Exchange value refers to “the power of purchasing other goods which the possession of [an] object conveys” (Smith  1960, p. 32); in other words, it expresses the relative price of a good in terms of other goods. Although the concept of exchange value has always played an important role in economic thought, the analysis of how it is determined has been the subject of much controversy.
For Adam Smith, David Ricardo, and Karl Marx it was important to distinguish exchange value from use value. Use value was the utility or the value in the use of a commodity, and was seen as necessary but not sufficient for a commodity to have exchange value. This is illustrated by the paradox of value, whereby things that had the greatest use value, such as air and water, had the lowest exchange value compared to (for example) diamonds, which had a low use value but high exchange value.
According to David Ricardo, commodities derive their exchange value from two sources. First, “from their scarcity,” where commodities cannot be reproduced (e.g., rare paintings, coins, pictures, etc.). These commodities are, by their very nature, a very minor part of what is exchanged in any economy. Second, the majority of commodities are produced by “the exertion of human industry: and these commodities have their exchangeable value determined by the quantity of labour embodied in their production” (Ricardo  1951, p. 12). This labor theory of value, which was present in a more ambiguous form in Adam Smith’s writings, played an important role in the works of both Ricardo and Karl Marx. The relationship between labor values and prices has been a source of much controversy.
In discussing these three economists, it is also important to distinguish between values that are determined in this way, that is, natural values or prices and market prices. Market prices may diverge from their natural values owing to “accidental” or “temporary deviations” (Ricardo  1951, p. 89). However, competition in the form of capital seeking the most profitable activity will ensure that the deviation is temporary and will establish a long-run tendency toward uniform profit rates through the economy. “The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating” (Smith  1960, p. 65).
It is important to note that the factors that determine the natural price are different from the factors that bring market price toward natural prices. This is important because it means that the natural prices will not be influenced by the path taken by market prices as they adjust to their natural levels (Kriesler 2003).
For Marx, the essence of a commodity is that it is produced for its exchange value; in other words, it is produced specifically in order to be sold. It is the generalization of commodity production into all spheres of society that he saw as one of the important results of capitalism. According to Marx, exchange value reflects the underlying social relations and “is in reality only an outward form of the social relation between the … producers themselves” (Sweezy 1968, p. 27, emphasis in original). So the market expression of exchange values reflected deeper social relations. This view should be compared with that of John Stuart Mill, for whom exchange value did not arise “from the nature of things,” but was “created by social arrangements” (Mill  1994, p. 54).
From the 1870s a new version of economics, sometimes referred to as “neoclassical theory,” came into favor, and has since become the dominant orthodoxy. The essence of this new theory was a subjective theory of value, where exchange value is determined by utility at the margin. In neoclassical economics, the distinction between use value and exchange value is abolished, as exchange value is now determined by use value at the margins, and the distinction between market and natural prices also disappears. In place of the latter is a distinction between short-run and long-run price determination, with both involving the determination of equilibrium values by the same forces—supply and demand. However, as the forces of supply and demand both determine the equilibrium position of prices in the short and long runs, and push the economy to those equilibria if it deviates, the problem of path determinacy arises. As a result, equilibrium exchange values cannot be determined, in neoclassical theory, independent of the adjustment path of the economy.
SEE ALSO Economics, Classical; Economics, Neoclassical; Equilibrium in Economics; Labor Theory of Value; Marx, Karl; Prices; Ricardo, David; Scarcity; Smith, Adam; Utility Function; Value
Kriesler, Peter. 2003. The Traverse. In The Elgar Companion to Post-Keynesian Economics, ed. John Edward King, 355–359. Cheltenham, U.K.: Edward Elgar.
Marx, Karl.  1990. Capital, Volume 1. London: Penguin.
Mill, John Stuart.  1994. Principles of Political Economy, ed. Jonathan Riley. Oxford: Oxford University Press.
Ricardo, David.  1951. On the Principles of Political Economy and Taxation, ed. Piero Sraffa with the collaboration of M. H. Dobb. Cambridge, U.K.: Cambridge University Press.
Smith, Adam.  1960. An Inquiry into the Nature and Causes of the Wealth of Nations, Vol. 1, ed. Edwin Cannan. London: Methuen.
Sweezy, Paul. 1968. The Theory of Capitalist Development. New York: Monthly Review Press.