What makes something valuable? Today, we know that value is in the eye of the beholder—that is, value is subjective. But for many years, people subscribed to the theory that the value of goods came from the amount of work that went into creating them: the “labor theory of value”.
For thousands of years, humans were sure that the earth was the center of the universe and the sun revolved around it. With the advent of systematic inquiry, scientists had to develop more and more complex explanations for why their observations of the universe did not fit with that hypothesis. When Copernicus and others offered an alternative explanation that was able to explain the observed facts, and did so more clearly and concisely, the heliocentric model triumphed. The Copernican revolution changed science forever.
There is a similar story in economics. For hundreds of years, many economists believed that the value of a good depended on the cost of producing it. In particular, many subscribed to the labor theory of value, which argued that a good’s value derived from the amount of work that went into making it.
Today, very few economists subscribe to the labor theory of value. But for those not educated in economics, the labor theory of value crops up all the time. Professor Horwitz uses the example of college students who think they should get a high grade, not because their essay was good, but because they worked very hard on it.
Have more examples of arguments based on the labor theory of value? Leave them in the comments! To get the creative juices flowing, check out this video on subjective value!