2nd The labour theory of value of the classics
3rd The value of labour according to Karl Marx
4th The value determination in the marginal utility school
5th Value creation in the Cambridge School
In this chapter we want to deal with the thesis put forward by Karl Marx and adopted by most socialists that only labour would create value. Again, also this thesis is about exclusivity, thus meaning that solely values would be produced due to human labour.
In reality, the relationship between labour and value creation is very complex and cannot be covered by a simple thesis. Of course, it cannot be denied that values can be generated through labour, indeed one can certainly assume that economic values are generally generated with the help of labour. However, it would be wrong to assume that economic values were only created if labour was expended and only through labour at all.
In general, we can assume that economic goods and thus also economic values are produced through the interaction of several production factors. However, production factors include not only labour, but also capital, land and nature. In order to produce an economic good, generally a raw material is needed that is either extracted in a mine or grows naturally by cultivating fields. In addition to the workers who perform the physical labour, capital is almost always needed, because an entrepreneur normally only receives the proceeds with which the raw materials, the semi-finished products and particularly the wages can be paid after production has been completed, the time when the products are sold. The sum of money needed to pay for the factors of production must therefore be advanced initially, and in a market economy this is done by a provider of capital (perhaps the entrepreneur himself) granting the credit necessary for this purpose.
Values exist in many different ways. A distinction is made between tangible and intangible values or even economic and above-economic values. In this chapter, we will deliberately limit ourselves to economic values. An economic value always arises when material goods are needed to realise certain human objectives. Whether we need material goods then, when we want to realise certain goals, is not a question of the moral evaluation of the individual goals. There are morally superior goals that require the use of material goods. Let us think, for example, of an appeal for donations to help people who were made homeless by flooding. There can be no doubt that this is a very high moral goal. Nevertheless, the necessary aid can only be realised with a large amount of donations.
On the other hand, let us think of bullying. It is possible for individual workers to harass and bully some of their work colleagues day after day without spending a cent on these actions. Again, it cannot be doubted that bullying of any kind is a very reprehensible behaviour in a moral sense.
The fact that material goods are needed to realise certain goals has nothing to do with the moral assessment of these goals. Such goals only become an economic problem if on one side the supply of material resources is not sufficient to realise all goals to the desired extent. In other words, there is scarcity and scarcity means that the demand for material resources exceeds the respective supply of resources. It is therefore important to direct the scarce resources to those uses in which the goal achievement rate is the highest.
On the other hand, certain objectives can usually be realised with different techniques, so that it is also important to produce a certain objective (good) with the technical method that allows the highest possible efficiency. The efficiency of a technical method is measured here by the question of how many resources are needed to produce a unit of good or - which means the same thing in terms of content - how many units of good can be produced with one unit of resource.
This allocation of material resources to the various types of use and techniques is carried out in a market economy via the prices of the individual goods and production factors. If the prevailing price ratio corresponds to the scarcity ratios, this economic task of allocation is achieved in the best possible way. The fact that a value (price) is assigned to the individual goods and factors serves in a market economy to solve the economic problem of directing production, which consists in coping with scarcity. So let us note that in economic terms values always fulfil the function of enabling the most efficient use of material resources. Let us now ask ourselves how these ideas have developed in the course of economic doctrines.
2nd The labour theory of value of the classics
Just as Karl Marx was a disciple of Georg Friedrich Hegel in terms of his philosophical views, Karl Marx followed the teachings of David Ricardo in his economic considerations - as shown in particular by Joseph Alois Schumpeter. Above all, Karl Marx based his economic analysis on the classical labour theory of value, which was developed mainly by David Ricardo. According to this theory, the value of a good can be determined according to how many hours of labour are socially necessary for the production of a unit of goods.
According to the common sense of the time, one actually should have expected that the value of a good (and this is the long-term valid price of a good) would be determined by the level of all cost factors in accordance with the objective theory of value that prevailed at the time. And the factors of production were considered to include not only labour, but also scarce land and capital. An objective theory of value can therefore only be convincing if it can be proven that neither land nor capital co-determines the level of value.
This was precisely the task David Ricardo set himself. He tried to prove that a land rent is only paid because with growing production, less productive land has to be used more and more and because the free market ensures that the same price is paid for the end products, regardless of how productive the individual soils are. The consequence was that the owners of more productive soils received a differential rent. The rent was therefore a consequence of the increased scarcity and the associated price increases for agricultural products and could therefore - for logical reasons - not at the same time be the cause of the increased prices. In David Ricardo's view, the soil was thus eliminated as a determinant of the values of a good.
Now how did David Ricardo succeed in eliminating capital as the determinant of the formation of the value of goods? For this, it must be remembered that the primary task of any classical theory of value was to determine not the absolute price level, but the relation between the individual prices of goods. However, according to David Ricardo, the price structure was not determined by the capital employed in production. This was because a uniform interest rate was valid for capital that was invested in the economy and this, in turn, meant that the interest costs contributed to determining the absolute level of the prices of goods, but not to determining the value - the relative price level. On the labour costs was added respectively an equal percentage, dependent on the interest rate for the capital costs; the relation between the individual long-term valid prices of goods were therefore not affected by changes in interest rates. This also excluded capital as a second possible determinant of the value of goods.
Thirdly, it had to be considered that the work has different qualities and that therefore the wage level also differs between the individual workers depending on the quality of the work. A skilled worker receives a higher wage than an unskilled worker. In order to arrive at the result of the classical theory of labour, namely that only the number of hours of labour necessary for production determines the value of goods, David Ricardo also had to exclude the qualification of the labour force as a possible determinant of the value of goods. Ricardo did this by assuming that the wage structure was determined in the long run by technical factors and not by economic factors such as scarcity or productivity.
Thus, if the wage structure was determined solely technically in the long run, one could consider the different labour qualities in the theory of value by simply converting the skilled labour into normal labour hours with the help of this given technical size. If, for the production of a certain unit of goods, in addition to 10 simple hours of labour, 4 hours of labour are required from skilled workers, and if twice as high a wage is paid for this skilled labour, the four hours of labour from skilled labour could be converted into 8 normal hours of labour.
Thus- superficially assessed - it seems that David Ricardo succeeded in tracing the value of a good solely to the number of hours of labour required to produce that good, thus placing the labour theory of value on a scientifically correct basis.
Let us now ask about the possible criticism of this theory of value. Let us start with the first step of the argumentation: with the proof that rents as a consequence of a price increase could not at the same time also be a determinant of this very price.
As a reminder, according to David Ricardo, there is an increase in the demand for agricultural products and this leads to price increases because of the scarcity of goods. This line of argument can be agreed with in any case.
In a second step, the attempt of suppliers to meet this increased demand by expanding production leads to a situation where land of inferior quality has to be cultivated. This assertion can also be agreed with.
In free markets products with the same quality also achieve a uniform price irrespective of whether different unit costs are incurred in production in the individual enterprises.
This observation also corresponds to the theory valid today.
Furthermore, the products that cause higher unit costs because of the lower quality of the soils are only produced and offered on the market if the price at least corresponds to the unit costs. Either this statement can certainly not be criticised.
Equal price with unequal unit costs eventually leads automatically to the owners of the better soils receiving a rent.
Thus, it appears that the attempt to eliminate the rent from the set of determinants of a price was successfully carried out by David Ricardo. However, the question arises as to why this line of argument is only valid for soils and thus for land rents. Doesn't this proof actually apply to all conceivable factors of production? The fact that some of the cultivated soils receive rents is obviously only due to the fact that soils have different qualities. But does this not also apply to the other factors of production?
Let us examine this question for capital. As we know, we quite often have to reckon with the fact that the provision of capital is sometimes quite risky. In these cases, the market compensates the providers of capital for the risk in the form of higher interest rates. It can be said that the higher the risk taken, the higher the interest rate. On the other hand, there are also capital investments that entail almost no risk. Thus, we find that the quality of the capital also varies and that therefore different interest rates have to be paid for different capital.
Indeed, it would seem that the quality of the soil is of a different character than the quality of the capital. The fact that land rents are granted lies in the quality of the land, i.e. in the characteristics of the factor of production that is offered. But the fact that capital has a different quality is due to the fact that enterprises, i.e. the demanders of this factor of production, want to take a different risk.
Nevertheless, there is one thing in common. The enterprises that demand capital need capital of different quality depending on the risk they are taking. An entrepreneur who wants to build a very high-risk investment needs investors who are willing to take a higher risk. It is this different willingness of the suppliers of capital that determines the quality of the capital granted.
With regard to the production factor labour, David Ricardo also assumes different qualities. And certainly, he also assumes that workers who are of above-average quality also receive above-average wages. Why should we not also be able to speak of the qualitatively better workers receiving a quality pension?
But if the rent concept proven by David Ricardo for soils can de facto be applied to every conceivable factor of production, all factors are catapulted out of the set of possible determinants, with the result that the value of goods remains undetermined as long as one likes to objectively trace the value of goods back to factor input.
This is precisely the answer of the Vienna School, the first variant of neoclassical theory. The value of a good can never be traced back to the input of a production factor alone; rather, it is determined solely by the utility that the end consumer gains from the consumption of a good.
The Cambridge School, the third variant of neoclassical theory, finds a somewhat different answer. These representatives of neoclassical economics assume that the value of a good is determined by supply and demand, that both a change in the supply of a factor of production and a change in demand can cause a change in the value of goods.
Let us now ask in a second step to what extent David Ricardo's attempt to remove the capital costs from the list of possible determinants is convincing. David Ricardo only succeeded in removing the capital costs from the set of possible determinants of the value of goods because he implicitly assumed that all enterprises need a single period for their production. This assumption certainly does not correspond to reality.
In reality, we have to assume that production mostly takes several periods due to circuitous routes of production and that the duration of this circuitous route of production varies from product to product.
But if this is the case, we can no longer consider the cost of capital to be the same percentage of labour costs everywhere. Let us consider an example:
We assume that an entrepreneur A produces quite labour-intensively, that 10 workers - already converted into standardised labour hours - are employed for a total of 100 labour hours and that production from the beginning to the end is just one period. The entrepreneur is forced to take out a loan before production begins, which is just enough to pay the workers. For the sake of simplicity, let us assume that no other costs arise apart from labour costs, e.g. that raw materials are processed which are already in the possession of the entrepreneur.
We now consider a second entrepreneur B who, in contrast to enterprise A, produces very capital-intensively, whereby we again want to assume that the raw materials required for production are already in the possession of this enterprise; furthermore, for the sake of simplicity, let us assume that the machines required for the production of the final product are produced in this enterprise itself. Again, 10 workers would be employed with a total of 100 standardised working hours.
The production of the final product now requires two periods for the entire production process, whereby in the first period initially only the required machine was produced, with the help of which the final product was then produced in the second period. The circuitous route of production therefore covers two periods for enterprise B, whereas it only covers one period for enterprise A.
These assumptions now have the result that enterprise A needs a loan that is sufficient to let the employees work a total of 100 hours and to pay them immediately. Since the interest rate was 3%, another 3% of the labour costs would be added to the total cost sum as interest costs.
Enterprise B, on the other hand, needs a loan that is sufficient to employ the workers for two periods. With the same interest rate, this means that interest costs must be added to the labour costs, which do not amount to 3%, but 6% of the labour cost sum.
This shows that the value sums of both products are not only increased in their absolute level by taking the capital costs into account, but that the value relations also change. It is thus proven that when taking into account production periods of different lengths, the value relations between two goods are not only determined by the number of necessary and standardised labour hours, but furthermore also by the level of capital costs. The attempt to reduce the number of types of production factors to one has thus failed.
Finally, let us turn to David Ricardo's third step, namely to prove that the multitude of different labour qualities could be traced back to a standardised labour quality. As shown, David Ricardo tries to solve this task by attributing the wage differences of different labour qualities to purely technical determinants, which furthermore can also be regarded as constant and thus predetermined, at least in the short term.
Just this assumption, however, must be doubted. In reality, these value relations in the case of wages are of an economic nature and are thus problem variables and not data variables as assumed by Ricardo. We always speak of economic problems when the value relations depend on the scarcity of these factors. And indeed, we must assume that scarcity relations are involved in determining the value relations of the different labour qualities. Let us illustrate this thesis with a simple example:
Let us assume a small enterprise that employs 10 unskilled workers for the production of a hand-crafted product that corresponds to the standardised quality of work and additionally requires a foreman who checks the hand movements of the workers. Let us further assume that traditionally the foreman was paid a wage that was just twice the wage of the unskilled workers. It is a mystery to me how it is possible that for technical reasons the supervision of the workers is worth twice as much as the execution of the work, but let us nevertheless assume that on the basis of such ideas the salary of the foreman has been determined up to now.
Let us now assume that the employment of the foreman is discontinued, e.g. because he retires, so that the enterprise has to hire a new foreman. Let us further assume that due to a booming economy, foremen have become very scarce and that the enterprise can therefore only hire a new foreman on the condition that it pays him not double but triple the basic salary of the other workers employed.
In this example, the value relations of the individual labour qualities are clearly determined by scarcity relations and one will have to concede that even in reality this possibility (the scarcity of certain skilled labour force) must very often be reckoned with. But then David Ricardo has also missed his goal in this third step of proof: he has again tried to explain one unknown (namely the value of a good) by another unknown (namely the value of a quality of labour among several) and has thus missed his goal. The problem would only have been solved if he had succeeded in clearly attributing the respective wage relations to data variables that do not require any further justification.
Let us try to summarise these three criticisms in David Ricardo's proof: David Ricardo did not succeed in reducing the multitude of actually existing types of factors of production to a single quantity. Thereby, it remains that the attempt of the representatives of the classical period to reduce the value of a good to objective quantities, namely to the necessary unit costs of a good, has failed.
Now this certainly does not mean that David Ricardo's theory of value should be thrown on the dump of doctrinal history. The merit remains that David Ricardo was almost the only one of the classical scholars to succeed in recognising the problem of any objective theory of value. It was a great achievement to have correctly recognised that the reduction of the values of individual goods to the necessary unit costs can only be satisfied if one can prove that a single homogeneous factor of production alone determines the value of a good.
It is said that the correct recognition of a problem is already half of the solution, but only the half. The solution of the correctly identified problem is one of the famous errors in thinking in the history of national economics. But even here, the way David Ricardo proceeded to finally reduce the multitude of factors of production that determine the value of goods to one determining factor must be described as downright brilliant.
Ricardo's mistake was, in the first place, that he did not realise that the proof for the elimination of the factor soil could basically be applied to any factor of production; in the second place, that he obviously started from the assumption that the differences in the length of the production periods were irrelevant for his proof; and finally, that he overlooked the fact that the wage relations between the individual qualities of labour very often depend on scarcity and thus on a problem variable that has to be clarified within the framework of an economic science.
3rd The value of labour according to Karl Marx
Karl Marx adopted this labour theory of value developed by Ricardo. However, just as he thought he had to put the Hegelian doctrine on its feet, Karl Marx also modified the Ricardian labour-value doctrine at least in two points and thus developed it further. On the one hand, he tried to apply the labour theory of value also to explain the value of labour. On the other hand, he saw in the labour value not only a yardstick and a control variable and thus a relative variable, but the labour value served him as a yardstick for the absolute value of a good.
It was therefore not only true for goods that their value was determined by the number of hours worked, but labour itself also obtained its value from the fact that labour must be expended in order to reproduce and maintain labour power. The worker only remained in a position to work if he fed himself and regenerated his labour power in the leisure time remaining to him. Since, according to classical ideas, the value of a good does not primarily depend on how many hours of labour were actually expended to produce a good, but only on how many hours of labour are necessary to produce a good, for Marx the subsistence minimum (of goods and leisure time) is considered the yardstick for the value of labour power.
Here, Karl Marx adopts the result of the Ricardian theory of development, according to which the wage rate has the tendency to descend to the subsistence level. However, Karl Marx deviates from the ideas of Ricardian theory to the extent that, in contrast to Ricardo, he does not attribute this tendency to lower wages to the scarcity of land, but to the way in which technical progress developed. For David Ricardo, it was the increasing scarcity of land that should lead to a permanent reduction in the wage level. The land rent was rising because of the increasing scarcity of land, with the consequence that a smaller and smaller share of production remained for the payment of the workers.
Karl Marx, on the other hand, tried to explain the tendency to lower wages by the fact that the organic composition of capital was permanently deteriorating. The capitalists were under pressure, triggered by mutual competition, to again accumulate (i.e. invest) their profits, the surplus value. In this process, however, an ever larger part of the capital would not be used to buy labour, but to procure technical equipment. Today we would say that technical progress was labour-saving.
The Marxist idea that only labour produced value and that therefore, with labour-saving technical progress, the total value of production declines, then leads to almost absurd conclusions. The per capita income of the population rises, the total population can afford an ever higher standard of consumption; nevertheless Karl Marx speaks of a decline in the total value of production instead of recognising that households derive an increase in utility not primarily from the fact that the labour input for the production of consumer goods has increased, but from the fact that they can consume more and better quality goods.
The correlations between technical progress and unemployment are in reality much more complicated. The first thing to note is that technical progress - especially when it is of a labour-saving nature - does on the one hand lead to a substitution of labour by capital and can thus partially trigger unemployment, but that on the other hand this effect also triggers compensation processes, since technical progress is always associated with an increase in investment, which in turn triggers an increase in demand for labour and thus at least partially offsets the job-destroying effect of the substitution processes. It is therefore by no means certain that every labour-saving technical progress leads to unemployment.
Secondly, Erich Streißler has shown that technical progress was in fact capital-saving and not labour-saving in the long run, labour-saving was only the relatively small part of the investments in machines; in the long run, however, the capital-saving effects had an impact on the investments in warehouses, which themselves were made possible by technical progress in transport. Thus, in reality we had mainly a technical progress that saved capital and just not labour.
Thirdly, the question of which technical progress will ultimately prevail on average is by no means invariably predetermined, but is itself in turn dependent on how the wage-interest ratio develops. If the wage rate rises more strongly than the interest rate, capital-intensive production processes become more advantageous for enterprises and they will indeed reduce jobs through mechanisation. If overall unemployment rises in this way, it is only an indication that a kind of technical progress has been triggered which is by no means desirable from a social point of view. It could have been avoided if the wage-interest ratio had developed in accordance with the scarcity ratios.
Labour-saving technical progress is only desirable in social terms if there is a shortage of labour; if due to this shortage technically possible increases in production and thus welfare gains would have to be omitted. Here it means a welfare gain if production can be increased through mechanisation without causing unemployment. The decisive point is that precisely Keynesian theory - contrary to its political intentions - has contributed to the fact that the recommendations it makes do not increase employment, but even destroy jobs in the long run.
According to Keynesian ideas (though not necessarily according to Keynes himself), in times of economic downturn, on one hand wages should be raised more than labour productivity increases (demand for an expansive wage policy). On the other hand, interest rates are supposed to fall in order to increase the volume of investment. However, both measures together lead to an increase in the wage-interest ratio, with the consequence that increasingly capital-intensive production methods are adopted. Although the volume of investment increases, it is mainly rationalisation investments rather than expansion investments that are carried out, which tend to destroy jobs rather than create new ones (in the case of job-saving technical progress).
4th The value determination in the marginal utility school
As already mentioned, the main interest of the marginal utility school, just as with the old classics, is the question of the determinants of prices, whereby it is also not - as with the classics - primarily a question of the absolute level of prices, but rather of the price relations to each other, and this again because the neoclassics also recognise the central role of prices within the framework of production control.
If one attempts to attribute the value of a good to the utility that this good provides to the end consumer, then one is faced with a similar problem as the old classics were faced with when they attempted to make the costs responsible for the level of the value of the good. We have already seen above that a theory which attributes the value of a good to the level of costs required for production is faced with the problem that such a theory can only satisfy if one starts from a single factor of production. If one recognises that a multitude of production factor types is always necessary for the production of a good, one has solved the problem of no theory of value, since one attributes one unknown (value of a good) to other unknowns (value of several production factors). However, a theory of value is only satisfactory if it succeeds in tracing the unknown problem variable (value of a good) back to variables which can all be assumed as being known.
The problem of the theory of marginal utility, which is comparable to this, is that the value that a good creates on the basis of the utility it provides must be attributed to the individual factors of production that were used in the production of the product. Just as the classics had to recognise that, as a rule, several types of production factors are used in the production of a good, the marginal utility school cannot avoid this knowledge. Only if a single factor of production, such as homogeneous labour hours, were used, could the value of the good be attributed 100% to this homogeneous factor. Since, when several inhomogeneous factors are used, it is initially unclear how much the individual factors have contributed to this value creation, the real problem of any theory of marginal utility is to attribute the total value of a good to the factors of production involved in its production. And just as at the centre of the Ricardian theory of value is the proof that only the standardised labour hours required in production are included as cost factors, just in the same way at the centre of the theory of marginal utility is the so-called attribution problem to the individual factors of production.
The problem of attribution is as follows: If we derive the value of a good from the utility that final consumers experience in consuming that good, then the question arises as to how this total value can be allocated to the individual factors of production involved in its production.
In principle, two different methods can be applied here. It is possible - as was later done by the Anglo-Saxon representatives of neoclassical theory - to understand the value of the individual factors of production as the direct result of the market, whereby mainly the market form realised in each case decides what remuneration the individual factors of production achieve. This is the path taken primarily by John Bates Clark, whom, however, we do not want to analyse in more detail here in this lecture.
However, one can also attempt to clarify what part the individual factors of production have contributed to the obtainment of the total value. This is the path taken by Karl Menger, Böhm-Bawerk and Friedrich von Wieser, which approaches the problem of attribution from a welfare-theoretical perspective rather than a positive, explanatory one. We will briefly discuss the presentation of these three authors, whereby each of these authors follows a slightly different path.
Let us start with the attempt made by Karl Menger. Karl Menger determines the value of a production factor using the so-called deduction method. First of all, the total value of a good on the market is taken as a basis. The next step is to consider how the total value would be reduced if the factor of production under investigation were to be subtracted in thought. The difference between the initial total value and the remaining value after deducting a factor would then be the value attributed to this factor. If a good initially reaches a value of 100 and if, when labour is deducted, it would only reach a value of 40, the value of the labour factor could justifiably be taken as 100 - 40, thus 60.
Here, it must critically be pointed out immediately that if one wanted to completely subtract a production factor, such as the labour factor, no product could be produced, because the production of almost all goods always requires all production factors under discussion. Production takes place on a certain terrain, so that the factor land is needed in any case; furthermore, as a rule, labour is used to create the final products, so that no product is created without the use of labour. Finally, capital is needed to be able to pay the workers immediately, before the entrepreneur receives the funds to pay the workers through the sale of the finished products. Or capital is needed to buy machines. Also here, one will have to assume that without any capital, production would not have been possible, one would not have been able to pay the workers immediately and production could not have been started at all without machines.
Thus, if we subtract in thought one factor entirely, we would have to assign to each factor the total value of the product, and here we get into a logical contradiction. The sum of the charges for all applied production factors cannot be larger than the total value, more is not to be distributed; on the other hand, results with the suggested solution a value of the threefold sales revenue, if we once assume three production factors (work, soil and capital).
The solution of the problem lies, of course, in the fact that we apply the marginal analysis. The deduction of a production factor should not refer to the factor as a whole, but in the sense of the marginal analysis always only to a small (infinitely small?) unit. Just as in the market the price of a good is related to the marginal utility of the last good demanded, also in the deduction procedure proposed by Karl Menger we determine the remuneration of a production factor by asking how the value changes if the factor under investigation is reduced by one unit.
In such a marginal analysis, we can generally very well assume that, with only marginal deductions, the production of the good is still possible, and this is because in almost any production some degree of mutual substitutability of the factors of production is possible. If one worker fails, another worker can step in; it is also conceivable that, by slightly modifying the production technique, production can be maintained with a smaller number of workers.
However, an important problem remains, which was not solved by Karl Menger. It remains completely unclear whether in this procedure the total value of a good really corresponds in the end exactly to the sum of the remunerations of all factors of production calculated in this way. It cannot be excluded that in this way the sum of the remunerations turns out to be larger or smaller than the total value of the good.
A solution to this problem was later proposed by the neoclassics, who followed the first path mentioned above (immediate market solution), in the so-called exhaustion theorem.
Let us now turn to the method proposed by Eugen von Böhm-Bawerk to solve the attribution problem. Böhm-Bawerk also starts with the same approach as Menger, i.e. he starts from the total value of the good and marginally reduces a factor of production by one unit. Unlike Karl Menger, however, Eugen von Böhm-Bawerk determines the value of this deducted production factor by asking by what amount this factor would increase the total value in another use.
Since, of course, in general not only one but several uses of a production factor are known, we still have to clarify in which use the deducted production factor is to be used. The answer is clear: We can order the individual uses (and these are indeed productions of goods) according to their value. We assume that initially each factor was used in the best possible use and that after the deduction from the best possible use, this factor is put to the second-best use.
Let us illustrate this relationship by means of an example: The total value of the first examined good A is again 100 units. One unit is subtracted from the production factor labour, so that the residual value of good A would be 80. This freed-up factor is now used in the production of good B (the second-best use). The value of good B was originally 200 and now increases to 230 due to the use of this factor.
In this case, the value of the deducted factor in the Böhm-Bawerk method is 230 - 200 = 30, while in the Mengers method it would have been only 100 - 80 = 20.
One can now combine both methods, i.e. run them one after the other, and determine the value of the production factor in question according to which method would have achieved the greater value. In our example, Böhm-Bawerk would be used and the value of the factor in question would be 30.
Basically, both methods are subject to the same criticism, so that it is sufficient at this point to refer to the criticism of Menger's method. Since the third method for the solution of the attribution problem to be presented: the method of Friedrich Wieser begins with a criticism of the methods already discussed, we can immediately continue our analysis with the presentation of Friedrich von Wieser's solution.
Let us finally turn to the third variant of the attribution problem, which was proposed by Friedrich von Wieser. He opposes the solution attempts of Karl Menger and Eugen von Böhm-Bawerk, since these would only be able to determine the second-best solution in each case. However, he was interested in the payment in the case of the best possible use and this would always bring a higher value than in the case of the second-best alternative.
In reality, the true values of the individual factors of production could only be determined with the help of a simultaneous system of equations. Here, this system of equations would reveal the correct values of all production factors in their best use.
However, Friedrich von Wieser's criticism of Karl Menger and Eugen von Böhm-Bawerk should not be overestimated either. Of course, it is basically true that the first-best value is always higher than the second-best. However, the marginal utility school uses marginal analysis, which actually assumes infinitely small steps. However, if smaller and smaller input quantities are changed, and therefore the input quantities changed in each case approach zero, the differences between the first-best and second-best uses necessarily approach zero as well. The difference between the two values can then be neglected.
5th Value creation in the Cambridge School
Of all three variants of neoclassics, the Cambridge school still adheres most closely to the ideas of the older classics. Together with the classics, first and foremost David Ricardo, the representatives of the Cambridge school also assume that the value of goods is co-determined by the supply side and that costs are therefore a major determinant of long-run prices of goods.
Unlike the older classics, however, these neoclassics start from the conviction that demand factors, just like supply factors, also contribute to price. The scissors example of Alfred Marshall, the main founder of the Cambridge school, is famous: Marshall compares price formation with a cut by means of scissors; both blades of the scissors would perform the cut of a piece of paper. One could, of course, hold one blade of the scissors in one's mind and then draw the conclusion that the other blade of the scissors had made the cut.
If we continue this beautiful illustration of the cut of the scissors, we can see that while it is generally the case that both blades, i.e. supply and demand, determine the price, under special conditions situations are also conceivable in which market outcomes are determined almost exclusively by only one side of the market, so that the other side of the market can be neglected respectively. In this sense, Keynesian theory can be understood as a theory that attributes unemployment solely to deficiencies in demand, just as Anti-Keynesian theory is understood as a theory that attributes unemployment primarily to supply factors.
Thus, we want to state that economic values fulfil the function of using the individual material resources in the most utility yielding way possible and that this function always refers to the relations of prices and not to the absolute price.
Now we have also seen that Karl Marx did not limit himself to understanding values in this relative sense; rather, Karl Marx always associated with his concept of value the value of a good in the absolute sense. In this understanding, economic values can only emerge through labour performance; for Karl Marx, values were thus quasi the coagulated labour performance itself. How is such an absolute understanding of value to be assessed?
If we limit ourselves to economic values, the individual material resources as well as the goods produced from these resources always represent only derived values. In this sense, a good only acquires value if it serves to realise certain goals. Goals can be the satisfaction of human needs, but they can also be goals that go beyond the mere satisfaction of needs. A goal can be anything that a human being can strive for. Only then and only to the extent that a good is able to fulfil one of these human goals does it acquire value. The value of a good is therefore always derived from the objective it serves and is never an end in itself.
If one likes to, one can speak in this context of the end justifying the means, but not in the often used sense that a means can already be considered justified if it is suitable to realise a specific goal. We have to assume that means almost never only have a positive influence on the goal that is being pursued with this means. In most cases, we have to reckon with the fact that the use of funds leads to negative effects on other goals. The use of a resource is only justified if the total net effect of the resource is considered desirable. Under certain circumstances, certain other objectives may be affected negatively. However, the resulting damage is considered to be less than the increase in welfare that can be achieved through this measure.