The Virtues of the ‘Knowledge Theory of Value'
Photo: jonathan nackstrand/Agence France-Presse/Getty Images
Kevin Hoover suggests that William Nordhaus relied on the labor theory of value in his paper on light (Letters, April 24). Yet Nordhaus actually used knowledge, not labor. He offered a method to measure innovation: the discovery and sharing of valuable new knowledge. Nordhaus measured the amount of knowledge per unit of time and observed that knowledge about light was growing exponentially, surpassing traditional measures of economic development. It is the time price over time that truly deserves our attention.
Economic theories offer different frameworks for understanding value, each rooted in distinct assumptions about what drives it, how it is measured and what it implies for economic systems. Adam Smith and Karl Marx proposed a labor-based theory of value, measuring 'surplus' and emphasizing scarcity, exploitation and redistribution. In contrast, we propose a 'knowledge theory of value,' grounded in abundance, innovation and entrepreneurship. This framework explains the vast differences between our age and the Stone Age. As Thomas Sowell observed, when we go to the market, we are trading knowledge, which creates value. We measure this creativity through time, specifically using time prices, the ratio of money prices to hourly income. As we discover and share more knowledge, time prices fall, reflecting increasing abundance.
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