A Historical Analysis of the Theories of Value

April 3, 2022
7:51 pm

How have economists measured economic value throughout history?


By Jacob Householder
Senior Capstone
November 20, 2021


The theory of value lies at the heart of the greatest economic debates and has momentous implications for past, present, and future economic policies. For thousands of years, governments have passed laws or enacted policies designed to obtain and stimulate the growth of domestic wealth. However, the vast majority of our understanding of value has been developed in recent centuries.

Is there any standardized way to measure value? Or is value wholly subjective to the parties involved in the transaction? Additionally, is there anything that has innate, quantifiable, or intrinsic value that all societies can agree upon? By reviewing the development of the theory of value over time, we may discover some principles and models that offer tremendous explanatory power for the way humans engage in voluntary transactions with one another. This paper offers a historical analysis of the theory of value and seeks to answer questions regarding how societies throughout history have attempted to measure value.


Based on the assumption of rational self-interested behavior, the routine of voluntary transactions that we may have come to take for granted would never occur without the involved parties’ expectations of available gain. It is the perception of added value and the potential increase in wealth that motivates two parties to engage in trade with one another. Although this concept appears to be simple and straightforward, many transactions could appear to be irrational, depending on the method by which value is measured.

Literature and Motivation

The accumulation of wealth is a fundamental and preliminary task at the heart of virtually every objective, whether honorable or nefarious. In order to accomplish any goal, wealth must first be acquired and then used to obtain the capital and material goods requisite to realize the intended purpose. Even ‘internal’ mental, spiritual, and intellectual goals require the accumulation of wealth to secure sustenance, shelter, safety, and the unhampered availability essential for clear focus, meditation, and study. The universal relevance and gravity of wealth justifies an exploration of the source of wealth. Investopedia defines wealth accordingly:

Wealth measures the value of all the assets of worth owned by a person, community, company, or country. Wealth is determined by taking the total market value of all physical and intangible assets owned, then subtracting all debts. Essentially, wealth is the accumulation of scarce resources. Specific people, organizations, and nations are said to be wealthy when they are able to accumulate many valuable resources or goods. (Investopedia 2021)

In summary, wealth simply measures, or references, the value of scarce resources owned by individuals, families, organizations, or communities. An examination of the source of wealth is therefore an examination of the source of value.

A personal study of the development of economic thought and theory has demonstrated that this relationship between wealth and value has remained impressively consistent throughout world history. Societies through the ages have understood that wealth increases for a person, organization, or community as their ownership of ‘things of value’ grows. It is, however, the concept and theory of value that has radically shifted through the millennia, as will be shown in this paper.

A proper understanding of value is not only relevant to individual and collective decision-making—value theory has been paramount to the development of past and present economic models by many of the world’s greatest thinkers. According to the political economist Joseph Schumpeter, “the problem of value must always hold the pivotal position, as the chief tool of analysis in any pure theory that works with a rational schema” (Gramm 1988). Recognizing the significance of this famous “problem,” this paper will explore the theory of value using the writings of early philosophers, scholars, and economists with the objective of understanding how our appraisal of value has evolved over time.

Historical Economic Analysis

Early Thought

In the 4th century B.C., the Greek philosopher Aristotle (384-322) was the first of the great thinkers to introduce articulate observations about the nature of value. In Aristotle’s 350 B.C. work on political philosophy called Politics, he explained the art of “wealth-getting” and distinguished between an item’s use and exchange values:

Of everything which we possess there are two uses: both belong to the thing as such, but not in the same manner, for one is the proper, and the other the improper or secondary use of it. For example, a shoe is used for wear, and is used for exchange; both are uses of the shoe. (Politics)

Further, Aristotle focused on an item’s relative usefulness by highlighting wants and needs as the source of the motivation for trade (Politics). These wants and needs were later termed an individual’s “utility” by the 18th century Swiss mathematician and physicist Daniel Bernoulli in his efforts to model risk-taking behaviors (Chen 2021).

After this initial development by Aristotle which established subjective wants and needs—later known as utility—as the basis of exchange value, our understanding of economic value plateaued for over 1,000 years as the Scholastics focused their attention on the normative philosophical fields of morals and ethics. Throughout the Scholastic era, the notion of utility “was widely held as the determinant of value with only a minority of theorists such as St. Thomas Aquinas (1225-1274) and John Duns Scotus (1265-1308) taking note of the cost of the production side” (Frogarty 1996).

Pre-Classical Thought

In his 1588 discourse on coinage, Bernardo Davanzati (1529-1606) expounded on Aristotle’s distinction between use value and exchange value by identifying the “paradox of value.” Davanzati “noted that gold has no ‘value-in-use’ but great ‘value-in-exchange.’ This was because, he argued, the value of gold rests purely on what can be had in the useful things that are exchanged for it” (Sewall 1901).

During the era of ​​Mercantilism (~1500-1776), merchants throughout Europe embraced the utilitarian source of value as they sought to build wealthy and powerful states (Wani 2020). The Mercantilist spirit of dominating trade and conquest which prevailed was founded upon several basic economic assumptions; 1) to prosper, the state must be powerful, 2) power comes from wealth, 3) wealth comes from gold and silver—precious metals perceived to have intrinsic value, and 4) gold and silver can be obtained through trade and conquest (Wani 2020). These merchants believed that the wealth of the world was stagnant, so one nation could only grow at the expense of another. They believed wealth could be acquired by maintaining a positive trade balance—an excess of exports over imports—with other nations (Wani 2020). Trade was considered to be the most important occupation, followed by industry and commerce. Agriculture was considered the least important occupation as the product of farming could only add to the wealth of a nation through the other occupations of trade, commerce, and industry (Wani 2020).

In the early 18th century, the French Physiocrats—a group of Enlightenment economists led by François Quesnay (1694-1774)—offered an alternative theory of wealth which derived value entirely from agriculture. Quesnay produced his famous Tableau Économique in 1758 (see Appendix Item #1) which was the first attempt to lay out a systematic, circular representation of the economy. His model, which described (for the first time) the circular flows of goods and money, portrayed farmers as the sole productive class, craftsmen as the sterile class, and landowners as the unproductive class. The Physiocrats were the first ‘economists’ to recognize wealth as a flowing variable, rather than as a mere “stock of goods.” Leonardo Becchetti explains:

In difference with the mercantilists who, as we have seen, measured the wealth of a country on the basis of the gold and precious metals it possessed, the physiocrats held that a country’s wealth should be measured by the income (the produit net) an economic system was able to produce each year. (Becchetti 2020)

William Petty (1623-1687) “abandoned the subjective theory of value and instead objectively searched for the natural and intrinsic laws of reality – of which ‘natural value’ was one of them” (Frogarty 1996). Petty believed that the natural value was composed of the costs of production which included land and labor, and that the market price for a good would oscillate around this ‘natural value’ (Frogarty 1996). In his book, Anatomy of Ireland (1691), Petty searched for a standardized value of labor based on the most available foods, successfully anticipating the theory of subsistence wages and labor theory of value that would be advanced by Karl Marx in the coming years.

Richard Cantillon (1680’s-1734) emphasized the ‘intrinsic value’ of a good, declaring it to be “proportional to the land and labor needed for its production” and distinguishing it from its market price (King 2014). Cantillon also sought to determine the intrinsic value of a good by narrowing relevant factors of production to a single determinant—ultimately favoring land rather than Petty’s preference for labor (Frogarty 1996). Accordingly, Richard Cantillon introduced the land theory of value to the scope of economic thought and theory. However, this model of intrinsic value was eventually found accurate only in a narrow range of cases (Frogarty 1996).

Nicholas Barbon (1640-1698) continued to promote the utilitarian theory of value. He stated, “‘[T]he value of all wares arise from their use; things of no use, have no value, as the English phrase is, they are good for nothing” (Barbon 1903). Additionally, Ferdinando Galiani (1728-1787) leveraged Davanzati and Montanari’s ideas of mercantilism and worked to improve upon the utility theory of value. Galiani “implicitly described the notion of diminishing marginal utility,” paving the way for the work of neo-classical economists Jevons and Menger (Frogarty 1996).

Jean-Baptiste Say is perhaps best known for his “law of markets” (Spithoven 1996) which economist Mark Skousen describes as “the classical macroeconomic theory that focuses on production, trade, and savings as the keys to economic growth and higher consumption” (Skousen 2016). Say helped to dispel the “entrenched populist myths of mercantilism” and introduced the long run balancing dynamics of supply and demand (Quddus 2017, xxviii). Market forces would later be expounded upon by other economists as the primary determining factors of market value.

In his work Some Considerations on the Consequences of Lowering of Interest and the Raising the Value of Money, John Locke (1632-1704) “developed a theory of price determination earlier, [but] it lacked the clarity, precision and understanding of Law” (Frogarty 1996). His most significant contribution to the theory of value may have been his review of value added to land and resources through productive labor which has been used to justify private and intellectual property rights (Mossoff 2012).

In his Essay on a Land Bank, John Law (1671-1729) expounded upon the Aristotle/Davanzati distinction between use and exchange value and introducing the famous “water-diamond paradox”, which he described as “…water, which has great use-value, has no exchange—value while diamonds, which have great exchange—value have no use-value…” (Law 1995). Adam Smith would also use this paradox, but to emphasize different production costs while Law “regarded the relative scarcity of goods as the creator of exchange value” (New World Encyclopedia). In this way, he recognized the scarcity principle which Carl Menger, William Stanley Jevons, and Leon Walras would introduce as “marginal utility theory” a century later. As clear as his explanation was, it appears that Law’s inability to articulate this principle more clearly and his failed financial operations in France caused his contributions to become nearly forgotten for the next 200 years, yielding ample room in the intellectual sphere for an exploration of objective value based on labor by the upcoming classical thinkers (Frogarty 1996).

Classical Thought

In The Wealth of Nations (1776), Adam Smith (1723-1790) used three distinct approaches to estimate value. The first was modeled after William Petty’s position which relied on the value of labor, which he believed applied most to the ‘early and rude state of society’ (King 2014). The second approach, which he believed to be especially relevant within contemporary capitalism, was an ‘adding-up theory’ based on the aggregate costs of production, including land, capital, and labor (King 2014). Smith’s third model “anticipated the later subjective value theory” and based value on the producers’ relative ‘toil and trouble’ (King 2014). Adam Smith retreated from pre-classical thought which hinted at marginal utility, focusing instead on total utility and the labor theory of value which resulted in a failure to solve the water-diamond paradox and the relationship between use- and exchange-value (Frogarty 1996). Adam Smith preferred a cost production theory over the utilitarian models of pre-classical thinkers.

David Ricardo (1772-1823) adopted and worked to improve upon Adam Smith’s cost production theory of value with his own model. He said, “Possessing utility, commodities derive their exchangeable value from two sources : from their scarcity and from the quantity of labour required to obtain them” (Ricardo 1817). His efforts to emphasize scarcity resurrected one of John Law’s great contributions to the theory of value. However, Ricardo ultimately believed labor, measured in hours, and potentially his new theory of land rent were of greater importance to value estimation than scarcity (Frogarty 1996). Karl Marx (1818-1883) strongly endorsed Ricardo’s labor theory of value in Capital and used it to promote his theories of capitalist exploitation (Frogarty 1996). However, it appears that unlike Ricardo, Marx was disinterested in scarcity as a relevant factor of value determination.

John Stuart Mill (1806-1873) appears to have all but abandoned the classical school’s emphasis on the labor theory of value. He stated, “The value which a commodity will bring in any market is no other than the value which, in that market, gives a demand just sufficient to carry off the existing supply” (Mill 1909). Frogarty reports that Mill’s acknowledgment of value-determining market forces led him to mistakenly claim that “there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete” (Frogarty 1996).

Neo-Classical Thought

William Jevons (1835-1882) and Carl Menger (1840-1921) ushered in a new school of economic thought by confidently returning to Davanzati’s work on marginal utility (Steedman 1997). “They felt that no matter what costs were incurred in producing a good, when it arrived on a market its value would depend solely on the utility the buyer expects to receive” (Frogarty 1996). Marginal utility, rather than total utility, appeared to be the only model general enough to explain all market transactions. Instead of being price-determining, Jevons articulated that the factors of production are price-determined: “Cost of production determines supply, supply determines final degree of utility, final degree of utility determines value” (Jevons 1957, 165). In Principles of Economics, Menger solved the famous water-diamond paradox, demonstrating that marginal utility was elastic enough to account for the satisfaction of both parties involved in an exchange of water for diamonds (Frogarty 1996).

To Leon Walras (1834-1910), the economic system of price/value determination was far more complicated than utility = value. Instead, Walras advocated, in his Elements of Pure Economics, a model of General Equilibrium which accounted for the dynamically interwoven forces of supply and demand (Frogarty 1996). Alfred Marshall (1842-1924), agreed that market transactions are best explained by an equilibrium in supply and demand, but also recognized the significance of a time element in these economic forces. He developed four separate time-based models that represented the static or dynamic nature of production (Frogarty 1996).

In more recent history, economists like John Maynard Keynes, Milton Friedman, Friedrich Hayek, Joseph Schumpeter, Ludwig Von Mises, and many others have further developed these discoveries into sophisticated models with tremendous explanatory power for market interactions.


The history of the development of the theory of value is replete with examples of economists placing disproportionate emphasis on their own perspectives and neglecting the significance of other legitimate theories. From the time of Aristotle until today, we observe philosophers and economists toggling back and forth between variations of utilitarianism and cost production theories of value. It appears that this is simply another case where our best estimate of truth is actually a synthesis of each unique standpoint.

The prevailing economic perspective today is that nothing has a measurable objective or “real” value, highlighting a catch-22 where a medium of measurement must first have objective value before it can measure the objective value of anything else. Instead, exchange value is determined by the intersections of demand, represented as a sloped demand curve (see Appendix Item #2), and supply, represented by an upward-sloping supply curve (see Appendix Item #3). Each point along the demand curve shows the equilibrium price for that quantity demanded. If demand was not subject to diminishing marginal utility and goods instead maintained a “real,” objective value, prices would remain consistent regardless of the quantity demanded. If there was a “real” or quantifiable “intrinsic” value for any item, voluntary transactions would never occur. The prevailing economic paradigm advocates that transactions are not zero-sum processes due to our relative needs and preferences. Markets are guided by the invisible hand to dynamically assign relative value by setting the prices of goods, services, and the factors of production.

Recognizing that value is subjective according to the marginal utility of the consumer, profit-maximizing producers should seek to understand the customer’s wants and needs and work within their comparative advantage to offer goods and services that satisfy unmet demand.


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Item #1: Tableau Économique

(Source: Quesnay François, and Marguerite Kuczynski. Tableau Économique Von François Quesnay 3. Ausgabe, 1759. Berlin: Akademie-Verlag, 1965.)

Item #2: Demand Curve

(Source: “Demand Curve and Nature of Curves.” theintactone, December 1, 2019. https://theintactone.com/2019/09/12/pom-u2-topic-4-demand-curve-and-nature-of-curves.)

Item #3: Market Equilibrium


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