One of the primary tenets of Austrian Economics is the Subjective Theory of Value. In a rational world, this would be as well known, and as central to economics, as the theory of evolution is well known, and central to biology.
Unfortunately, it is generally so obscure as far as the general public goes, as to not even generate a pale imitation of the controversy which is associated with the theory of evolution. Even among most economists, who almost certainly have come into contact with its spores, it has impacted their economic reasoning, and their economic policy pronouncements, hardly at all.
In diametric opposition to what most people believe, the Subjective Theory of Value expressly claims that there is no such thing as an intrinsic or fixed value associated with any economic good or service. Instead, the economic value of a good or service is specific to a given individual at a given time and circumstance, and results from his subjective judgement as to its effectiveness in serving as a means to his most desired ends.
While a belief in intrinsic values usually involves assigning a fixed money value to an economic good, the Subjective Theory of Value treats money as merely another economic good and treats all goods on a relative, rank order basis. Not only are different goods ranked by an individual on a single scale as to their subjective value, but the full spectrum of different quantities and combinations of all individual goods also occupy different gradation marks on the subjective value scale. Thus every possible combination of every possible quantity of every possible good are inherently ranked in order of subjective preference on the scale. However, this potentially infinitely complex grading process is actually limited to a conscious subset of goods that is of interest at a particular time. It is important to note that the distances between gradations on the scale are completely meaningless. Any two gradations can only be compared as to one being higher or lower in value than the other. No arithmetic is possible between gradations on a given individual's subjective value scale, and not even a comparison can be made with any other individual's scale. The only thing that can be said about the scale is that when two different combinations of goods differ only in the quantity of a single one of the goods, the combination that has the greater quantity of that one good falls higher on the value scale than the other. However, even that may not be true in all cases.
Now, having said all that, note that parts of the above have been derived here in real time, and must be considered as opinions about the implications of the Subjective Theory of Value, not necessarily fundamental parts of it. However, this is not of great significance, because Austrian Economics is only really concerned with the results of the actions taken by individuals, especially in voluntary exchange. In that sense, the Subjective Theory of Value is only a model of how choices are made. The actual exchanges made or not made are the only evidence available as to the preferences of the individual at a particular time. The goods received in exchange are presumed to serve purposes that are more urgent than the purposes that could be served by the goods given up. This presumption would not be violated even if a given individual made exchanges that served his purpose of making exchanges that were the result of a series of random coin flips.
Closely related to the Subjective Theory of Value, is the Law of Diminishing Marginal Utility. This states that the value of a good or service is set at the margin, and the utility of every additional quantity or unit of an identical good diminishes as it becomes employable in less and less urgent uses. If you have one slice of ham in the morning, it can be employed to satisfy your hunger. If you have a second slice, you can feed it to your neighbor's dog. Thus the value of one slice of ham depends one whether you have one or two. If you have two slices, the loss of one would represent the loss of value associated with the presumably less urgent use of feeding your neighbor's dog as you can eat the one that is not lost. But if you have only one slice, its loss is associated with the greater value of satisfying your own hunger. Assume that instead of a dog, your neighbor has two eggs. It is not too much of a stretch of the imagination to suppose that both you and your neighbor might well prefer to have one slice of ham and one egg, as opposed to either two slices of ham or two eggs. This has enabled a mutually voluntary exchange of one egg for one slice of ham that makes both you and your neighbor better off by your own subjective judgements.
Although this would seem to be commonplace, and happens throughout the economy for all sorts of goods and services, increasing everyone's standard of living by their own lights, there is another important point.
If there actually did happen to be such a thing as a fixed, intrinsic standard of value, mutually beneficial voluntary exchange would be impossible except for error, and the thousandth unit of a given good would be just as valuable as the first. This would be a poor, zero sum, irrational world.
Regards, Don |
