This research analyzes Adam Smith's conception of the theory of value, and its relationship to the development of wealth. In the development of economic theory, there have been three broad approaches to the analysis of value. The first approach concerns general use. The general use theories are based on an assumption that the value of a commodity is related to the functions for which it may used (Ekelund & Hebert, 1983, pp. 66-76). The second approach considers production costs, and is often referred to as the labor theory of value. The labor theory approach to the analysis of value postulates that value reflects the cost of production, as that cost is measured in terms of absorbed labor (Blaug, 1982, p. 95). The third approach concerns utility. The utility theory postulates that the final increment in demand and supply determines the exchange value of commodities (Barber, 1984, pp. 165-176).
Value determination, according to Smith, must be considered in two contexts utility and exchange, although Smith was not referring to marginal utility. In this context, he stated that:
The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use'; the other 'value in exchange'. The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it (Smith, 1978, pp. 131-132).
Smith, in The Wealth of Nation...