#readwise # Theory of Value (Economics) - Wikipedia  ## Metadata - Full Title: Theory of Value (Economics) - Wikipedia - URL: https://en.wikipedia.org/wiki/Theory_of_value_(economics) ## Highlights A theory of value is any economic theory that attempts to explain the exchange value or price of goods and services. **Key questions in economic theory include why goods and services are priced as they are**, how the value of goods and services comes about. ^z2ok8r --- A major question that has eluded economists since the earliest of publications was one of price. As commodities began to be exchanged for currency, economic thinkers have constantly been trying to decipher how prices are determined. --- **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.** ^sc3xhs --- **The utility 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 work The Wealth of Nations. **The famous diamond–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. --- In classical economics, **the labor theory of value asserts that the economic value of a good or service is determined by the total amount of socially necessary labor required to produce it.** ^caepu5 - Note: **The cost-of-production theory of value** is similar, but **includes** not just the cost of labor, but of **other components required for the production of a good (cost of constituent parts, taxes, etc.)**. --- The subjective theory of value is a theory of value that believes that an item’s value depends on the consumer. This theory states that an item’s value is not dependent on the labor that goes into a good, or any inherent property of the good. Instead, **the subjective theory of value believes that a good’s value depends on the consumers wants and needs.** The consumer places a value on an item by determining the marginal utility, or additional satisfaction of one additional good, of that item and deciding what that means to them. --- The modern subjective theory of value was created by William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century. The subjective theory contradicted Karl Marx's labor theory which stated an item's value depends on the labour that goes into production and not the ability to satisfy the consumer. --- **The subjective theory of value helped answer the "diamond–water paradox,"** which many believed to be unsolvable. The diamond–water paradox questions why diamonds are so much more valuable than water when water is necessary for life. This paradox was answered by the subjective theory of value **by realizing that water, in total, is more valuable than diamonds because the first few units are necessary for life.** The key difference between water and diamonds is that water is more plentiful and diamonds are rare. Because of the availability, one additional unit of diamonds exceeds the value of one additional unit of water. ---