedia. Retrieved 2017-03-02.
- S2CID 153732595.
- ^ a b "Austrian school of economics". Encyclopedia Britannica. Retrieved 2017-03-02.