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Subjective theory of value

From The Austrian Economics Wiki, the global repository of classical-liberal thought

The subjective theory of value holds that a good's value comes from the importance an individual places on it, not any inherent property or labor cost. More precisely, value is set by the good's contribution to the acting individual's most urgent unsatisfied end, not by any physical property of the good or by the labor spent producing it.[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 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.[2]

See also: Subjective

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 usefulness 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 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.[3] Eugen von Böhm-Bawerk worked this out as a matter of marginal utility: a settler with five sacks of grain does not value each sack at the average usefulness of grain in general, but ranks his own uses for it from feeding himself to feeding his parrot, and it is the good's contribution to the least urgent of those uses, the margin, that fixes its value to him.[4] Water is abundant enough that its marginal unit satisfies only a trivial want, while a diamond, being scarce, is never put to a use less urgent than an already valuable one.

Subjectivity of value

Main article: Value

There is no way to measure an increase or decrease in happiness or satisfaction; not only between different people, it is not possible to measure change in the happiness of one given person.

In order for any measure­ment to be possible, there must be an eternally fixed and objec­tively given unit with which other units may be compared. There is no such objective unit in the field of human valuation. The in­dividual must determine subjectively for himself whether he is better or worse off as a result of any change. His preference can only be expressed in terms of simple choice, or rank. Thus, he can say, "I am better off" or "I am happier" because he went to a concert instead of playing bridge (or "I will be better off" for going to the concert), but it would be completely meaningless for him to try to assign units to his preference and say, "I am two and a half times happier because of this choice than I would have been play­ing bridge." Two and a half times what? There is no possible unit of happiness that can be used for purposes of comparison and, hence, of addition or multiplication. Therefore, values cannot be measured; values or utilities cannot be added, subtracted, or mul­tiplied. They can only be ranked as better or worse. A man may know that he is or will be happier or less happy, but not by "how much".

Accordingly, the numbers by which ends are ranked on value scales are ordinal, not cardinal, numbers. Ordinal numbers are only ranked; they cannot be subject to the processes of measurement. Thus, in the above example, all we can say is that going to a concert is valued more than playing bridge, and either of these is valued more than watching the game. We cannot say that going to a concert is valued “twice as much” as watching the game; the numbers two and four cannot be subject to processes of addition, multiplication, etc.[5]

"Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men."[6]

Disagreement within the tradition

Austrians agree that value is subjective but not on how far subjectivism should be carried. Ludwig von Mises and Rothbard treat an actor's ends as given at the moment of choice, which is what lets value scales be ranked at all; the evenly rotating economy they use to isolate pure time preference from entrepreneurial profit assumes those data hold still. Ludwig Lachmann pushed the same premise further, arguing that if ends and means are subjective then so are an actor's expectations of the future, so nothing guarantees that the plans of different market participants mesh into an equilibrium at all, only that each acts on his own reading of an uncertain future.[7] Israel Kirzner took a middle position, keeping Mises's confidence that entrepreneurial alertness pushes markets toward coordination while accepting Lachmann's point that the process, not a static endpoint, is where the real work of a market economy happens.

References

  1. ↑ Mises, Ludwig von. "Human Action, Chapter IV: A First Analysis of the Category of Action", 1949.
  2. ↑ Gordon, David. "An Introduction to Economic Reasoning", 2000.
  3. ↑ Callahan, Gene. "Economics for Real People", 2004, page 42.
  4. ↑ Böhm-Bawerk, Eugen von. "The Positive Theory of Capital, Chapter IV: The Marginal Utility", 1889.
  5. ↑ Rothbard, Murray N. "Man, Economy, and State: 5. Further Implications, A. Ends and Values", 1962.
  6. ↑ Menger, Carl. "Principles of Economics", Chapter III, The Theory of Value, 1871.
  7. ↑ Lewin, Peter. "Time, Complexity, and Change: Ludwig M. Lachmann's Contributions to the Theory of Capital", 1996.

See also

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