Subjective theory of value

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The subjective theory of value (or theory of subjective value) is an economic theory of value that holds that "to possess value an object must be both useful and scarce,"^[1] with the extent of that value dependent upon the ability of an object to satisfy the wants of any given individual. The theory recognizes that one thing may be more useful in satisfying the wants of one person than another, or of no use to one person and of use to another.^[2] The theory contrasts with intrinsic theories of value that hold that there is an objectively correct value of an object that can be determined irrespective of individual value judgements, such as by analyzing the amount of labor incurred in producing the object (see labor theory of value).

1 Overview
2 Political implications
3 Criticism
4 Notes
5 See also
6 External links

[edit] Overview

The theory holds that things become valuable in the economic sense (have exchange value or price) under two conditions: 1) They are useful in satisfying human wants, and are therefore desired. 2) There are not enough of them, or just enough of them, to satisfy demand. Any goods that are in unlimited supply, or in a greater supply than that demanded, would have no value. In other words, those useful items that are of insufficient quantity to satisfy demand have a price, and those that exist in numbers superfluous to demand (or that satisfy no wants) are free. The subjective theory of value was built upon to develop marginalist economics.

The subjective theory contrasts with intrinsic theories of value, such as the labor theory of value which holds that the economic value of a thing is contingent upon how much labor was exerted in producing it. For example David Ricardo said, "The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not as the greater or less compensation which is paid for that labour."

In the context of a free market (meaning a legal structure based on private property and voluntary exchange), 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 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.

Indeed, 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.

While earlier economic schools such as medieval Scholastics and French Economists of the 18th and 19th century implicitly used the STV, it was formalized by the Austrian School with the notion of marginal utility by Carl Menger, who said: "The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts...Hence not only the nature but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals." (Principles of Economics)

[edit] Political implications

If it is true that the economic value of things cannot be ascertained without subjecting a particular good to individual value judgements in a market, then governments may have difficulty justifying, to economists, setting the prices of goods and services for society. This is also a technical problem for governments wishing to implement a planned economy. Those who espouse the subjective theory of value tend to advocate that individuals should be allowed to choose for themselves what price they are willing to pay for, or part with, any given good or service. They tend to maintain that forcible interference by the state in the process of individuals arriving at a mutual value judgement when making a trade is irrational, unworkable, and/or immoral.

[edit] Criticism

The nature of the value of things is a hotly debated subject, as any theory of value will have far-reaching implications in both political and economic theories. While most modern economists subscribe to the subjective theory of value, as well as the Marginal theory of value, many important economic thinkers subscribe to other theories. Marx adhered to the Labor theory of value, while Alan Greenspan, former Chairman of the Federal Reserve bank, supported Ayn Rand's Objectivist theory of value. Ayn Rand was critical of the subjective theory of value, because she considered the value of an object to be a combination of intrinsic properties, and subjective desires. Greenspan authored one of the chapters in her book, Capitalism: the Unknown Ideal, in which she presents a systematic analysis of Capitalism, and why she believes it is based on the objectivist (not to be confused with objective) theory of value, and not the subjective theory.

Rand's chief criticism of the subjective theory of value, is that it declares that objects have no value of their own, and that the value is completely in the mind of the user. Based on this view, a tyranical government may decide that it, not the people, knows best what people should desire. It may then launch a campaign to "re-educate" the populace as to what it should desire instead. A government may decide, for example, that the people should not desire to smoke, and launch a campaign to eradicate smoking (see Smoking ban).

[edit] Notes

^ Moser, John. The Origins of the Austrian School of Economics," Humane Studies Review, 11: 1 (Spring 1997) [1]
^ Menger, Carl. Principles of Economics