The term ‘value’ has two distinct meanings—value in use (utility) and value in exchange (purchasing … — Adam Smith

The term ‘value’ has two distinct meanings—value in use (utility) and value in exchange (purchasing power)—and the things most useful often have little exchange value, while things with high exchange value may have little use, exemplified by water and diamonds; this distinction frames Smith’s subsequent inquiry into the real measure and components of exchangeable value and the causes of deviations of market from natural price.

By Adam Smith, from La Richesse des nations

Key Arguments

Smith explicitly distinguishes two meanings of value: ‘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.’
He labels these ‘The one may be called “value in use;” the other, “value in exchange.”’
He observes the non‑correspondence between the two: ‘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.’
His famous example is that ‘Nothing is more useful than water; but it will purchase scarce any thing; scarce any thing 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.’
He then outlines the plan of his analysis of exchangeable value: to show, first, ‘what is the real measure of this exchangeable value; or wherein consists the real price of all commodities’; second, ‘what are the different parts of which this real price is composed or made up’; and, lastly, ‘what are the different circumstances which sometimes raise some or all of these different parts of price above, and sometimes sink them below, their natural or ordinary rate’, i.e., ‘the causes which sometimes hinder the market price… from coinciding exactly with what may be called their natural price.’
He links this to the preceding discussion by stating that these ‘rules which men naturally observe, in exchanging them either for money, or for one another… determine what may be called the relative or exchangeable value of goods.’

Source Quotes

These rules determine what may be called the relative or exchangeable value of goods. 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 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.

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 any thing; scarce any thing can be had in exchange for it.

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 any thing; scarce any thing 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. In order to investigate the principles which regulate the exchangeable value of commodities, I shall endeavour to shew, First, what is the real measure of this exchangeable value; or wherein consists the real price of all commodities.

It is in this manner that money has become, in all civilized nations, the universal instrument of commerce, by the intervention of which goods of all kinds are bought and sold, or exchanged for one another. What are the rules which men naturally observe, in exchanging them either for money, or for one another, I shall now proceed to examine. These rules determine what may be called the relative or exchangeable value of goods. 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.

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. In order to investigate the principles which regulate the exchangeable value of commodities, I shall endeavour to shew, First, what is the real measure of this exchangeable value; or wherein consists the real price of all commodities. Secondly, what are the different parts of which this real price is composed or made up. And, lastly, what are the different circumstances which sometimes raise some or all of these different parts of price above, and sometimes sink them below, their natural or ordinary rate; or, what are the causes which sometimes hinder the market price, that is, the actual price of commodities, from coinciding exactly with what may be called their natural price.

Key Concepts

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 any thing; scarce any thing 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.
What are the rules which men naturally observe, in exchanging them either for money, or for one another, I shall now proceed to examine. These rules determine what may be called the relative or exchangeable value of goods.
In order to investigate the principles which regulate the exchangeable value of commodities, I shall endeavour to shew, First, what is the real measure of this exchangeable value; or wherein consists the real price of all commodities. Secondly, what are the different parts of which this real price is composed or made up. And, lastly, what are the different circumstances which sometimes raise some or all of these different parts of price above, and sometimes sink them below, their natural or ordinary rate; or, what are the causes which sometimes hinder the market price, that is, the actual price of commodities, from coinciding exactly with what may be called their natural price.

Context

Closing section of the excerpt from Chapter IV, where Smith pivots from his historical account of money’s origin to a conceptual clarification of ‘value’ and sketches the agenda for his subsequent analysis of price and exchangeable value.