The subjective theory of value (STV) is an

economic theory Economics () is a behavioral science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

for explaining how the value of goods and services are not only set but also how they can fluctuate over time. The contrasting system is typically known as the

labor theory of value The labor theory of value (LTV) is a theory of value that argues that the exchange value of a good or service is determined by the total amount of " socially necessary labor" required to produce it. The contrasting system is typically known as ...

. STV's development helped to better understand human action and decision making in economics. The theory claims that the value of a good is not determined by any inherent property of the good, nor by the cumulative value of components or labor needed to produce it, but instead is determined by the individuals or entities who are buying (and/or selling) that good. Thus a good's value may increase substantially following its creation if the good is perceived as being of greater importance, or as being more desirable than before. There are many variables that can influence this process, including, but not limited to, changes in the age of the good, personal affinity, cultural significance, scarcity, as well as situational circumstances. This is often seen in the case of

collectable A collectable (collectible or collector's item) is any Physical object, object regarded as being of value or interest to a collecting, collector. Collectable items are not necessarily monetarily valuable or uncommon. There are numerous types ...

items such as cars, vinyl records, and comic books. An additional variable, as Austrian economist

Carl Menger Carl Menger von Wolfensgrün (; ; 28 February 1840 – 26 February 1921) was an Austrian economist who contributed to the marginal theory of value. Menger is considered the founder of the Austrian school of economics. In building his margi ...

pointed out, is the estimation of a good's value due to uncertainty and lack of knowledge, in which people "sometimes estimate the importance of various satisfactions in a manner contrary to their real importance". It is one of several theories that sprang from the marginal revolution, which was a departure from classical economics, and in particular STV departed from the

. The modern version of the subjective theory of value was created independently and nearly simultaneously by

William Stanley Jevons William Stanley Jevons (; 1 September 1835 – 13 August 1882) was an English economist and logician. Irving Fisher described Jevons's book ''A General Mathematical Theory of Political Economy'' (1862) as the start of the mathematical method i ...

Léon Walras Marie-Esprit-Léon Walras (; 16 December 1834 – 5 January 1910) was a French mathematical economics, mathematical economist and Georgist. He formulated the Marginalism, marginal theory of value (independently of William Stanley Jevons and Carl ...

, and

in the late 19th century.Stigler, George (1950) "The Development of Utility Theory. I" ''The Journal of Political Economy'' The theory has helped explain why the value of non-essential goods can be higher than essential ones, and how relatively expensive goods can have relatively low production costs.

Overview

According to the subjective theory of value, by assuming that all

trade Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market. Traders generally negotiate through a medium of cr ...

s between individuals are voluntary, it can be concluded that both parties to the trade subjectively perceive the goods, labour or money they receive, as being of higher value to the goods, labour or money they give away. The theory holds that one can create value simply by trading with someone who values the items higher, without necessarily modifying them. Wealth is understood to refer to individuals' subjective valuation of their possessions, and voluntary trades may increase the total wealth in society. This is because each participant of the voluntary transaction has gained more value than they originally had. This suggests that items cannot be objectively valued as any value placed upon the item is only correct if both buyer and seller agree on the price and a transaction takes place. A seller may value an item in their possession higher than any buyer will value it leading to either a price reduction until the item's price equals a buyer's value of the item, or the seller will continue to value the item higher than any buyer and no transaction will occur. Individuals will experience more radical improvements to life and satisfaction from acquiring the first unit of a good compared to the

marginal utility Marginal utility, in mainstream economics, describes the change in ''utility'' (pleasure or satisfaction resulting from the consumption) of one unit of a good or service. Marginal utility can be positive, negative, or zero. Negative marginal utilit ...

from acquiring additional units of a good. They will initially prioritise obtaining the goods they most need (of central, not marginal utility), such as essential food, but once their need for it is satisfied up to a certain level, their desire for other luxury or surplus goods will begin to rise, and the satisfaction obtained from the original essential goods will diminish.Menger, C. ''Principles of Economics''
p. 127
/ref> Proponents of the theory also believe that in a

free market In economics, a free market is an economic market (economics), system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of ...

competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indi ...

between individuals seeking to trade goods they possess and services they can provide for goods they perceive as being of higher value to them results in a

market equilibrium In economics, economic equilibrium is a situation in which the economic forces of supply and demand are balanced, meaning that economic variables will no longer change. Market equilibrium in this case is a condition where a market price is esta ...

set of prices emerging. This occurs during auctions. Bidders are able to express their belief in the value of each item via bids. As each person raises their bid, the value of the item rises even though the nature and function of the item has not changed. This behaviour can lead to the winner's curse.

Labour theory of value

Classical economists Classical economics, also known as the classical school of economics, or classical political economy, is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. It includes ...

such as

David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, politician, and member of Parliament. He is recognized as one of the most influential classical economists, alongside figures such as Thomas Malthus, Ada ...

proposed a labour theory of value that states there is a direct correlation between the value of a good and the labour required to produce the good, concluding "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 on the greater or less compensation which is paid for that labour." Ricardo clarified that this correlation did not effectively connect those with market prices, or 'value in exchange', seeing them as separately derived from the quantity of labour input and other production factors. Increasing wages would not necessarily cause price rises, but conversely price rises may not cause wages to increase. Carl Menger argued that production was simply another case of the theory of marginal utility, and that labourers' wage-earning potential is set by the value of their work to others rather than subsistence costs, and they work because they value remuneration more highly than inactivity.Menger, C. ''Principles of Economics''
pp. 169–173
/ref> A combination of both labour and subjective theories can be seen in the formulations of English economist

Alfred Marshall Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist and one of the most influential economists of his time. His book ''Principles of Economics (Marshall), Principles of Economics'' (1890) was the dominant economic textboo ...

. He argued that prices are determined by both the objective costs of production, the supply, and the subjective utility of consumers, the demand. This approach is in line with the modern conception of how market prices are determined, where both the demand and supply curves intersect. This is in contrast to other 19th century theories which view costs through a type of subjective value lens. Since the subjective value holds that buyers use their own value judgements, the same goes for sellers, and thus the mechanism of production. Austrian economist

Ludwig von Mises Ludwig Heinrich Edler von Mises (; ; September 29, 1881 – October 10, 1973) was an Austrian-American political economist and philosopher of the Austrian school. Mises wrote and lectured extensively on the social contributions of classical l ...

believes that production costs are determined by a seller's evaluations of their

opportunity cost In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, ...

s, or the sellers "marginal utility lost of having fewer of that good".Stringham, P. Green
"Economic Value and Cost are Subjective"
2010, p. 6. Under this, supply curves are also set by subjective preferences.

References

{{DEFAULTSORT:Subjective Theory Of Value Theory of value (economics) Subjectivism Utility

Overview

Labour theory of value

See also

References