The Free Market Center
When anyone suggests the existence of intrinsic economic value, they confuse or mislead the listener or reader. Nothing contains intrinsic or objective economic value.
The elegance of the Subjective Theory of Value lies in its 1) simplicity and 2) ubiquity. The subjective theory provides the only consistent “source” and “measure” of value in any place at any time.
Economic value has only one source: the subjective judgments of an individual person. This source applies to all economic goods in all situations at all production levels. All other value theories rely on some form of intrinsic value, i.e., the object (or service) contains value irrespective of the judgment of the user or the purpose for which a person might use the good. The idea of intrinsic value always breaks down when subjected to scrutiny. The principle of the individual as the source of value remains valid at any place at any time.
The measure of value consists of the relative preferences of the individual judging the value. In the mind of any individual, one economic good always has relatively more or less value than any other economic good. No objective measure exists for economic value. It is only in the process of exchange, in the revealing of price, that any hint of that relative value becomes exposed.
Money prices do not represent a measure of value. Money consists of an economic good used for indirect exchange. The value of money varies in the minds of individuals in the same manner as all other goods.
I have described, in other media, some of the underlying concepts of the “Subjective Theory of Value.” This subject plays such an essential role in understanding free market principles that I will mention it frequently on this platform.
These simple principles provide the basis for a complex system of values and actions that create a network of relationships we refer to as a market.
Important characteristics and qualifications of subjective value.
The word subjective has several varying definitions. Webster’s dictionary uses phrases peculiar to a particular individual, modified or affected by personal views, experience, or background, arising from or identified using one’s perception. These definitions help with an understanding of the concept of subjective value. Economic value always consists of a judgment by a human mind. Because of that characteristic, a person cannot quantify economic value. It has no unit of measure. The measure of value consists of the relative preferences of the individual judging the value.
The theory of economic value does not concern itself with the reason for any judgment of value. To understand a theory of value, the economist only has to know that the judgment comes solely from the individual, demonstrated by his action. The economist does not concern himself with the influence of psychology, religious beliefs, or other internal or external influences.
The fact that ethical values do not play a role in economic value has particular importance. To argue that one economic choice has more or less economic value than another based on moral judgments has no bearing on subjective value. Whether the economic actor has moral or immoral intent based on the judgment of an outside observer makes no difference. For economic discussion, we must consider economic value as amoral — as opposed to immoral or moral. A person’s ethical standards may influence his judgments about value. But, from the standpoint of economic analysis, it does not matter. The economist must accept that the individual values a good or service for whatever reason. This point will become important when we discuss the various rationale for intervention. In brief, government cannot make people moral by dictating their economic behavior.
People always make rational decisions based on value, whether you agree with those decisions or not. In general, people always act rationally. The only times irrational behavior occurs are cases of Tourette’s syndrome, reflexive responses to stimuli, involuntary responses to environmental changes, and similar actions. Your disagreement—or anyone else’s—with a person’s value judgment does not make it irrational. We must consider it rational if they have any reason for their actions.
I must reiterate that only single individuals — or separate individuals — can make judgments about economic value. Groups cannot make such judgments. Voting on an action does not make it a collective judgment. It only means that the individual members of the group place a sufficiently close value on the action that they vote in favor of it. The person directed to act based on crowd agreement must value that action. The fact that only separate individuals make judgments of economic value plays such a significant role in economic activity that I will devote an entire blog post to emphasizing this point.
Value and its measure always and everywhere exist only in the mind of an individual. It provides the extremely important basis for exchanges made in markets everywhere. Because this idea contradicts popular misconceptions, the reader should spend time thinking about this concept.
In summary, individuals determine economic value subjectively and establish their own measures of value based on their personal scales of preference. They reveal their preferences without precise units of measure when they make an exchange. We can only say they value one thing more or less than something else based on their action,
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