Subjective Theory of Value - Overview

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 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 - necessarily - exerted in producing it - under the condition, however, that this "thing" has a use value. 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, 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 socially necessary 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.

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.