In a nutshell, Karl Marx thought economic value was determined by how much something cost to make, but he was wrong. Economic value is determined by how much someone is willing to give up to get something else. Jay W. Richards explains this well in Money, Greed, and God:
Marx’s prophecy that capitalism would destroy itself hinged on his labor theory of value. According to Marx, when a factory owner hires a worker to build a chair and then sells the chair for more than it cost to produce, the owner has taken more value than the good is actually worth. He’s taken its “surplus value.” Such profit is basically theft, since, on Marx’s terms, the chair is worth exactly what it cost to produce it. So the factory owner has gotten more than it’s really worth. This is why Marx speaks of capitalists “exploiting” workers, even if the workers have chosen to work for the salary they are given.
Without his definition of value, however, Marx’s argument collapses. The workers have received what they agreed to. The factory owner has wisely combined their labor with his resources. He then markets and sells the chairs for more than they cost to produce but not more than others will freely pay. He’s rewarded with profit for his entrepreneurial effort. There’s no injustice here, no exploitation, no contradiction that will inevitably lead to class warfare and revolution.
This may sound like philosophical nitpicking, but millions of people died in the twentieth century, in part because of Marx’s error. And it’s not yesterday’s news: millions of Christians still don’t get economics for the same reason. They compare the high salary of a business owner (who bears the risk) or a CEO (who may make decisions worth many millions of dollars) with the lower salary of an employee and assume that somebody’s getting the shaft. … Unless those workers were lied to or forced to work, or the CEO lies about his record, there’s no fraud here. Everyone has freely chosen to work for their wages. Of course, some of those workers may have limited choices. That’s regrettable, but it’s not fraud.
Economic value is not only in the eye of the beholder; the beholder’s eye can see things differently in different circumstances. I’ll value the same glass of water much more if I’m hot and thirsty, and miles from any other water, than if I’m sitting in my air-conditioned kitchen, where I can get a glass of ice water anytime I want. And I’ll value the tenth refill of that glass less than the first, even though the same amount of labor was required to make each of the glasses available to me.
Even though I need water to survive, I usually can get water whenever I want it. So it’s practically free. In contrast, a painting by Van Gogh, which no one really needs, is still really expensive. Part of the reason is because the paintings are scarce. Unlike with water, you can’t get Van Gogh free from a Dutch-impressionist dispenser in a department store. But that’s not the whole story. Van Goghs aren’t only scarce; they’re desired. Lots of people will cough up serious dough to get one of them. And this affects their price for everyone. That’s why I’d almost always prefer a Van Gogh to a glass of water. Only if I were dying of thirst would I prefer a glass of water to Starry Night, since in other circumstances I could exchange the painting for millions of gallons of water anytime I wanted.
Adam Smith, who held an on-again-off-again labor theory of value, struggled to resolve this paradox in his Wealth of Nations. It seems like a paradox if you’re looking for economic value in the wrong place. But it’s not a paradox once you realize that economic value has to do with how much I, and lots of other people, value goods and services in the marketplace.
Those insights were first developed by Christian scholars in the middle ages, but most Christian critics of capitalism still don’t know about them. Others have heard them but dislike them. Part of the blame for that lies with economists themselves, who often talk as if economics explains everything. For instance: “The measure of value,” said Austrian economist Carl Menger, “is entirely subjective in nature.” This sounds a lot like Protagoras’s claim that “man is the measure of all things.”
But the word value is fuzzy. It has several meanings. To say economic value is subjective is not to say, with many a college freshman, that “everything is relative.” We’re talking about economic value. My ultimate value in the eyes of God is not the same as my economic value. Our true value is not found in our intelligence, skin color, good grooming, strength, or stock-market prowess. No one has the authority to make one person more valuable than another. “All men are created equal”—equal in value and dignity—because all of us are created in God’s image. Our equality doesn’t vary with the wants and needs of consumers in the marketplace. So ultimately, the small handicapped child in rural India is worth just as much as Bill Gates, who has created millions of jobs. … But Bill Gates and that handicapped child don’t have the same economic value.