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Subjective theory of value

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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.[1] This theory is one of the core concepts of the Austrian School of Economics, but is also accepted by most other "mainstream" schools of economics. While the modern version of this theory was formulated 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.[2]

Overview

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: a buyer in a free market who offers to pay a price lower than that which is commensurate with the amount of labor used to produce the good merely communicates information to the seller about the value the good might create for the buyer. (The price offered is not a measure of subjective value; it is just a means of communication between the buyer and the seller.) The offer is in one sense an expression of the buyer's opinion, which the seller is free to reject.

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 wouldn't make the trade, but would keep the thing he values more highly. Likewise, the seller agrees to trade only if he values the good less than the price he receives. In a free market, both parties therefore enter the exchange in the belief that they will receive more value than they transfer to the other party.

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.

Diamond-Water Paradox

The development of the subjective theory of value was partly motivated by the need to solve the so-called 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. Based on these measures how could a diamond be valued greater than water? The measure of uselfulness or "utility" failed to solve the paradox because water is obviously more useful to an individual than are diamonds. But 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 an attempt to solve this paradox by positing 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.[3]

Criticisms

Economist 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".[4]

Notes

  1. ^ Mises, Ludwig von. "Human Action", 2010, page 96.
  2. ^ Gordon, David. "An Introduction to Economic Reasoning", 2000.
  3. ^ Callahan, Gene. "Economics for Real People", 2004, page 42.
  4. ^ Mattick, Paul (1977). Economics, Politics and The Age of Inflation.

See also

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