The concept of value plays a vital role in economic thinking. If you attempt to describe the actions of any person, you must make assumptions about what they value. All market activity depends on assumptions about value, whether implicit or explicit.

I will discuss value frequently in my writing, and I want to make my assumptions about the source and measure of value explicit.

Sources and Measures of Value

Ask a student of economics about the sources and measures of value, and you will probably get a laundry list of value theories: labor theory, cost of production, energy theory, and more.

If you look carefully at value theories, they fall into two distinct categories: Intrinsic and Subjective Value.

Intrinsic Value

Intrinsic value theories share the common assumption that economic value resides in the item itself. Value either gets put into the item or exists because of its nature.

Intrinsic value theories share a fatal flaw, they all depend on their situation, by whom and where the item gets used.

The measures of value seem to vary along with the names of the theories. Many share the logically inconsistent assumption that money measures value. In other posts, I will discuss why money cannot act as a measure of value.

Subjective Value

The subjective theory of value assumes that only individuals always and everywhere determine value. Based on their preferences, individuals simultaneously establish their measure of value.

If value exists only in the minds of people, how does the economist make definitive statements about the influence of value on market activity?

Economic value and its relative measure becomes clear as a result of economic actions, not before. When a person makes an exchange he reveals with certainty that he values what he gets more than what he gives up. The outside observer cannot tell how much more the actor values what he gets, but he can say with cetainty that he values it more.

My Value Principle

I view the subjective theory of value as the only theory that holds up to logical scrutiny. Again, it applies always and everywhere.

Conclusion

Establishing a value principle has significant importance in thinking and writing about markets. Value should act as one of the final tests for any statement about economic activity.

I will return to the discussion of value many times on this site but a simple example might help:

To say that the price of gas at your local station is rising because their suppliers raise asking prices, although partly true, contains a logical inconsistency.

Yes, to not lose money your station must increase its price. But, why do suppliers ask for more money? Other drivers like yourself value the gas more than the money they give up to get the gas. If you don’t pay the price others will.

If drivers quit buying gas at those prices, the price offered at you station would fall rapidly.