There are many things Adam Smith got right about economics, including the discipline’s fundamental insight about the unplanned nature of market-driven economic and social order. He is rightly called the founder of economics for that reason. However, he did not get everything right. One of his most important errors, and one he shared with many 18th and 19th century economists, including Karl Marx, was his erroneous theory of value and explanation of price.

Smith was an adherent of what is known as the “labor theory of value” (LTV). At its most general, the LTV explains that the value (and price) of goods is determined by the amount of labor that went into their production. Sometimes the LTV is generalized a bit more to include other inputs, turning it into a “cost of production theory of value.” What is important here is that in all forms, the LTV and its broader interpretations see the value of outputs as being determined by the value of the inputs that went into producing them. On this fundamental point, Smith and the others got it exactly backward. Modern economics has rejected labor and other cost of production theories of value. Instead, value is understood as the subjective assessments by individuals of the usefulness of specific goods and services for satisfying their wants. This subjectivist and marginalist theory of value was developed in the 1870s and reversed the understanding of value in a way analogous to the way Copernicus reversed our understanding of the relationship between the Earth and Sun. By valuing outputs this way, we made valuable the inputs that created them . Goods don’t have value because labor has value; labor has value because the goods labor creates are valued by consumers. After exploring Smith’s views, I will outline the modern theory of value and show the ways it is superior to the labor theory of value.

Smith is very clear in The Wealth of Nations that he sees labor as the source of value. For example, in the opening paragraph of Chapter 5 on real and nominal price (I.v.1., p. 47), he writes:

The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labor which it enables him to purchase or command. Labor, therefore, is the real measure of the exchangeable value of all commodities.

And later in that chapter (I.v.7., p. 51):

Labor alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price.

Smith is quick to note, as the second quote suggests, that matters are complicated when we are in a world where goods are traded for money. He points out that not all labor is the same, so simply measuring, for example, the hours of labor that went into producing an object might not tell us just how much effort went into that process. Some labor is just more skilled than others. But Smith says there is no easy way to solve this problem by finding an accurate measure of labor. Instead, these differences are evened out by the “higgling and bargaining of the market.” Even so, he is emphatic that labor alone is the “ultimate and real” standard for the comparison of value.

In the rest of the chapter, Smith discusses the ways in which a good’s “real” value determined by labor is distinct from the money price of the good, which he refers to as its “nominal” price or value. In a barter economy, Smith argues, we could perhaps more easily trade goods at ratios that directly reflect the labor required to produce them, as in his famous deer and beaver example at the start of Chapter 6. However, in a world where money mediates almost all exchanges, the money price of a good is an “estimate” of the ultimate and real value determined by labor. Smith goes on to claim that labor’s value has a permanence to it that cannot explain the variations in nominal prices that we observe in the market. Those variations can be due to changes in the value of the goods and services that come from changes in the value of the money commodities (such as gold and silver) that are used to purchase them. Underlying all of those market processes, however, is the labor that is the common element in determining the value of all goods and services.

Smith and the other classical economists did not ignore the concept of utility in thinking about value. The idea of labor as the source of value is discussed primarily in the context of the exchange value of goods. But what of goods’ use value to those who possess them? Here the classical economists were stymied in their understanding by their inability to solve what became known as the “water/diamond paradox.” The paradox was that water, which is necessary for human life, is normally very cheap, while diamonds, which are a luxury, are normally very expensive. If utility helped explain use value, something was wrong here. his struggle with utility, and the recognition that not all labor was the same meant that converting labor time into price was problematic (and was the problem that ultimately vexed Marx). As a result classical economists like Smith had multiple problems explaining value and price.

Those problems were addressed in the 1870s in the work of three different economists, all of whom stumbled onto variations of the same basic idea. William Stanley Jevons in England, Leon Walras in Switzerland, and Carl Menger in Austria all realized, in different ways, that the key insight was that value was determined “on the margin.” In what is now known as the Marginal Revolution in Economics, they argued that value depended not on the total supply of a good but on the particular unit that was being considered for purchase or sale at a given time and place. This resolved the water-diamond paradox: what matters for the value of a good is not its “total utility” (what its total supply contributes) but its “marginal utility” (what the specific unit in front of us contributes). So with water, the marginal unit is a very small piece of the total supply, so there are many substitutes for the particular unit. We don’t buy all of the potable water in the world, nor a substantial portion of it. One bottle of water is a tiny fraction of the total supply, so the value of that specific unit is low even though the total utility of water is very high. Diamonds, by contrast, are the reverse. One carat of diamonds is larger portion of the total supply than one bottle of water is to the total supply of water. The greater scarcity of diamonds means that the marginal unit will be more expensive than the marginal unit of water.

The idea that value was about the marginal unit fundamentally transformed the way economics operated. “Thinking on the margin” has become the core of the “economic way of thinking.” What it means to think that way is to compare the additional benefits and additional costs of any prospective decision and chose the one that provides the most net benefits. Notice the use of “additional” there. That is capturing the idea of the margin. Facing a choice, we don’t consider the total benefits or costs of the good or service in question, but the benefits and costs of this particular unit in this specific context. For example, when a student considers skipping a class, the right comparison is between the benefits and costs of that specific hour of class, not the benefits and costs of the course, or of her education, as a whole. It would be wrong to say “I shouldn’t skip this class because my college education is too valuable.” The right question is whether the value of this specific hour of class is greater, on net, than the value of any other alternative use of her time. It’s the marginal utility of education not the total utility that matters.

So this explains the water-diamond paradox, but what of the labor theory of value? A close reading of the explanation above suggests the answer: in comparing the marginal benefits and costs, nowhere did I suggest that those costs are related to the labor involved. If anything, the explanation implies that the evaluation of those costs and benefits is done by the actor herself, and not by some objective, external standard. In fact, in the history of economics, the idea of marginal thinking is connected up with what is generally known as the “subjective theory of value” or “subjectivism.” During the 19th century, a number of writers glimpsed the idea that value might not be determined by the costs of production such as labor, but by the particular ways in which individual choosers believed that specific goods and services would satisfy their wants. Their struggle was that you could not fully explain subjectivism without the idea of the margin. It took the contributions of Jevons, Walras, and Menger to provide the missing piece to those earlier, incomplete discussions of subjectivism.

Interestingly, it is equally true that one cannot fully understand the importance of marginal thinking for a theory of value without subjectivism. To best see this point, I need to focus on the work of Carl Menger. Even as all three marginal revolutionaries discovered a common insight, they articulated that insight in very different ways. The presentation in Walras was the most mathematical, with Jevons’ book being somewhere in the middle, and Menger’s absent of any equations. This is important because both Walras and Jevons understood the concept of the margin to be a mathematical one. They demonstrated the concept by presenting a mathematical function for total utility and then showing that marginal utility was the first derivative of that function. In non-mathematical terms, the mathematical margin means how much the dependent variable (i.e., total utility) changes with a small change in one of the independent variables (i.e., the factors that determine total utility). So if we have one more unit of the good (one of those factors) and put that in the total utility function, how much will total utility change? That change is marginal utility, mathematically understood.

Conceptualizing utility as both something measurable and as something that could be put in a continuous function so that the tools of calculus could be applied were foreign to Menger’s presentation because the mathematical representation did not take the subjectivism of value seriously enough. Menger begins his Principles of Economics by carefully defining what makes something a good, or gives it any utility at all. He argues that it is our perception that an object can satisfy one of our wants that makes it a good. What differentiates “economic” goods from “non-economic” goods is that economic goods are scarce. We do not have a sufficient supply to satisfy all of the wants we might have for them. Thus, all goods have utility, but only economic goods have value. In modern terms, if using a unit of a good for one purpose means sacrificing its use for an alternative purpose, the good has value. For both utility and value, the key for Menger is that people believe that the object can satisfy some want. It is that belief that makes the object a good and gives scarce goods value.

Like Walras and Jevons, Menger had the concept of the margin in his value theory. For Menger, the “margin” referred to the fact that all wants had to be satisfied by particular amounts of specific goods. The value of a good is “the significance that each concrete unit of the available quantities of these goods has for our lives” (1985 [1871]: 116). The footnote attached to the phrase “concrete unit” is Menger’s response to the water-diamond paradox. He differentiates the value of a whole “species” (such as a particular kind of tree that is useful for fuel) from the concrete units we need to satisfy the specific wants we have in the current context. “Not species as such, but only concrete things are available to economizing individuals. Only the latter, therefore, are goods, and only goods are objects of our economizing and of our valuation” (1985 [1871]: 116 fn. 3, emphasis in original). He (120-21) later writes:

Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.

This summary of his argument contains both his subjectivism (value is about our “judgment” and “consciousness”) and his marginalism (value depends upon the “goods at [our] disposal” and not the total stock of the good). Once value is understood as thoroughly dependent on human perceptions about the usefulness of goods for satisfying wants of varying importance, subjectivism cannot be separated from marginalism because want-satisfaction will always depend upon specific “concrete quantities” of the good, and not the good’s “total utility.” What gives goods value is the belief in the ability of specific quantities of that good to satisfy specific human wants.

Suppose we have several uses for a one-gallon bucket of water. We can use it for drinking, we can water plants, we can wash clothes, or we can wash our car. Suppose we rank the importance of those uses in the order listed. And suppose we find ourselves with two such gallon buckets. Clearly, we will use one for drinking and the second for watering plants. The value of water to us can be looked at two ways. First, what’s the value of an additional gallon bucket? That is the importance we attach to the end of washing our clothes. The value of a bucket we already possess can be understood as the importance of the least pressing want we satisfied with a bucket – in this case, watering plants. Notice how the value of those gallon buckets is about the ability of “concrete quantities” to satisfy “specific ends,” and that the importance of those ends is determined by the subjective evaluation of the chooser.

Finally, we can see the idea of diminishing marginal utility here. The marginal utility of each additional bucket we obtain declines because the importance we place on the ends satisfied by each subsequent bucket declines. This also explains why we are willing to pay less per unit to purchase larger quantities of goods. We would not be willing to pay as much for the third bucket as the second given that the importance to us of washing our clothes is less than that of watering plants. This is the proper theory of value that lies behind the modern downward sloping demand curve.

By now, the way in which modern subjectivism and marginalism offer an alternative to the labor theory of value should be clear. Labor and other cost of production theories of value look backward to how a good was produced to find its value. Even a more sophisticated version that focuses on the value of the labor a good can procure still misses the key point that value is dependent on our beliefs about how goods can be used to satisfy our wants going forward. It is as consumers, not as producers, that we give goods value. The labor theory of value sees value being infused into goods through the process by which they are produced. But as Menger (146) points out, it does not matter to the value of a diamond whether we have stumbled across it on the ground or spent 1000 days digging it up. Value is forward looking, driven by our subjective perceptions of the way in which specific goods and satisfy specific wants.

This is where the marginalist revolution was the economics equivalent of Copernicus shifting our understanding of the solar system from a geo-centric to a helio-centric one. For Smith and others who accepted the labor theory of value, the value of the inputs determined the value of the output. After the 1870s, however, that understanding of causality was reversed. What we ultimately value are final goods that are able to satisfy wants. Because those final goods are believed to do have value, the inputs that went into making them also have value. Labor does not give goods value; the fact that goods are valued means that the labor that went into making them is valuable. The same is true with every other input. Value does not flow from input to output, or from production to consumption. Rather, it flows the opposite way. The value of inputs is derived from the value we attribute to the outputs. It is not the chef’s valuable labor that makes a gourmet meal valuable. It is the value we attach to the meal that makes the chef’s labor valuable.

 

This piece was first posted at AdamSmithWorks, part of the Liberty Fund network. For more from AdamSmithWorks about the Labor Theory of Value, check out Eric Schliesser’s piece, Smith’s Labor Theory Thought Experiment.

The post Adam Smith on the Labor Theory of Value appeared first on Econlib.

THIS SEEMS ABOUT RIGHT:  Judas Iscariot: Patron Saint of Wokery.

From Silva-Steele v. Enghouse, decided Thursday by the N.M. Court of Appeals, Judge Jennifer Attrep, joined by Judges Megan Duffy and Katherine Wray:

Defendant Adrienne Enghouse appeals a district court order permanently enjoining her from entering Plaintiff Jamie Silva-Steele's private, residential property. Silva-Steele initiated this case after Enghouse left a flyer, related to unionization efforts, at Silva-Steele's residence….

Before the incident giving rise to the injunction, Enghouse was attempting to unionize the employees of a hospital at which Silva-Steele serves as president and CEO. As part of her organizing activities, Enghouse leafleted Silva-Steele's neighborhood with informational flyers, leaving one at Silva-Steele's front door. {There does not appear to be any dispute that, because Silva-Steele's property was unposted at that time, Enghouse did not trespass on Silva-Steele's property when she left the flyer. The next day, however, Silva-Steele posted non-solicitation signs at her residence.}

In response, Silva-Steele filed a verified application for a restraining order in district court. Silva-Steele alleged in the application that Enghouse had "crossed the line by showing up at [her] house, and leaving … propaganda behind," causing her to "fear for [her] safety and the safety of [her] family." In relevant part, Silva-Steele asked the district court to order Enghouse to stay away from her home….

[At a hearing, c]ounsel for Enghouse admitted that Enghouse would be committing criminal trespass if she reentered Silva-Steele's property. Nevertheless, Enghouse, through counsel, refused to agree not to enter Silva-Steele's property in the future. After the hearing, the district court … found, "Enghouse … refused to acknowledge that the criminal trespass laws prohibit her from entering … Silva-Steele's property and testified that she intended to return to the property in the future." The court concluded, "Immediate and irreparable harm will result from … Enghouse's actions unless she is permanently restrained and enjoined from entering … Silva-Steele's private residential property." The district court thus permanently enjoined "Enghouse from entering the private property of … Silva-Steele for any purpose." …

The court concluded an injunction was authorized, despite the New Mexico Anti-Injunction Act:

The Anti-Injunction Act provides, "No court … shall have jurisdiction to issue a permanent injunction … in any case involving or growing out of a labor dispute, within the state," except after making certain findings:

1. that unlawful acts have been threatened or committed and will be executed or continued unless restrained;
2. that substantial and irreparable injury to complainant's property will follow unless the relief requested is granted; [and]
3. that complainant has no adequate remedy at law.

The first required finding under the Anti-Injunction Act is that "unlawful acts have been threatened or committed and will be executed or continued unless restrained." … Silva-Steele sent "an email to … Enghouse telling her that she was not welcome on the property and that any further attempt to do so would be considered a trespass, [and] Silva-Steele and her husband … posted non-solicitation signs at their residence." Notwithstanding Silva-Steele's actions, "Enghouse refuses to stay away from … Silva-Steele's family home, has stated again that she intends to go back there and that she has a right to do so. In other words, she plans to intentionally trespass on … Silva-Steele's personal family residence in the future."

It is a crime in New Mexico to "knowingly enter[ ] or remain[ ] upon the unposted lands of another knowing that such consent to enter or remain is denied or withdrawn by the owner or occupant thereof." In light of Enghouse's intent to commit criminal trespass of Silva-Steele's property, as found by the district court, Subsection 50-3-1(A) of the Anti-Injunction Act is plainly met.

The second required finding under the Anti-Injunction Act is that "substantial and irreparable injury to [the] complainant's property will follow unless the relief requested is granted." … [The district court concluded:]

The interest to be protected is … Silva-Steele and her family's right to the legitimate and private use and enjoyment of their home, and to be free from unwanted intrusions by … Enghouse.

New Mexico's recognition that a citizen has the right to be free from unwarranted intrusions onto private property is further embodied in its criminal trespass statute.

[A] trespass is an unauthorized entry onto another's property that disrupts the property owner's exclusive possession of the property…. Enghouse intends to trespass on … Silva-Steele's property in the future even though permission has been expressly denied and non-solicitation signs have been posted.

Silva-Steele and her family have the right to be free from interference and harassment by … Enghouse, and to the fully protected use and enjoyment of their home.

[There is an] ongoing threat that [Enghouse] will criminally trespass onto [Silva-Steele's] residential property should she desire to do so.

The injury with which … Silva-Steele is threatened is irreparable.

Immediate and irreparable harm will result from … Enghouse's actions unless she is permanently restrained and enjoined from entering … Silva-Steele's private residential property.

In light of these unchallenged findings and conclusions, [the substantial and irreparable injury element] of the Anti-Injunction Act is met.

The third required finding under the Anti-Injunction Act is that "[the] complainant has no adequate remedy at law." Related to this point, the district court made several findings and conclusions:

Silva-Steele is not seeking monetary damages but only wants to stop the unwarranted interference of her right to the use and possession of her private residential property. Recovery of monetary damages would be wholly inadequate in this case and would only lead to a multiplicity of lawsuits out of repeated acts of trespass by … Enghouse.

Because … Enghouse has announced her intention to continue to trespass on … Silva-Steele's private property in the future, equity must interfere and grant relief.

New Mexico courts have long held that injunctions are warranted when a defendant threatens repeated trespasses which would necessarily involve plaintiff in a multiplicity of suits…. Therefore, injunctive relief is appropriate.

Neither money nor criminal penalties can fully redress the rights that … Silva-Steele seeks to protect. There is no adequate remedy at law unless injunctive relief is granted.

Silva-Steele has suffered and will continue to suffer an irreparable injury for which there is no adequate remedy at law.

Enghouse—for good reason—makes no contention that threats of repeated trespass can be remedied by damages or are otherwise insufficient to support the issuance of an injunction….

And the court also rejected Enghouse's First Amendment argument:

Enghouse simply cites federal case law for the general proposition that "peaceful pamphleteering" is constitutionally protected. Although Enghouse's general contention is unobjectionable, it is not helpful to her. As Silva-Steele notes, Enghouse "fails to recognize that the constitutional balance weighs differently in circumstances involving the delivery of otherwise protected speech to an unwilling recipient in the recipient's own home." Cf. Rowan v. U.S. Post Off. Dep't (1970) (concluding that the First Amendment does not protect a right to force unwanted speech, through mailers, into a person's home). Enghouse does not respond to this point, nor does she otherwise explain how the prohibition against distributing leaflets at Silva-Steele's private residence, after permission has been expressly denied, amounts to a First Amendment violation….

Linda M. Vanzi and Edward Ricco (Rodey, Dickason, Sloan, Akin & Robb, P.A.) represent the CEO.

The post Injunction Against Further Leafletting by Union Organizer at CEO's Front Door appeared first on Reason.com.

While other media companies are abandoning discriminatory Diversity, Equity and Inclusion (DEI) policies, Disney appears to be continuing practices that could result in severe penalties, Federal Communications Commission (FCC) Chairman Brendan Carr says. Chairman Carr issued the warning in a Pod Force One interview with Host Mirada Devine, discussing how, during the Biden Administration, the FCC pumped “millions and millions” into promoting DEI ideology in an effort that distracted the FCC from its true mission. “That had real, practical consequences. So, Day One, we came in and we ended the FCC’s promotion of DEI,” Carr said, noting how the policies enacted under the previous administration were unjustifiably punitive, redundant and counterproductive. They even inhibited efforts to bring high-speed internet to the public, he explained. Companies, like Disney, that continue to cling to DEI ideology could face a range of penalties, including loss of their licenses, if they discriminate against employees based on race and gender, Chairman Carr said: “Disney, which owns ABC: there’s been some really concerning evidence that has come to light that Disney DEI practices, that they were effectively discriminating against people, based on race and gender. “We’re still looking at that, we’ll allow them to make their case, we have an open mind on it. But, we do have an investigation going on right now into Disney’s DEI practices.” “And it could get bad for Disney, depending on what the facts show,” Chairman Carr said. Currently, the evidence appears to suggest racial discrimination, Carr explained: “There is evidence that they were creating internal promotions, internal work groups – again, siloing and dividing people based on race and gender. “And, again, the evidence indicates, and there may be counter-evidence out there, that you had promotion opportunities, or you were judged, on how much you were promoting people based on skin color.” “That is something that is really invidious that I thought that, as a country, we had stopped doing 60, 70, 80 years ago,” Carr said. “And, I’m glad we’re getting back to treating everyone, regardless of skin color, regardless of any other protected characteristics, based on their merits. That’s how it should be.” “And, to be honest, it looks like they’re taking a pretty big hit at the box office; you see them pushing some of that stuff. It’s just not resonating with people,” Carr said. Meanwhile, family-friendly and pro-America content has proven to be extremely popular with the public, he said. “Again, it’s sort of a symptom of what I view the broader media ecosystem being out of place,” Carr said. “New York and Hollywood have never really been known for having the pulse of the cross-section of the country, but it got worse in the late twenty-teens and the early 2020’s, where we saw this significant explosion of DEI and woke ideology. And it was just fully embraced – hook, line and sinker – by New York and Hollywood.” Still, there appears to be a “course correction” taking place with other businesses regulated by the FCC and in the country, as a whole, Chairman Carr said.

Professor Lucas Engelhardt examines how mainstream economics has deliberately abandoned the history of economic thought, and why Austrian economists must keep teaching and re-teaching the great debates of the past.

It's not the story that Politico really wanted but unfortunately for them, it is the story they ended up with due to cold hard reality. The story in question by Erica Orden appeared on Sunday, "The Epstein files’ cottage industry." What is interesting is that none of the clients that the lawyers are representing is named Donald Trump despite the desperate Politico attempt in the summer of 2025 to link the President to Jeffrey Epstein culminating in SIX Epstein-Trump stories in a 24 hour period in July of that year. As you read the story about the new "cottage industry" for lawyers, the main takeaway is the absence of Trump as a client despite the previous red hot Politico hopium last year that this would not be the case. Scores of people named in the files — including high-profile figures as well as people whose names may have simply been mentioned in an email — have turned to criminal defense lawyers to help them navigate public scrutiny or professional blowback from their relationship with late convicted sex offender Jeffrey Epstein or his co-conspirator Ghislaine Maxwell. Major organizations and academic institutions have also enlisted some of the biggest white-shoe law firms to conduct internal investigations into their ties to Epstein and Maxwell.  Imagine if all those Politico writers last year forced to write Trump-Epstein tales could have traveled in a time machine to the current period and had seen such a story sans any suggestion that Trump had been implicated. Would they experience a sense of anger or frustration that all their work dig dig digging for that elusive Trump-Epstein connection had been for naught? Among the prominent clients of lawyers needing legal defense help  concerning the Epstein files was also someone who is easily much better known that most of  the others: Bill Gates. And the difference between Bill Gates and Donald Trump upon whom Politico was so focused on last year is that Gates actually does have a very strong connection to Jeffrey Epstein even beyond the fact it was a major cause for his divorce. Politico obviously isn't unaware of such a connection since last December it published this story, "Bill Gates appears in newly released photos from Epstein estate." Gates' absence from the current Politico story is even more mysterious since a few days ago, his Gates foundation popped up in the news with nefarious revelations about the strong ties that Epstein had to it as illustrated by this Vanity Fair article last Thursday, "Jeffrey Epstein's Lasting Grip on the Gates Foundation." Buried among the massive tranche of documents released by the DOJ in January and the roughly 4,000 pages of grants on the Gates Foundation website is yet another complicated Epstein story: ghost-written emails, Middle Eastern intelligence, a personal loan to the former head of a prestigious think tank who allegedly helped afford visas to young Eastern European women. Between 2013 and 2019, the Gates Foundation provided $8 million in grants to the International Peace Institute (IPI), a think tank that works closely with the United Nations and is focused on multilateral approaches to global peace and security. According to emails released by the DOJ, Epstein appeared to help facilitate a large portion of those funds. The most prominent of Epstein's clients and now his entire foundation has come under scrutiny due to the release of the Epstein files and yet Erica Orden somehow avoids mentioning him despite the fact this is something that would supercharge the Epstein files "cottage industry?" Last summer we saw the frenzy that Politico went into over someone it obviously detests so is the opposite effect now happening in which Politico provides cover to one it favors despite the revelations in the Epstein Files?