The Meaning of Value

Smith believed that the word value

has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called "value in use"; the other, "value in exchange." The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.¹⁵

According to Smith, value in exchange is the power of a commodity to purchase other goods—its price. This is an objective measure expressed in the market. His concept of value in use is ambiguous; it resulted in a good part of his difficulties in explaining relative prices. On the one hand, it has ethical connotations and is therefore a return to scholasticism. Smith's own puritanical standards are particularly noticeable in his statement that diamonds have hardly any value in use. On the other hand, value in use is the want-satisfying power of a commodity, the utility received by holding or consuming a good. Several kinds of utility are received when a commodity is consumed: its total utility, its average utility, and its marginal utility. Smith's focus was on total utility—the relationship between marginal utility and value was not understood by economists until one hundred years after Smith wrote—and this obscured his understanding of how demand plays its role in price determination. It is clear that the total utility of water is greater than that of diamonds; this is what Smith was referring to when he pointed to the high use value of water as compared to the use value of diamonds. However, because a commodity's marginal utility often decreases as more of it is consumed, it is quite possible that another unit of water would give less marginal utility than another unit of diamonds. The price we are willing to

¹⁵Ibid., p. 28.

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pay for a commodity—the value we place on acquiring another unit—depends not on its total utility but on its marginal utility. Because Smith did not recognize this (nor did other economists until the 1870s), he could neither find a satisfac­tory solution to the diamond-water paradox nor see the relationship between use value and exchange value.

Date: 2015-02-03; view: 1053