Understanding Value, Wages, Rent, Interest, and Profit in Economics
Subjective Theory of Value
The subjective theory of value, also known as the marginal theory, is based on idealism. It posits that individuals make personal or subjective decisions to maximize satisfaction, which is measured and assessed individually.
- Subjectivist utility refers to the ability of goods to satisfy human needs. Utility is linked to scarcity in determining an asset’s value.
- As an individual possesses more of a good, they assign it a lower utility (value).
- Law of diminishing returns: As an individual possesses more of an asset, the value assigned to each additional unit decreases in direct relation to the increase in the total units of the asset.
- Total Income: The total satisfaction an individual obtains from possessing or consuming goods.
- Marginal Utility: The increase in total profit caused by an increase of one unit consumed, possessed, or produced.
Objective Theory of Value
Karl Marx developed the objective theory of value. It seeks to historically explain the concept of value and has three main features:
- It is historical: It moves from the abstract to the concrete.
- It is objective: It analyzes the real manifestation of value in society and social value.
- It is social: The focus is on social value, not the individual’s valuation of a good.
Concept and Classification of Wages
A salary is compensation for labor. It is a historical category existing within a specific historical period: capitalism. Thus, a salary is the payment for labor or the price for the use of external labor.
Other related concepts include payment, pay, remuneration, and fees. Payment periods can be bi-weekly or weekly. Wages can be classified as follows:
- Individual Salary
- Salary for a specific task
- Total Wage
- Salary on
- Nominal Wage
- Maximum Wage
- Real Wage
- Average salary
- Base salary
- Salary Contract
- Minimum wage
- Wages for time
Objective and Subjective Theories of Wages
Objective Theory
The objective theory of wages, based on the labor theory of value, states that the socially necessary labor of all economically active members of society creates the social product. This product is then shared among the different social classes. This theory specifically studies and analyzes the capitalist system. A portion of the social product is distributed to workers as wage earners, determined by the objective laws of capitalism.
Subjective Theory
This theory, also called the marginal theory, argues that wages are the remuneration of labor. It relies on assumptions from the subjective theory of value and the declining productivity of factors. The subjective theory of distribution states that each factor of production is remunerated according to its marginal productivity. Thus, wages are determined by the marginal productivity of labor.
Differences Between Objective and Subjective Theories of Wages
- Wage determination in the objective theory is social, while in the subjective theory, it is individual, using curves and mathematical equations.
- The wage measure is objective in the objective theory and subjective in the subjective theory.
- The objective theory seeks to analyze all social relations of production and distribution in the capitalist system. The subjective theory is limited to the subject, the economic entity, or the company, making it unable to explain social wages and overall employment.
- The objective theory reflects facts as they are, while the subjective theory reflects facts as one would like them to be.
- The objective theory is based on socially necessary labor as the creator of value, while the subjective theory is based on marginal utility as the creator of value.
Theory of Rent
Concept: Rent is the payment made for land use. It is the portion of the crop that a tenant pays to the landowner for the use of the original and indestructible powers of the soil. Leasing is one form of rent. The landlord, who owns the property, leases it for a specified time through a contract, and the tenant uses the property and pays rent.
In the capitalist system, rent exists due to the monopoly of land ownership and the fact that land is a limited resource with varying quality. Rent is part of the economic surplus created by productive workers and can be spent on consumption or investment.
Ricardian Theory
Ricardo argued that rent exists because good quality land is scarce. As the population grows, lower quality or poorly located land must be cultivated. He proposed the concept of differential rent based on land quality differences. He illustrated that with the same quality of labor and capital but different land quality, only the owner of the best, most fertile land will receive rent.
He stated that the value of goods is measured by the labor required to produce them under the worst conditions. Consequently, the value and price of agricultural products increase when produced under poor conditions because it requires more work. He concluded, “…wheat is expensive because rent is paid, but rent is paid because corn is expensive…”
Marxist Theory
For Marx, rent is a portion of the surplus value generated by wage workers that is appropriated by landlords because they own the land. Rent represents the excess of the appreciation over the average profit of the land in agriculture.
Marginal Theory
The marginalist theory explains that landowners receive rent because they possess a productive factor that is scarce. Consequently, its marginal productivity increases proportionally as demand increases. There is a restricted, inelastic supply of land, and as the demand for land increases, so does rent.
Theories of Interest
Concept: Interest is the price paid for the use of borrowed funds. These funds can be used to buy goods or capital in the production process. Interest is what the lender receives when the loan is repaid.
Interest can be classified as:
- Short-term interest: Credit received for a period not exceeding one year.
- Long-term interest: Credit received for a period exceeding one year.
Based on the calculation method:
- Simple interest: Charged for the use of capital over a given period.
- Compound interest: Interest accumulated and added to the loan, generating further interest.
Marginal Theory
This theory links interest to the marginal productivity of loan capital and diminishing returns given a certain combination of factors. The interest rate is determined by the marginal productivity of loan capital.
Marxist Theory
This theory posits that interest is a portion of the surplus value, i.e., unpaid labor to employees. Credit capital owners take over the loan interest for a period.
Keynesian Theory
Keynes argued that interest is a payment for the use of money. It is a monetary phenomenon depending on both the supply and demand for money. The importance of interest lies in its influence on investment, which, in turn, determines the level of employment, income, and effective demand.
Theory of Profit
Concept: Profit is the surplus income a capitalist receives from their capital investment. The capitalist’s goal is to make a profit; once they recover their investment, the remainder is profit. Profit can be divided based on production and amount. A society’s income can be divided into wages and surplus value.
Subjective Theory
This theory, also called the marginal theory, argues that wages are the remuneration of labor. It relies on assumptions from the subjective theory of value and the declining productivity of factors. The subjective theory of distribution states that each factor of production is remunerated according to its marginal productivity. Thus, wages are determined by the marginal productivity of labor.
It indicates that there is a social value shared among society’s members. Wages constitute a part of this value, while profit, interest, and capital gains constitute other parts.