A log on different theories of value.
We cover LabourTheoryofValue by Classical Economists such as AdamSmith, David Ricardo & Karl Marx to neoclassical economists' MarginalTheory to the vastly ignored yet most sensible SraffianTheory of Value.
Classical political economists found value to be determined in production; as the cost of production could be reduced to labor - LaborTheoryofValue. Neoclassical economists looked for value in the market act of exchange - MarginalTheoryofValue. Why is it important to understand this? Theories of value are at the heart of two of the major themes
If we were all self-sufficient in our material lives there would be no problem of economic value. I would produce and consume what I value and you would produce and consume what you value. But most of what each of us produces is consumed by others and vice versa. So the value of what you produce in terms of the conditions under which it can be exchanged for the things you consume will determine the level of your material life.
Profit occurs when a firm sells a good or service for more than it costs to produce. However, the term price usually connotes something temporary. Price may rise or fall based on temporary shifts of demand or even on changes in the weather.
So economists need a term that embodies the concept of the price that something would be if it were not for all these variations in demand, weather, etc.
Adam Smith called it the Natural Price. 20th-century Economists called it Long Term Equilibrium Price / value-in-exchange / exchange value
found value - which he called "natural price"- by adding the costs of production. In a society without private ownership of land and which used only the simplest of tools, labor would make up the entire cost of production.
But this simple measure of value is not sufficient for the more complex production processes and property ownership patterns of capitalism. A capitalist hires a worker, provides equipment, raw materials and space so there will normally be profit. Smith means that the worker is paid by the hour of labor while the capitalist is "paid" by the amount of capital and the length of time that the capital is engaged in that production process.
Natural Value = Labor cost + Profit + Rent
Natural Price of Labor = Cost of the goods and services the workers need to work and raise families.
But how is the natural rate of profit determined? Or the natural rate of rent? Smith has no answers.
"The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labor which is necessary for its production"
Ricardo was searching for an "invariable measure of value." This is truly an impossible goal. When the technology of production of a good or service changes, its value will change. All theories of value are in agreement on this.
Natural price of labor = price of the food, necessaries, and conveniences required for the support of the laborer and his family.
With a rise in the price of food and necessaries, the natural price of labor will rise;
When market price of labor > its natural price means the condition of the laborer is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family.
When, however, by the encouragement which high wages give to the increase of population, the number of laborers is increased, wages again fall to their natural price, and indeed from a reaction sometimes fall below it.
The capitalist pays his suppliers, repairs or replaces his worn-out equipment, pays the workers, and sells the product for a price determined by the amount of labor it took to produce it. Whatever is left over is profit. There was still one major problem with the labor theory of value. It would only work well as a theory of natural price if the ratio of labor costs to capital costs was the same in all industries.
worked within the framework of David Ricardo's labor theory of value. The two most important differences were
The Transformation Problem: Marx had not been able to resolve Ricardo's difficulty with using labor as a standard of value. Many mathematically-inclined Marxists have found ways to transform labor values into long-run prices, but each method requires its own set of assumptions.
Evaluating the Labor Theory of Value.
The neoclassical economists essentially developed this out of Ricardo's theory of rent. The marginal theory of value finds value at the margin of production, just as Ricardo had found land rent to be determined at the margin of cultivation.
Facts for Marginal theory
This was generalized into the law of diminishing marginal utility: the utility (pleasure) of consuming an extra (thus marginal) unit of any good or service declines as the number of units we have consumed in a period goes up.
With costs increasing while benefits are decreasing, we can ascribe a simple rule of behavior to all economic actions. If the benefit exceeds the cost, do it. If the cost exceeds the benefit, don't do it. If the costs and benefits are exactly equal all is for the best.
Value will be the actual price once all the producers and consumers have had time to adjust their consumption and production to any changes in taste and/or technology. Or aside from the time frame - there is no difference between value and price according to this theory.
So there is no need to "transform" value into normal price as with the labor theory of value. What you see is what you get.
The value to the consumer of the last unit consumed (the marginal unit) = cost of the last unit produced (again, the marginal unit)
Another requirement of this theory is that supply and demand forces be completely independent of each other. The only connection between supply and demand is price This shifted the foundation of economics from production to exchange.
The classical economists found the determinants of value in the conditions of production; the neoclassical economists found the determinants of value in the meeting of buyer and seller in the marketplace
The marginal theory of value studies the distribution of income by treating wages, profits and rents as nothing more than prices that occur in labor markets, capital markets and land markets.
This requires a level of aggregation that violates the theory's fundamental assumptions. As a theory of relative prices, the marginal theory of value is highly transparent; as a theory of the distribution of income, it is hopelessly opaque.
The Sraffian Theory of Value: Aside from providing an elegant solution to a problem that neither Ricardo nor Marx had been able to resolve, Sraffa's theory of value quickly took center stage in several ongoing economic debates.
The Nature of Capital Capital is essentially past labor. Marx had recognized that when he called it "dead labor." But there is a bit more to it.
Capital is a product of labor that has been held over time
Income Distribution is Exogenous - The solution is obvious. If we accept the precept that some non-economic forces determine how the net product gets divided between capitalists and workers, the problem disappears.
Both the oldest (the labor theory of value) and the newest (the Sraffian theory of value) theories find the fundamental forces of value determinant to be the technology of production and the distribution of income.
The current mainstream theory, the marginal theory of value, finds the determination of value in the intersection of the demand force of utility and the supply force of cost.
Ricardo and Marx used the labor theory of value to seek an understanding of the distribution of income and of economic growth. But there were serious difficulties in using it as a theory of normal price. The marginal theory of value seemed to explain normal price quite easily, but requires a huge leap of faith when used as a theory of the distribution of income. The Sraffian theory of value plays both roles well, but its structure is more difficult to comprehend.
Given the new age technologies and standing on the shoulders of these giants can we create a better theory of value? we believe so.
We’ve logged out thoughts over here.