Value Theory: Experiments in a New Idea

Value Theory: Experiments in a New Idea

The volume of literature which was written on value, even before economics took form as a definite discipline, was considerable. Naturally the ideas were somewhat vague, but many of them hint at later ideas of great consequence. With the decline of the self-sufficient feudal manor and the rise of the town and appearance of commerce, the religious control over estimates of value disappeared. As Aquinas pointed out, the utility of an object might vary considerably depending upon the need which an individual felt; but this had little bearing upon the objective estimate of value (except in unusual circumstances), because the idea of the just price tied value inseparably to the value of the labor of the craftsman as judged by the standards of custom and status. What Aquinas was saying was reiterated centuries later. The value of an article, in the long run, is determined by the quantity of labor necessary to produce it.

Following Aquinas the emphasis tended to swing away from labor toward utility as the essential basis of value, though for some time the two ideas existed side by side. Buridan and Biel, writers of the 13th and 14th centuries, said that the ability to satisfy human needs was the basis of value, and was the cause of fluctuation in value as reflected in price. This view was shared at a later date by Nicholas Barbon (1640-1698) one of the early English writers who elaborated his ideas in a very modern form. Things derive their value, he believed, from their capacity to serve the needs of men's bodies and minds. However, he recognized that the supply of articles available for use influenced their "present value" or price. Ultimately the market was the best judge of value; therefore, price and value were essentially the same.

Sir William Petty (1623-1687), a British writer on economic statistics, added land as a value-producing factor. "While labor is the father and active principle of wealth, earth is the mother," is an often quoted expression to which he subscribed. He believed that land as well as labor should be considered in any system of evaluation. He apparently was searching for some method to express labor and land in terms of each other. At another point in his works he said that the cost of a day's food for an average adult man is a better measure of his value than the day's labor.
John Locke (1632-1704), a contemporary of Petty's, took the opposite position. Labor determined value; land- as such was valueless and it was only by the application of labor that it yielded any value at all. Capital was labor stored up in tools and equipment. This theory, incidentally, reappeared in Ricardo and in socialist thought nearly two hundred years later. Locke was quite aware of the short-term effects of supply and demand upon price, or market value. Over short periods, and in a superficial sense, supply and demand affect value, he said, but in the long run labor alone (which is the principal cost of production) determines value. It is interesting too that he should have understood the principle of elastic and inelastic demand. He said, "Things- absolutely necessary for life must be had at any rate; but things convenient will be had only as they stand in preference with other conveniences . . ." The idea of competition of substitutes was also known to him.

Though Adam Smith usually gets the credit, it was John Law (1671-1729) who first used the diamond-water example to illustrate his exchange theory of value. Water which is useful is plentiful and has no value in exchange, while diamonds which are useless command high prices. In his Money- and Trade Considered, he said:

Goods have a value from the uses they are applied to; and their value is greater or lesser, not so much from their more or less valuable or necessary uses, as from the greater or lesser quantity of them in proportion to the demand for them. (pp. 4-5, 2nd ed.)

A return to emphasis on utility as a criterion of value is noted in the writings of Turgot (1727-1781). In fact the systematic formulation of this concept is sometimes credited to him. He was aware that value was created by several factors, but the most important was the need of the individual, or, in other words, the utility which an object possessed to the individual. There was, of course, great variation in utility from individual to individual, from time to time, and from place to place. Future need and difficulty of attainment also influenced evaluation. As far as market price was concerned, Turgot understood the importance of supply and demand, and believed that midway between the various offers and demands a price would be set.
Richard Cantillon (1680-1734) was a French banker who laid the foundation for the classical theory of value in his Essay upon the Nature of Commerce in General which was published in 1755. (Adam Smith acknowledged his dependency upon the work of Cantillon from time to time.) The intrinsic value of a commodity is the measure of the quantity and quality of land and labor entering into its production. Market prices are set by supply and demand and do not always reflect intrinsic value, although for commodities that are in constant demand and general use the market price is stable and remains close to the intrinsic worth. Other prices vary greatly, being in general determined by supply and demand, but also fluctuating according to the whims and fancies of bargainers and the aggressiveness of sellers.

Twenty years after Cantillon's Essay came The Wealth of Nations. At the outset Smith distinguished between the two types of value—value in use, and value in exchange. These two values are seldom equal, for things which have value in use may be plentiful and have no value in exchange, and vice versa. It is at this point in his explanation that he uses the previously mentioned diamond-water illustration employed earlier by John Law.

Although not a thoroughgoing advocate of the labor theory of value, Smith nevertheless indicated that value in exchange was rooted in the labor necessary to acquire it. In fact labor was the original purchase price paid for all things. While gold and silver vary in the amount of labor they may purchase, the quantity of labor necessary to produce a commodity varies but little from time to time, thought Smith. The latter is the real estimate of value, however much prices may change. The labor value is the real price; the money value is the nominal price.
But it was only in the simplest societies that commodities were really exchanged on, or in consideration of, their labor value. When land became scarce, and capital important, the owners of such could exact a fee for their use which had to be met out of the market price of the commodity; consequently labor costs no longer were the only costs which established real price. It is not clear whether Smith believed that rent and interest came out of value created by labor or whether additional value was added from a different source to provide for their share.
Smith recognized the difficulties inherent in applying the labor theory of value. Since he had already intimated that it could apply only in relatively simple communities, he did not worry about such problems as how various degrees of skill and speed were to be equated, or how persons in entirely different occupations would balance their effort. Nevertheless, he indicated that labor never could be evaluated on a purely quantitative basis, for esteem and prestige modified the evaluation of different kinds of work.

Market values fluctuated above and below the normal values set by the cost of production (costs of labor, land, and capital). Prices could not continue long at variance with normal value, for a kind of magnetism made up of forces in the economic order itself tended to draw them together. However, monopolies and "natural causes" might temporarily or permanently sustain market values above the normal value level.