Cost-of-production theory of value
In
economics, the
cost-of-production theory of value is the belief that the value of an object is decided by the resources that went into making it. The cost can be composed of any of the
factors of production including labour, capital, land, or technology.
Two of the most common cost-of-production theories are the medieval
just price theory and the
classical labor theory of value. The
labor theory of value, which interprets labor-value as the determinant of prices, was first developed by
Adam Smith and later expanded by
David Ricardo and
Karl Marx. Most classical economists (as well as nearly all Marxists) subscribe to it. However, Marx's theory is not a true cost-of-production theory since the value of a
commodity contains a component of
surplus value unrelated to the physical cost of producing it. The magnitude of this surplus value may be unrelated to production-costs. A somewhat different theory of cost-determined prices is provided by the "
neo-Ricardian school" of
Piero Sraffa and his followers.
The most common counterpoint to this is the
marginal theory of value which asserts that economic value is set by the consumer's
marginal utility. This is the view most commonly held by the majority of contemporary mainstream economists.
The Polish economist
Michał Kalecki [
1] distinguished between sectors with "cost-determined prices" (such as manufacturing and services) and those with "demand-determined prices" (such as agriculture and raw material extraction).
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production, costs, and pricing*
list of economics topics*
prices of production
