Theory of Value

15 min read

Theory of Value

The question of what makes something “worth” something — and why economics has never settled on a single answer.

What is it?

Here is a question you can use to stump almost anyone: what is value? Not “how much does this cost” — what is the thing we are talking about when we say one thing is worth more than another?

Most people assume the answer is obvious. It is not. Over the past 250 years, economics has produced four fundamentally different answers, each built on different assumptions about human nature, society, and the relationship between objects and the people who want them. These are not minor academic disagreements. Which theory of value you accept shapes what you think a fair wage is, whether financial traders create or extract wealth, and whether a diamond is worth more than water for good reasons or absurd ones.1

The deepest insight is that value is not a property of things. A loaf of bread does not carry an invisible number stamped on it by nature. Value is a relationship — between the person, the context, the alternatives available, and the social meaning the object carries. Every economic theory you will ever encounter is a different guess at what that relationship looks like.2

Understanding the history of these guesses does not mean picking a winner. It means learning to ask the right question whenever someone tells you something is “worth” a number: worth to whom, in what context, under what norms?

In plain terms

Imagine four people arguing about why a painting is beautiful. One says “because the painter worked hard.” Another says “because of how it makes me feel.” A third says “beauty is entirely in the eye of the beholder.” A fourth says “it is beautiful because our culture taught us to see it that way.” Each captures something real. None captures everything. The theory of value is economics having the same argument — about worth instead of beauty.

At a glance

How does it work?

1. The labor theory — value as embodied work

The earliest systematic answer came from Adam Smith in The Wealth of Nations (1776). Smith argued that the “real price” of anything is the labor it costs to produce — the toil and trouble required to bring it into existence. David Ricardo refined this into a more rigorous claim: the exchange value of a commodity is determined by the quantity of labor necessary for its production, relative to other commodities.1

Karl Marx took the labor theory furthest. In Das Kapital (1867), he argued that labor is the only source of new value. A chair is worth more than the wood, nails, and glue that compose it because a worker added something — labor power — that the raw materials did not possess. If the chair sells for more than the cost of materials plus the worker’s wage, the difference (what Marx called “surplus value”) is extracted by the factory owner. The entire critique of capitalism as exploitation rests on this framework.3

The labor theory is intuitively powerful — it feels right that things should be worth the effort it took to make them. But it has a well-known hole. A mud pie takes just as much labor to make as a real pie. Nobody will buy the mud pie. Labor alone cannot explain value.2

Think of it like...

If you spent eight hours digging a hole in your garden and then filling it in again, you expended real labor. But you created nothing anyone wants. The labor theory struggles to explain why effort alone does not create value.

2. The marginal revolution — value at the edge

In the 1870s, three economists working independently — Carl Menger in Vienna, William Stanley Jevons in Manchester, and Leon Walras in Lausanne — arrived at the same insight almost simultaneously. This is known as the marginal revolution, and it changed economics permanently.4

Their argument: value is not in the thing. It is in the last unit of the thing, relative to what you already have. Consider water and diamonds — a puzzle that had tormented economists since Smith. Water is essential to life. Diamonds are decorative. Yet diamonds cost vastly more than water. Why?

The marginal answer: you already have water. You have so much of it that one more glass is nearly worthless to you. Diamonds, by contrast, are scarce. The marginal utility — the additional satisfaction from one more unit — of a diamond is high because you have so few. Value is not about total usefulness. It is about usefulness at the margin, measured at the edge of what you already possess.4

This was a genuine intellectual breakthrough. It resolved the water-diamond paradox, provided a mathematical framework for supply and demand, and became the foundation of what is now called neoclassical economics.

3. The subjective theory — value is in the chooser

The later Austrian school — Friedrich Hayek, Ludwig von Mises, and their intellectual descendants — pushed marginal utility to its logical conclusion. If value depends on the individual’s situation and preferences, then there is no such thing as “objective” value at all. Value is nothing more than the preferences of individual choosers, revealed through the act of exchange.5

A price, in this view, is not a measurement of some underlying reality. It is a footprint — the trace left behind when many individuals make many trades, each pursuing their own subjective ends. The price of coffee is not “what coffee is worth.” It is the summary of what happened when millions of people with different tastes, budgets, and circumstances all made decisions about whether to buy coffee today.

This framework is elegant and internally consistent. It also has a consequence that many find uncomfortable: if value is purely subjective, then any price set by a willing buyer and willing seller is, by definition, the “correct” price. There is no external standard against which to judge whether a transaction was fair or exploitative.

Think of it like...

A subjective theorist looking at an auction would say: the final price is not what the painting is “worth.” The final price is just what happened when this particular group of people with these particular preferences competed. A different group at a different auction might produce a completely different price — and both would be equally “correct.”

4. The social theory — value is conferred by context

Karl Polanyi, Thorstein Veblen, and the economic sociologist Viviana Zelizer argued that all three theories above miss something fundamental.6

Consider a diamond engagement ring. Its value is not determined by the labor to mine it (labor theory), or the marginal satisfaction of one more piece of jewelry (marginal utility), or the isolated preferences of the buyer (subjective theory). It is valuable because it symbolizes commitment within a shared social ritual — marriage — that a specific culture has constructed. Take away the ritual and the value evaporates. The diamond industry spent decades building this social meaning through advertising; before De Beers’ campaigns of the 1930s and 1940s, diamond engagement rings were not a widespread tradition.6

Zelizer’s work on money itself drives the point further. In The Social Meaning of Money (1994), she showed that people routinely treat identical dollars differently depending on their social origin: lottery winnings get spent differently from wages, an inheritance is treated differently from a bonus, and households “earmark” money for specific purposes that have no economic logic but deep social logic.7 Money is not socially neutral. It carries meaning that shapes how people use it.

The social theory says that value is conferred by social context — by institutions, rituals, norms, and collective agreements about what matters. This does not make value fake. Social constructions are among the most powerful forces on earth. But it means that value cannot be understood by looking at individuals or objects in isolation.

Concept to explore

See embeddedness for Polanyi’s broader argument that all economic activity is embedded in social relationships, not floating in an abstract “market.”

5. Mazzucato’s critique — the circular definition

Mariana Mazzucato, in The Value of Everything (2018), argues that modern economics has quietly abandoned the question of value altogether.2 The discipline now operates with a circular definition: whatever commands a price in a market is valuable, and whatever is valuable commands a price. This is convenient for building mathematical models, but it means we can no longer distinguish between value creation (making something that improves people’s lives) and value extraction (capturing a share of existing value without adding to it).

A hedge fund manager who earns 50,000 are both paid “what the market says they are worth.” But that answer evades the question Mazzucato wants to reopen: does the hedge fund manager create 10,000 times more value for society than the teacher, or does the hedge fund manager extract value from a system whose rules happen to reward that activity?2

This is not an abstract point. It shapes tax policy, healthcare funding, financial regulation, and how societies decide who gets rewarded for what. The theory of value you implicitly hold shapes the world you build.

Think of it like...

Imagine a game of Monopoly where the rules say “whoever has the most money is the most valuable player.” That is a circular definition — it does not tell you whether the player contributed the most to the game or simply captured the most from other players. Mazzucato’s point is that modern economics plays this game without noticing.

Why do we use it?

Key reasons

1. It prevents false confidence. Anyone who tells you confidently what something is “really worth” is implicitly choosing one of these four theories and ignoring the others. Knowing all four makes you harder to mislead.

2. It connects economics to ethics. The question “what is value?” is inseparable from “what should be valued?” Understanding the history of the debate reveals that economics has always been entangled with moral philosophy — despite its claim to be a neutral science.1

3. It clarifies modern policy debates. Arguments about executive pay, financial regulation, public investment, and the “real economy” versus “the financial sector” are all, underneath, arguments about which theory of value is correct. Recognizing this makes the debates legible.

When do we use it?

  • When evaluating a price and wondering whether it reflects genuine usefulness, scarcity, or social convention
  • When analyzing a business model and trying to distinguish value creation from value capture
  • When reading economics and needing to understand why different schools of thought reach opposite conclusions from the same data
  • When debating policy — minimum wages, taxes on financial transactions, public funding for research — and realizing the disagreement is about underlying theories of value, not just numbers
  • When thinking about your own work and asking what makes it “worth” something to the people who pay for it

Rule of thumb

Whenever someone states a price as if it were an objective fact about the world — “that company is worth $10 billion” — pause and ask: worth to whom, by what measure, under what assumptions?

How can I think about it?

The restaurant analogy

Four food critics walk into a restaurant and taste the same dish.

  • The labor critic says: “This dish is excellent because the chef trained for fifteen years and spent six hours preparing it.”
  • The marginal critic says: “This dish is excellent because I have not eaten all day and each bite satisfies me enormously.”
  • The subjective critic says: “Whether this dish is excellent depends entirely on whether I personally enjoy it. There is no objective answer.”
  • The social critic says: “This dish is excellent because it appeared in a Michelin-starred restaurant, and the entire system of Michelin stars shapes what we experience as delicious.”

Each critic is capturing something real. None is capturing everything. The theory of value is economics having this argument — about everything that has a price.

The family heirloom analogy

Your grandmother’s watch is worth 0 in labor terms (it was mass-produced decades ago), and irreplaceable to you (subjective value). But why is it irreplaceable? Not because of anything intrinsic to the watch. It is irreplaceable because it carries social meaning — a relationship, a memory, a family identity. The social theory captures what the other three miss: the watch is valuable because of the web of human relationships it sits inside.

  • The watch = any economic good
  • The pawn shop price = marginal utility / market price
  • The manufacturing cost = labor theory valuation
  • Your attachment = subjective value
  • The family story = social value conferred by context

Concepts to explore next

ConceptWhat it coversStatus
price-signalHow prices compress distributed knowledge into coordination signalsstub
embeddednessPolanyi’s argument that markets are embedded in social lifestub
money-as-social-technologyMoney as transferable credit backed by trust, not a commoditystub
economicsThe parent domain covering ledgers, trust, and normscomplete

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Where this concept fits

Where this concept fits 

graph TD
    A[Economics] --> B[Theory of Value]
    A --> C[Price Signal]
    A --> D[Embeddedness]
    A --> E[Money as Social Technology]
    B --> C
    style B fill:#4a9ede,color:#fff

Related concepts:

  • price-signal — prices are the mechanism through which value theories become visible in markets
  • embeddedness — Polanyi’s framework explains why the social theory of value holds: markets are embedded in social life
  • money-as-social-technology — if value is relational, then money is the social technology that makes value transferable between strangers

Sources

Further reading

Resources

Footnotes

  1. Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan and T. Cadell. Book I, Chapters 5—7 on the “real price” of commodities. Further developed in Ricardo, D. (1817), On the Principles of Political Economy and Taxation, London: John Murray. ↩ ↩2 ↩3

  2. Mazzucato, M. (2018). The Value of Everything: Making and Taking in the Global Economy. London: Allen Lane. ↩ ↩2 ↩3 ↩4

  3. Marx, K. (1867). Das Kapital: Kritik der politischen Okonomie. Hamburg: Verlag von Otto Meissner. Volume I, Part III on surplus value and the labor theory. ↩

  4. Menger, C. (1871). Grundsatze der Volkswirtschaftslehre. Vienna: Wilhelm Braumuller. Jevons, W. S. (1871). The Theory of Political Economy. London: Macmillan. Walras, L. (1874). Elements d’economie politique pure. Lausanne: L. Corbaz. ↩ ↩2 ↩3

  5. Hayek, F. A. (1945). “The Use of Knowledge in Society.” The American Economic Review, 35(4), 519—530. ↩

  6. Polanyi, K. (1944). The Great Transformation. New York: Farrar & Rinehart. Veblen, T. (1899). The Theory of the Leisure Class. New York: Macmillan. ↩ ↩2

  7. Zelizer, V. (1994). The Social Meaning of Money. New York: Basic Books. ↩

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