That the exchange value of a good is determined by the amount of labour required to produce it was at one time a fairly common belief. Adopted and restated by Adam Smith and his successors, this doctrine was later taken over by Karl Marx and other socialists and put into a form in which labour is held to be the sole source or cause of value. In its best form, as set forth by Ricardo, the labour theory of value was to the effect that, allowing for temporary fluctuations of supply and demand, the exchange values of different commodities tend to be proportional to the respective quantities of labour required to produce them. The rent of land was held to be without influence on the value of its produce, for the reason that the value had to be high enough to cover the labour costs incurred under the most unfavourable conditions of cultivation, where no rent is or can be paid. Capital was regarded as stored up labour, and interest or necessary profit on capital was disregarded on the arbitrary assumption that its amount would be roughly proportionate to the total amount of labour employed in producing a commodity.
Apart from the circumstance that other costs than labour are not adequately brought into the reckoning, the labour theory of value encounters two difficulties. First, different kinds of work call for different kinds and degrees of ability and training, and differ in respect of attractiveness. Different kinds of labour can be fused into a "quantity" of labour only by grading them or weighting them in accordance with the different values which their respective products command in the market, and this pro cedure leads to circular reasoning. Second, so far as there is, in fact, any systematic relation between quantities of labour and the values of products, it is a result of the circumstance that labour is apportioned to different tasks only in such proportion and de gree as its different products are valuable. Similar difficulties are encountered in any attempts to find a simple relation between values and "real costs." Dissatisfied with explanations of values in terms of costs, some economists, taking note of the circumstance that values must necessarily be related to the choices and preferences of consumers, sought to find the determinant of value in marginal utility (i.e., the utility or importance to the buyer of the least important or "mar ginal" part of his current consumption of any commodity). Sub jective values are proportionate to marginal utilities and exchange values must be proportionate to subjective values. If they were
not, the consumer would alter his budget by buying more of one thing and less of another. Each consumer thus adjusts his pur chases so as Co bring his own valuations into line with the values which obtain in the market, but the values which obtain in the market are the resultants of the aggregate demand of consumers for different products. This aggregate demand determines what and how much shall be produced and what the values of different uses of labour and of other productive agents shall be. Such, in brief outline, is the marginal utility theory of value. It illumi nates some aspects of the problem, but it is quite as one-sided and incomplete as a cost-of-production theory of value is. That con sumers' preferences determine what shall be produced and what costs of production shall be incurred is no more true than that the relative costs of producing different things determine how far consumers can follow their preferences.
The costs which are most directly and systematically related to values are displacement costs. Labour displaces other uses of time, saving displaces present consumption, any one use of labour or capital or natural resources displaces other uses, and in general, the production of one good displaces the production of other goods. The production of some goods can be increased with a progressively smaller sacrifice of other pos sible products. Other goods can be had in larger quantities only by sacrificing progressively larger amounts of alternative prod ucts. As the amounts of a given good which have to be sacrificed in order that other goods may be acquired change, consumers will alter their budgets, but how far they will go will depend upon the relative importance to them of the uses of the increments of goods which they acquire and of the increments which they sacrifice. Out of the play of forces such as these, and especially out of the rela tion between the preferences of consumers on the one hand and the technical conditions which determine the displacement costs of production on the other hand, there emerges a tendency—never fully effective because of continuous changes in the structure of demand and in the conditions of supply—towards the establishing of a system of exchange values which would bring production and consumption fully into equilibrium.
See also ECONOMICS and PRICE. (A. Yo.)