Adam Smith's Classification (Value In Use vs. Value in Exchange) Caused Much of the Present Confusion When Using the Term “Value”

No term affords a better illustration of this than the word Value. It is deeply rooted in popular conception and in popular speech. Of all words used in economic theory, it has most need of exact definition, because there the theory of value occupies the chief place. Yet the history of economic science is strewn with the wrecks of theories of value.

Every one knows Thornton's story of how Sydney Smith retired from the Political Economy Club, because his chief motive for joining it had been to discover what Value was, while all he had discovered was that the rest of the Club knew as little about the matter as he did! Every one, too, has smiled at Mill's statement, made in 1848, that there was nothing in the laws of value which remained for him or for any future writer to clear up. And many felt sympathy with Jevons when he threw the term overboard altogether, declaring that neither writers nor readers could avoid the confusion so long as they used the word.

But although it might be possible, by a very strict attention to proof sheets, to keep the word out of a book, it would not be possible to keep it out of the economist's mouth, any more than it would be to banish it from ordinary speech. And—happily, as it seems to me—the recent writings of the Austrian school have shown that we may retain the old familiar word, and yet attain the exactitude of scientific nomenclature.

There is a time-honoured classification to which is due much of the present confusion. In the Wealth of Nations (Book i. chap, iv.), occurs the following passage:

 "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 goods may frequently be had in exchange for it."

--William Smart, An Introduction to the Theory of Value: On the Lines of Menger, Wieser, and Böhm-Bawerk, 4th ed. (1920; repr., London: Macmillan and Co., 1931), 1-3.