Carl Menger: The Nature of Value
Somewhat ironically, it was one of the greatest philosophers who has ever lived, Aristotle, who was perhaps most responsible for steering the discipline of economics down a false trail. Since the time that he expounded his views, economics has been struggling to rid itself of Aristotle's first, false step.
Consider the following passage from the man known in the Middle Ages as "the philosopher":
"Money, then, acting as a measure, makes goods commensurate and equates them; for neither would there have been association if there were not exchange, nor exchange if there were not equality, nor equality if there were not commensurability."  (All emphases mine.)
Aristotle posits that if there were no common medium of exchange (money) that could determine equality—presumably of value—between goods, then there would be no market exchange, and, indeed, no association of humans beyond the scope of the household.
If, as per Aristotle, money serves to "measure" some "equality" between goods and exchange depends on the ability to establish such equality, then it follows that this equality must exist prior to exchange. Goods themselves must possess some property that makes seven of good X equal to three of good Y. If that is the case, then economists ought to search for the factor by which certain quantities of certain various goods can be declared equal to each other.
The two most obvious places to look for such a factor were in human effort and natural bounty. Relatively early in the history of economics, Sir William Petty (1623–1687) proposed a theory of value that relied on both of these factors. According to Petty, "all things ought to be valued by two natural Denominations, which is Land and Labour."  Karl Marx, among others, famously based his value theory on the amount of labor that went into a good. If the worker did not receive 100% of the final price of a good he made, he was being "exploited."
The problem with all such efforts to conceive value as dependent on some "objective" factor is that they are viciously circular. If the value of a flute depends on the labor that went into constructing it, then how do we determine the value of that labor? If the value of a head of lettuce depends on the value of the land that produced it, then how do we explain the value attached to that land?
Marx himself recognized, but didn't resolve, this difficulty. He understood that someone who labored all day vigorously smashing chairs could not expect the same pay as someone who worked building them. He declared that it was only "socially useful" labor that determined value. But how in the world could we characterize "socially useful" labor other than by the fact it produced "socially useful" things? In other words, we are still stuck in a circle, explaining the value of goods by the labor that went into them and the value of that labor by the goods it produces.
It was perhaps the Austrian economist Carl Menger who was most responsible for diverting economics from this barren path, although certainly he must share credit with William Stanley Jevons and Léon Walras, who arrived at similar conclusions as Menger almost simultaneously.
Despite his intellectual roots in Aristotlean thought, Menger was wise enough to see that Aristotle had erred in regards to exchange. One can make no sense of the relationship of value to market prices if one regards value as a property of goods themselves. Since the properties posited as "inhering" in goods, such as land and labor, are themselves traded on the market, such explanations must always beg the question as to how those "determinants" of value are priced.
Menger's breakthrough insight was to realize that "[v]alue is… nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs... and in consequence carry over to economic goods as the… causes of the satisfaction of our needs." (Principles of Economics)
In other words, value is the name of an attitude or disposition that a particular person adopts toward a good: he chooses to value it. Although Menger set economics on the path to a correct theory of value in 1871, ancient errors die hard. We can still find many erroneous conceptions of value in contemporary discussions of economic issues.
For example, it is quite common to refer to money (or gold, or financial assets) as a "store of value." But an attitude cannot be stored! You cannot pour some of your attitude towards goods into a bar of gold, put it in a vault, and hope it "keeps." You can, of course, store the gold bar. And you will certainly hope that when you decide to take it from the vault and sell it, that others will choose to value it as well. But only the gold was stored.
Money is also referred to as "a measure of value." But if, following Menger, we regard valuing as an attitude people take towards things, then money certainly cannot measure value, since money itself is simply another thing that people choose to value (or not). Rather than "measuring" the value of other goods and services, money itself is valued by human actors based on its adequacy as a commonly accepted medium of exchange.
Another common, troublesome phrase claims that in free markets, people "trade value for value." But if we realize that value names an attitude or disposition, we see that the phrase is misleading. I can trade some gold that I value with you for a sheep you value. If such a trade takes place, you must also value my gold and I your sheep. In fact, you must value my gold more than you value your sheep, and I must value your sheep more than I value my gold.
When we exchange these goods, my attitude toward the gold does not transfer to you with the gold, nor does your attitude toward the sheep become mine. If that occurred, we would wind up immediately trading them back again, since before the first trade you valued the gold I was offering more than the sheep, and I valued the sheep you offered more than the gold I made available.
In fact, there is nothing fishy about my trading something I don't value at all for something you have that I do value. Perhaps I have a painting I consider awful, and I am about to throw it away. But you visit and upon seeing it exclaim: "What a great painting! I'll give you $100 for it."
Now, it might be charitable of me to say, "No, just take it." But it is not immoral for me to accept the money. Lest anyone think that the idea that it is not dishonest to profit from such a deal is a recent product of "bourgeoisie mentality," see Sir Lionel Robbins noting:
"Saint Thomas says that if a merchant arriving at a place of dearth, knowing that there are merchants, let us say, a week behind him who are due to arrive at a place of dearth and who will bring the price down, he is not committing a mortal sin if he sells at the prevailing price in the place of dearth—although Saint Thomas adds that it might be more virtuous if he revealed that there were other chaps speeding along about a week behind." 
The error contained in the idea of "trading value for value" is closely related to the notion that goods should sell for close to what they cost to produce. If I sell a computer program for far more than it cost me to make it, many people would call my price a "rip-off." After all, if exchanges properly take place when the "exchanged values" are "equal," then any profits earned by one party to the trade must be illicit.
We see this idea in "cost-plus" pricing to set utility rates. Of course, this tempts utility executives to drive up costs in order to charge higher rates, since some of those costs can be perks for themselves. This is known as "padding the rate base." Regulators have tried to allow only "reasonable" costs, but that raises the issue of how regulators are to gauge better than company executives what is a reasonable expense.
The subjective nature of the value of consumer goods extends to all of the layers of producer goods. Producer goods are priced according to the estimated value of the consumer goods they might produce. It is true that products requiring high-priced inputs will generally command a high price themselves. But that is because, unless a product can fetch a high price, producers will not use expensive inputs to make it. If people value diamonds highly for jewelry, no one will consider using them for ordinary windows, even if they might work well for that purpose. It is not the fact that diamonds are expensive that makes diamond rings expensive; it is the fact that people value diamond rings highly that makes diamonds expensive.
Wine producers place a high value on Napa Valley vineyards because consumers place a high value on Napa Valley wine. If they did not, real estate there still might be expensive, but it would be devoted to housing developments or something else other than vineyards. If the wine were lousy, no producer could expect a high price for it just because his land cost a bundle!
Consumers just don't care how difficult it is to manufacture a product. They care how much satisfaction they will get from it. It would be very difficult for me to write articles while holding my breath underwater, but that will not up the fee a magazine or website will pay me for an article. Of course, I might turn the process itself into a spectacle or show, but in that case I'd really be selling the spectacle plus the article.
So, in conclusion, let me ask: is there anyone out there who will pay me extra for underwater economics writing?