Thursday, July 10, 2008

The Subjective Theory of Value

Over the past few days I've been reading George Reisman's translation from the German of Ludwig von Mises' book Epistemological Problems of Economics. In this book Mises formulated many of the building blocks of his comprehensive economic theory that would later be found in Human Action. Though I've encountered the subjective value concept elsewhere (Menger's pioneering work among many others), this book is reinforcing its importance to any possible systematic conception of exchange ratios, prices, wages, etc.

Although some contend that there are objective, universally consistent values, it has become apparent that this view is untenable for the formulations of economic theory. People everywhere have different tastes and preferences for different things. Indeed, every action contains some form of prefering one thing over another. Everyone is faced with opportunity costs surrounding how they determine to use their finite time, ie. Go to work or go to the beach, watch television or read a book, etc. From the fact that it is impossible to do two things at once, whatever one chooses to do involves prefering some A to some B. The source of this preference and why you chose A to B is immaterial for economic science. All that is important is that there exists a preference.

It has become abundantly clear to me that the Subjective Value Theory is the heart of economic science. Once one recognizes that always and everywhere people are exercising preferences (valueing one thing higher than another), it becomes easier to notice that the more people that prefer a certain thing to another than the more intensive is the demand for that thing. Since people have differing preferences, it becomes useful for people to trade with one another. Without getting into the specifics of monetary theory, once a medium of exchange is employed in the transactions of people in there transactions, money prices (exchange ratios) emerge, and from the emergence of these exchange ratios all other phenomena of modern economic life also develop, ie. interest rates, wages, etc.

Mises believed that the theories of economics were not subject to criticisms levied by those citing statistics that did not fit in with what the theory would have predicted. He believed that "A theory is subject to the tribunal of reason only." When I first read that sentence in Human Action I did not know quite what he meant by it. But now I've come to realize just why Mises believed that unacceptable theories could only be attacked through reason and not experience. Because all valueing is subjective, that is, unique to the mind and perception of the individual, then all economic value is inherent to the minds of human beings. They are psychic qualities; no object has value outside of that which we give to it in our own minds. So, because all economic value is of the mind, then all theories and conceptions of economics as such can only originate from our minds.

*I've spent a while working on this post, and I'm not confident that I have adequately conveyed precisely what I concieve of the integral part played by the subjective value theory in economic science. This muddiness only reflects my continuing attempts to wrestle with this concepts in my own mind. It's obvious that I still have much more thinking to do.*

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