During the second and third quarters of the nineteenth century the classical theory of value was almost universally held by economists: it serves as the basis of much of the economic thought of the present day.
A second theory of much historical importance is the labor theory of value. Adam Smith ar gues that in a primitive society the respective amounts of labor spent on commodities must have served as a basis for their exchange value; Ricardo in many passages speaks as though he regarded labor as the basis of exchange value. although a general examination of his work leaves no doubt that he admits the determining influence of other elements in value besides labor. The theory was adopted by Karl Marx and his followers as a theoretical basis for socialism, Whatever part of the volute of a commodity falls to the landlord or the capitalist Karl Marx re garded as a deduction from the fruits of labor, since labor alone created value. The difficulty in accounting for the value of goods produced at a varying expense in labor, of goods which are not reproducible, and of those which are freely given by nature, but in quantities not adequate to the demand, deprives this theory of scientific value.
Utility theories of value were unsuccessful in explaining the facts of value, until the second half of the nineteenth century. when the concept `marginal utility' was discovered. By a well known psychological principle, the pleasure de rived from the satisfaction of any given want de clines with each successive unit of satisfaction experienced. If an individual possesses a stock of goods for consumption. some units of this stock may be so used as to yield a high degree of satis faction; other units will yield less, and the 'final' or 'marginal' unit may yield hut little satisfaction. however great the satisfaction from the first unit may have been. The absolute im portance to the individual of any unit in his possession will be measured by the utility of the marginal unit. since the loss of any other unit would at once be made good by the sub stitution of the marginal unit. In his private economy, an individual values his goods accord ing to their marginal utilities. In exchange. both buyer and seller compare the marginal util ity of the commodity to be bought and sold with the marginal utility of money. If the seller finds that the marginal utility of the money of fered him exceeds the marginal utility of the commodity for sale. he is naturally willing to sell: if the buyer finds that the marginal utility of the commodity exceeds that of the money de manded. he purchases. Naturally, many sellers would he willing to take a price less than that which they are offered; many buyers would pay more than they do rather than go without the commodity they desire. A certain number of buyers, however, possess limited means, and would not purchase if the price rose above a cer tain figure. A number of sellers would hold their property rather than take a lower price.
It is these buyers who are least eager to buy and sellers least eager to sell who hold the power of determining ratios of exchange, all other pur chases and sales, in an open market, conform ing to the values set by these.
The marginal utility theory does not deny that in the long run the values of commodities tend to correspond with their respective costs of pro duction: but it gives a new interpretation to the fact. 'Costs' consist themselves in values—value of labor, capital, use of land, etc., used up in the manufacture of a commodity. These things are not valued for their own sake, but for the sake of the products for final consumption into which they enter. Naturally, these commodities are valued marginally. If pig iron in one use creates a value equal to 40, in another use a value rep resented by 10, the latter use will determine the value of pig iron. But under free competition there would be a tendency to increase the pro duction of commodities in which pig iron created a value of 40, withdrawing iron, if necessary, from the less productive use. The result would be that the value of iron in the more profitable use would decline, and with it the value of the commodity into which it entered. In this way it appears as if value were determined by costs. On the other hand, the increase in value of iron in the least profitable use, resulting from the withdrawal of iron from that use, shows quite clearly that in a broad view it is the commodity for final consumption that determines the value of the elements in cost, not cost that determines values.
This theory was originated by Gossen in the fifties, but gained no attention at the time. Two decades later it was rediscovered by Jevons, Men ger, Walras, and J. B. Clark, working independ ently. Through the consistency with which it ex plains the diverse phenomena of value, it has re ceived wide acceptance, although it has been un able to displace the classical theory completely. Marshall has endeavored to reconcile the two theories, holding that cost of production and marginal utility, taken together, explain value, but that neither theory alone explains it satis factorily. In this view he is followed by proba bly the majority of American and English econo• mists. See POLITICAL Ecoxomr.
BIBLIOGRAPHY. All standard works on economBibliography. All standard works on econom- ics present a general theory of value. For the classical theory, the best expositions are Mill, Principles of Political Economy (London, numer ous editions), and Cairnes. Political Economy (New York, 1874). For the labor theory, see Marx, Capital (London, 1S87). For the margi nal utility theory, consult Cosset). Gesetze des menschlichcn l'erkehrs (Brunswick, 1S54) ; Jevons, Theory of Political Economy (London, 1871) ; Clark, Philosophy of Wealth (Boston, 1S94); Wieser, Natural Value (London. 1S93) ; Smart, Introduction to the Theory of Value (Th.. 1S91) ; Marshall, Principles of Econom ics (3d ed., ih., 1895).