Value is at the core of everything!

Adam Smith found value - which he called "natural price"- by adding production costs.

David Ricardo - "The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labor which is necessary for its production"

Karl Marx - worked within the framework of David Ricardo's labor theory of value. The two most important differences were

• Emphasis on fixed capital
• Use of the labor theory of value to identify the source of profit.

The neoclassical economists essentially developed this out of Ricardo's theory of rent. The marginal theory of value finds value at the margin of production, just as Ricardo had found land rent to be determined at the margin of cultivation.

Facts for Marginal theory

• Increasing cost industries were the norm, not special cases. Costs/unit rise the more units of any one product are produced in a given period

• The desire for any particular good weakens the more units of that good we have consumed in a given period.

This was generalized into the law of diminishing marginal utility: The utility (pleasure) of consuming an extra (thus marginal) unit of any good or service declines as the number of units we have consumed in a period goes up.

The value to the consumer of the last unit consumed (the marginal unit) = cost of the last unit produced (again, the marginal unit)

The Nature of Capital is essentially past labor. Marx recognized that when he called it "dead labor." But there is a bit more to it.

Capital is a product of labor that has been held over time

Income Distribution is Exogenous - The solution is obvious. If we accept the precept that some non-economic forces determine how the net product gets divided between capitalists and workers, the problem disappears.