Cost of production theories of value
I am working as a gold prospector. I go out one morning to pan for gold. I wade into the icy waters of an Alaskan river and begin the laborious task of sifting through the stones on the river bottom. After ten hours of work I find a single lump of gold, weighing some fraction of an ounce. I throw the lump in the pouch I keep around my neck.
I pack up my gear and get ready to head home. But just as I turn away from the river, I hear a hissing noise and then a splash behind me. I turn around and see that the water is steaming in a certain place. I look there and, lo and behold, there is another lump of gold of the same size as the one I prospected: a golden meteorite has fallen from the sky! I grab it from the water and throw it also into my pouch.
Now, I head to town to sell my gold to a buyer. When I dump out the contents of my pouch, I can't even recall which lump took ten hours of labor to acquire and which took almost none. Not only that, the buyer doesn't ask! He has no concern as to how much labor is "embodied" in these two pieces of metal. He just weighs them and pays for them based on their weight. "Embodied" labor plays no part whatsoever in the exchange value of these items.
Nor, when a jeweler fashions these two lumps of gold into rings and sells them, do the women who wear them worry about how much labor "went into" one ring versus the other. "Embodied labor" makes no difference to use value either.
I pack up my gear and get ready to head home. But just as I turn away from the river, I hear a hissing noise and then a splash behind me. I turn around and see that the water is steaming in a certain place. I look there and, lo and behold, there is another lump of gold of the same size as the one I prospected: a golden meteorite has fallen from the sky! I grab it from the water and throw it also into my pouch.
Now, I head to town to sell my gold to a buyer. When I dump out the contents of my pouch, I can't even recall which lump took ten hours of labor to acquire and which took almost none. Not only that, the buyer doesn't ask! He has no concern as to how much labor is "embodied" in these two pieces of metal. He just weighs them and pays for them based on their weight. "Embodied" labor plays no part whatsoever in the exchange value of these items.
Nor, when a jeweler fashions these two lumps of gold into rings and sells them, do the women who wear them worry about how much labor "went into" one ring versus the other. "Embodied labor" makes no difference to use value either.
Well , the gold ring could well end up selling at price of gold used + price of labor used + profit markup. So that would be the "cost of production" and economics provides a theory for why there is tendency for this be the case.
ReplyDeleteYou would then need a separate theory to explain the price of gold and price of labor (the original factors of production). Economics has quite a good theory for that too.
Rob, Marginal value theory has no difficulty in explaining why prices tend towards the cost of production. That is not a cost of production theory of value, however.
DeleteSeems like that would depend upon how you define a "a cost of production theory of value"
DeleteThe wikipedia article is quite informative:
http://en.wikipedia.org/wiki/Cost-of-production_theory_of_value
Me, I just define it the way Economists do.
DeleteFair enough, but it seem kind of odd to exclude the one theory that seems to best explain the cost of production from the set of cost of production theories.
Delete" but it seem kind of odd to exclude the one theory that seems to best explain the cost of production from the set of cost of production theories."
DeleteBut... I am not talking about explaining the cost of production! I am talking about explaining value.
And besides Rob, a notorious difficulty with cost of production theories of value is that they have a lot of trouble explaining the value of the costs of production! On the other hand marginalist theory has no such difficulty: the value of the factors of production flows from the value of the final products they will produce.
DeleteAgreed. I was being a bit flippant earlier.
DeleteI do see that marginalist theory is not really a "cost of production theory of value" but rather a theory that explains how the costs of production are derived. .
Cost of production theories do not claim to be universal. Hicks, for example, always recognised flexprice and fixprice markets.
ReplyDeleteIn the example you give of course the price of gold is not really based on the man's labour or capital goods bill (his tools and transport and food, I suppose), but set on a larger market and demand and supply have much to with it.
But how credible is the "prospecting" example for how most gold is produced these days?
Gold is mostly mined on an industrial scale these days and is very capital-intensive, with a serious wage bill too. So cost of production as a price floor must enter into the equation, even though gold is one of those highly speculative assets, whose price fluctuates.
"So cost of production as a price floor must enter into the equation"
DeleteIf I can only jump 10 feet horizontally, i will not try to jump across an 11 foot chasm. That does not mean the distance I can jump is determined by chasms.
At the risk of immodesty, Gene, you might want to read my critique of cost theories of value if you've never done it before.
ReplyDeleteI haven't read your article Bob. I think Bohm-Bawerk's article "Value, Cost and Marginal Utility" is good on this.
ReplyDeletehttp://mises.org/journals/qjae/pdf/qjae5_3_5.pdf