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Ineconomics,economic value is a measure of the benefit provided by agood orservice to aneconomic agent, andvalue 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 ofcurrency, and the interpretation is therefore "what is the maximum amount ofmoney 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 differingtheories of value.
Economic value isnot the same asmarket price, nor is economic value the same thing asmarket value. If aconsumer 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.
The economic value of agood 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 conceptsvalue in use andvalue in exchange.
Value is linked toprice through the mechanism ofexchange. When an economist observes an exchange, two important value functions are revealed: those of thebuyer and seller. Just as the buyer reveals what he is willing to pay for a certain amount of a good, so too does the seller reveal what it costs him to give up the good.
Additional information aboutmarket 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 product will, or would begiven up in exchange for some other desired condition or product. Among the competing schools of economic theory there are differing metrics for value assessment and the metrics are the subject of atheory of value. Value theories are a large part of the differences and disagreements between the various schools of economic theory.
Value for money forms part of the "economic dimension" of the five "cases" required to validate aUK government investment or spending proposal.[4] UK governmentguidance in this context speaks of "assessing" and of "maximising" value for money.[5]
Inneoclassical 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 tosupply in aperfectly 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.
Inclassical economics, the value of an object or condition is the amount of discomfort/labor saved through the consumption or use of an object or condition (Use value). Thoughexchange value is recognized,economic value is not, in theory, dependent on the existence of a market and price and value are not seen as equal. This is complicated, however, by the efforts of classical economists to connect price and labor value.Karl Marx, for one, saw exchange value as the "form of appearance" (This interpretation of Marx is along the lines of the Marxist thinkerMichael Heinrich) [Erscheinungsform] of value, in hiscritique of political economy which implies that, although value is separate from exchange value, it is meaningless without the act of exchange.
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."[6] To Keen and the tradition ofDavid Ricardo, this corresponds to the classical concept of long-run cost-determined prices, whatAdam Smith called "natural prices" and Marx called "prices of production". It is part of acost-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 toHenry 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."[7]
In another classical tradition, Marx distinguished between the "value in use" (use-value, what a commodity provides to its buyer), labor cost which he calls "value" (thesocially-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 hislabor theory of value, Marx, like Ricardo, developed a "labor theory of price" where the point of analyzing value was to allow the calculation ofrelative prices.Others[broken anchor] 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 volumeUnto 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.[non sequitur]
Economists such asLudwig 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.
The theory of value is closely related to that ofallocative 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,efficiency andeffectiveness, often referred to as the "Three Es", may be used as complementary factors contributing to an assessment of the value for money provided by a purchase, project or activity. The UKNational Audit Office uses the following summaries to explain the meaning of each term:
Sometimes a fourth 'E',equity, is also added.[8][9]
In philosophy, economic value is a subcategory of a more generalphilosophical value, as defined ingoodness and value theory or in thescience of value.
Adam Smith agreed with certain aspects oflabor theory of value, but believed it did not fully explain price and profit. Instead, he proposed acost-of-production theory of value (to later develop intoexchange 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.
Theutility theory of value was the belief that price and value were solely based on how much "use" an individual received from a commodity. However, this theory is rejected in Smith's workThe Wealth of Nations. The famousdiamond–water paradox questions this by examining the use in comparison to price of these goods. Water, while necessary for life, is far less expensive than diamonds, which have basically no use. Which value theory holds true divides economic thinkers, and is the base for many socioeconomic and political beliefs.[10]
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.[11]
Inclassical economics, thelabor theory of value asserts that the economic value of a commodity is determined by the total amount ofsocially 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 marketablecommodity, including the labor necessary for the development of anycapital used in the production process. BothDavid Ricardo andKarl Marx attempted to quantify and embody all labor components in order to develop a theory of the real, or natural, price of a commodity.[12]
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.
Critics of traditionalMarxian economics, especially those associated with theNeue Marx-Lektüre (New Readings of Marx) such asMichael Heinrich, emphasize amonetary 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."[13] 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 incorporatesproduction into itsM-C-M' circulation, it functions ascapital implementing thecapitalist relation and the exploitation oflabor power constitutes the actual presupposition for this incorporation.[14]
Thesubjective theory of value emphasizes the role of consumer preferences[15] in influencing price. According to this theory, the consumer places a value on a commodity by determining themarginal utility, or additional satisfaction of one additional unit.[16][17]Marginalism employs concepts such asmarginal utility,marginal rate of substitution, andopportunity costs[18] to explain consumer preferences and price.
