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Concept
Cost-of-production theory of value
Summary
In economics, the cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production (including labor, capital, or land) and taxation.
The theory makes the most sense under assumptions of constant returns to scale and the existence of just one non-produced factor of production. With these assumptions, minimal price theorem, a dual version of the so-called non-substitution theorem by Paul Samuelson, holds. Under these assumptions, the long-run price of a commodity is equal to the sum of the cost of the inputs into that commodity, including interest charges.
Historically, the best-known proponent of such theories is probably Adam Smith. Piero Sraffa, in his introduction to the first volume of the "Collected Works of David Ricardo", referred to Smith's "adding-up" theory. Smith contrasted natural prices with market price. Smith theorized that market prices would tend toward natural prices, where outputs would stand at what he characterized as the "level of effectual demand". At this level, Smith's natural prices of commodities are the sum of the natural rates of wages, profits, and rent that must be paid for inputs into production. (Smith is ambiguous about whether rent is price determining or price determined. The latter view is the consensus of later classical economists, with the Ricardo-Malthus-West theory of rent.)
David Ricardo mixed this cost-of-production theory of prices with the labor theory of value, as that latter theory was understood by Eugen von Böhm-Bawerk and others. This is the theory that prices tend toward proportionality to the socially necessary labor embodied in a commodity. Ricardo sets this theory at the start of the first chapter of his Principles of Political Economy and Taxation, but contextualizes it as only relating to commodities with elastic supply.
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