Subjective theory of value
Encyclopedia
The subjective theory of value (or theory of subjective value) is an economic theory of value
Theory of value (economics)
"Theory of value" is a generic term which encompasses all the theories within economics that attempt to explain the exchange value or price of goods and services...

 that identifies worth as being based on the wants and needs of the members of a society, as opposed to value being inherent to an object.

It holds that to possess value an object must be useful, with the extent of that value dependent upon the ability of an object to satisfy the wants of any given individual.

"Value" here is partially separate from exchange value
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...

 or price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...

, except insofar as the latter is intended to help identify the former; the value of any good or service simply being whatever someone would trade for it in the present. This creates problems as consumers tend to bid up prices if they are funding demand with credit. This tends to separate subjective values from stable values.

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. The theory contrasts with intrinsic theories of value
Intrinsic theory of value
An intrinsic theory of value is any theory of value in economics which holds that the value of an object, good or service, is intrinsic or contained in the item itself...

 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
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...

).

Overview

The theory holds that things become valuable in the economic sense (have exchange value
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...

 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 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
Intrinsic theory of value
An intrinsic theory of value is any theory of value in economics which holds that the value of an object, good or service, is intrinsic or contained in the item itself...

, such as the labor theory of value
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...

which holds that the economic value of a thing is contingent upon how much labor was - necessarily - exerted in producing it - under the condition, however, that this "thing" has a use value
Use value
Use value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...

. For example David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...

 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
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

, several major conclusions follow from the theory. The theory contrasts with normative
Normative economics
Normative economics is that part of economics that expresses value judgments about economic fairness or what the economy ought to be like or what goals of public policy ought to be....

 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
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

. Whereas the labor theory of value has been used to condemn profit
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...

 as exploitation
Exploitation
This article discusses the term exploitation in the meaning of using something in an unjust or cruel manner.- As unjust benefit :In political economy, economics, and sociology, exploitation involves a persistent social relationship in which certain persons are being mistreated or unfairly used for...

, 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.

Criticisms

Economist Paul Mattick argued that STV 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 tries to explain prices, prices were necessary to explain marginal utility"

Trade unionist Allan Engler namely prices exist before subjective evaluations can take place so "prices are determined marginal utility;
marginal utility is measured by prices. Prices... are nothing more or less than prices. Marginalists, having begun their search in the field of subjectivity, proceeded to walk in circle".

See also

  • Austrian School
    Austrian School
    The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

  • Eugen von Böhm-Bawerk
    Eugen von Böhm-Bawerk
    Eugen Ritter von Böhm-Bawerk was an Austrian economist who made important contributions to the development of the Austrian School of economics.-Biography:...

  • Free price system
    Free price system
    A free price system or free price mechanism is an economic system where prices are set by the interchange of supply and demand, with the resulting prices being understood as signals that are communicated between producers and consumers which serve to guide the production and distribution of...

  • Intrinsic theory of value
    Intrinsic theory of value
    An intrinsic theory of value is any theory of value in economics which holds that the value of an object, good or service, is intrinsic or contained in the item itself...

  • Labour theory of value
  • Marginalism
    Marginalism
    Marginalism refers to the use of marginal concepts in economic theory. Marginalism is associated with arguments concerning changes in the quantity used of a good or service, as opposed to some notion of the over-all significance of that class of good or service, or of some total quantity...

    , the theory of marginal value.

External links

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