Subjective theory of value
The subjective theory of value is a theory of value which advances the idea that the value of a good is not determined by any inherent property of the good, nor by the amount of labor required to produce the good, but instead value is determined by the importance an acting individual places on a good for the achievement of their desired ends. This theory is one of the core concepts of the Austrian School of Economics. While the modern version of this theory was discovered independently and nearly simultaneously by William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century it had in fact been advanced in the Middle Ages and Renaissance but did not gain widespread acceptance at that time.[unreliable source?]
In the context of a free market, several major conclusions follow from the theory. The theory contrasts with normative versions of the labor theory of value that say the exchange value of a good should be proportional to how much socially necessary labor went into producing it. The subjective theory of value is a denial of intrinsic value. It leads to the conclusion that there is no proper price of a good or service other than the rate at which it trades in a free market. Whereas the labor theory of value has been used to condemn profit as exploitation, the subjective theory of value rebuts that condemnation: every exchange in a free market is voluntary, and thus mutually beneficial. If the exchange were not mutually beneficial, then it would not take place at all (for an exchange to be voluntary, there are two requirements. 1: Both parties have to agree, 2: Neither party is causing or threatening to cause the other party suffering). i.e. "I scratch your back if you scratch mine." Neither participant of this exchange made any direct actions meant to cause the other participant's back to be itchy in order to force the exchange. Rather, the itchy back is something that occurred on its own. In a free market, as a result of competition, if any party does not offer a good enough deal to the other party, then the other party will get a better deal from someone else (leading to market equilibrium prices), preventing the party that offered the first deal from benefiting at all. If a buyer offers $100 for a good, and the seller subjectively values that good more than he or she values $100, then the seller will reject the offer. Prices are not required for a consumer to subjectively value a good. Rather, a consumer compares his or her subjective valuation of a good (after having already subjectively valued the good) with that of the cost of buying the good when determining whether or not to make a purchase. Market equilibrium prices reflect supply (how scarce a resource is) and demand (how needed or wanted a resource is). Demand is affected by peoples' subjective valuations of the good or service (people would not spend money on something they didn't value).
The subjective theory of value supports the inference that all voluntary trade is mutually beneficial. An individual purchases a thing because he values it more than he values what he offers in trade; otherwise he would not make the trade, but would keep the thing he values more highly. Likewise, the seller agrees to trade only if he values his good less than the price or good he receives. In a free market, both parties therefore enter the exchange in the belief that they will both receive more value than they give up.
In turn, this leads to a third important conclusion: the mere act of voluntary trade increases total wealth in society, where wealth is understood to refer to an individual's subjective valuation of all of his possessions. In contrast to intrinsic-value theories, which tend to support the conclusion either that wealth creation is impossible (zero-sum), or that wealth creation is possible only by the application of labor, the subjective-value theory holds that one can create value simply by transferring ownership of a thing to someone who values it more highly, without necessarily modifying that thing.
The development of the subjective theory of value was partly motivated by the need to solve the value-paradox which had puzzled many classical economists. This paradox, also referred to descriptively as the diamond-water paradox, arose when value was attributed to things such as the amount of labor that went into the production of a good or alternatively to an objective measure of the usefulness of a good. The theory that it was the amount of labor that went into producing a good that determined its value proved equally futile because someone could easily stumble upon the discovery of a diamond while out for a hike, for example, which would require minimal labor, but yet the diamond could still be valued higher than water.
The subjective theory of value was able to solve this paradox by realizing that value is not determined by individuals choosing between entire abstract classes of goods, such as all the water in the world versus all the diamonds in the world. Rather an acting individual is faced with the choice between definite quantities of goods, and the choice made by such an actor is determined by which good of a specified quantity will satisfy the individuals highest subjectively ranked preference, or most desired end.
Marxist Paul Mattick argued that the subjective theory of value leads to circular reasoning. Prices are supposed to measure the "marginal utility" of the commodity. However, prices are required by the consumer in order to make the evaluations on how best to maximise their satisfaction. Hence subjective value "obviously rested on circular reasoning. Although it tried to explain prices, prices were necessary to explain marginal utility". Mattick denies the relations between the human mind and the external world proposed by Carl Menger and modern subjectivists.
- Demonstrated preference
- Eugen von Böhm-Bawerk
- Free price system
- Marginalism, the theory of marginal value
- Intrinsic theory of value
- Labour theory of value
- Power theory of value