Theory of imputation

For other uses of "imputation", see imputation (disambiguation).

In economics, the theory of imputation, first expounded by Carl Menger, maintains that factor prices are determined by output prices.

This is the opposite of the labor theory of value maintained by classical economists such as Adam Smith and David Ricardo.

The imputation theory was important because it addressed the question of economic value. Marginalist economists such as Carl Menger and Frank Fetter of the Austrian School maintained that value was not made up of the factors that made up a good; instead, it was made up of the most valuable use that the last unit of the good could be put to—the marginal utility of the finished good.

While it was easy to maintain that this was the value of goods consumed by the end user (lower-order goods), it was harder to make this case for higher-order goods which had no end user and merely went into the making of lower-order goods. In effect, higher-order goods do have end users, the manufacturers of lower-order goods. It was these people whose marginal utility decided the factor prices, and their products were valued on their marginal utility to the end users. Thus the factors of production were as sensitive to marginal utility as consumer goods themselves.

See also

• Implicit cost
• Imputed income