Subjective theory of value

The subjective theory of value is a doctrine of value which advances the idea that the value of a good is not determined by any inherent property of the good, nor by the amount of labor required to produce the good, but instead value is determined by the importance an acting individual places on a good for the achievement of their desired ends. This theory is one of the core concepts of the Austrian School of Economics, but is also accepted by most other "mainstream" schools of economics. While the modern version of this theory was discovered independently and nearly simultaneously by William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century it had in fact been advanced in the Middle Ages and Renaissance but did not gain widespread acceptance at that time.

Diamond-Water Paradox
The development of the subjective theory of value was partly motivated by the need to solve the so-called value-paradox which had puzzled many classical economists. This paradox, also referred to descriptively as the diamond-water paradox, arose when value was attributed to things such as the amount of labor that went into the production of a good or alternatively to an objective measure of the usefulness of a good. Based on these measures how could a diamond be valued greater than water? The measure of uselfulness or "utility" failed to solve the paradox because water is obviously more useful to an individual than are diamonds. But the theory that it was the amount of labor that went into producing a good that determined its value proved equally futile because someone could easily stumble upon the discovery of a diamond while out for a hike, for example, which would require minimal labor, but yet the diamond could still be valued higher than water.

The subjective theory of value was able to solve this paradox by realizing that value is not determined by individuals choosing between entire abstract classes of goods such as all the water in the world versus all the diamonds in the world. Rather an acting individual is faced with the choice between definite quantities of goods, and the choice made by such an actor is determined by which good of a specified quantity will satisfy the individuals highest subjectively ranked preference, or most desired end.

Subjectivity of value
There is no way to measure an increase or decrease in happiness or satisfaction; not only between different people, it is not possible to measure change in the happiness of one given person.

In order for any measure­ment to be possible, there must be an eternally fixed and objec­tively given unit with which other units may be compared. There is no such objective unit in the field of human valuation. The in­dividual must determine subjectively for himself whether he is better or worse off as a result of any change. His preference can only be expressed in terms of simple choice, or rank. Thus, he can say, "I am better off" or "I am happier" because he went to a concert instead of playing bridge (or "I will be better off" for going to the concert), but it would be completely meaningless for him to try to assign units to his preference and say, "I am two and a half times happier because of this choice than I would have been play­ing bridge." Two and a half times what? There is no possible unit of happiness that can be used for purposes of comparison and, hence, of addition or multiplication. Therefore, values cannot be measured; values or utilities cannot be added, subtracted, or mul­tiplied. They can only be ranked as better or worse. A man may know that he is or will be happier or less happy, but not by "how much".

Accordingly, the numbers by which ends are ranked on value scales are ordinal, not cardinal, numbers. Ordinal numbers are only ranked; they cannot be subject to the processes of measurement. Thus, in the above example, all we can say is that going to a concert is valued more than playing bridge, and either of these is valued more than watching the game. We cannot say that going to a concert is valued “twice as much” as watching the game; the numbers two and four cannot be subject to processes of addition, multiplication, etc.

"'Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.'"

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