Subjective Theory of Value
This article is part of the Basic Liberalism Course -> Module 5: Notions of Austrian Economics
Last updated: 2026-05-21
The Subjective Theory of Value is one of the fundamental pillars of the Austrian School of Economics. Formulated definitively by Carl Menger in 1871 in his work Principles of Economics, this theory was part of the so-called "Marginalist Revolution" and transformed economics forever.
1. The origin of value: from costs to the human mind
Before Menger, the classical school (Adam Smith, David Ricardo) and later Karl Marx defended variants of the Labor Theory of Value. They maintained that the value of a good was determined to a large extent objectively by the cost of production or the number of hours of labor incorporated into it in the past.
Menger destroyed the logical basis of this claim by demonstrating that value is not an intrinsic property of objects nor does it come from their productive past. Value arises from the individual's perception of the object:
- Pure subjectivity: An object has value only if a human being perceives that said object has the capacity to satisfy a specific need and if the good in question is scarce.
- Value travels from the future to the present: An entrepreneur can spend millions of hours of labor and resources manufacturing a good, but if in the end the final consumers do not desire it or do not value its utility for the future, that product will be worth absolutely zero. It is the consumers' valuations regarding future utility that determine the value of everything prior.
2. The Law of Imputation (Structure of Production)
At a methodological and political economy level, Menger introduced the concept of goods ordered hierarchically according to their proximity to final consumption:
- First-order goods: Goods for direct consumption (e.g., a piece of bread).
- Higher-order goods: Factors of production necessary to produce them (e.g., flour, wheat, the oven, the baker's labor, arable land).
Under the Law of Imputation, Austrians explain that value is not transferred from higher-order goods (the costs) to the consumer good. It is exactly the opposite: the subjective value that the consumer assigns to the bread (first order) is imputed or transferred backward, determining the value that flour, the oven, machinery, and the labor employed to produce it will have in the market. Production costs do not create value; rather, they reflect the subjective value that is expected to be obtained in the future.
3. Philosophical and Political Implications
The adoption of methodological subjectivism provides the Austrian School with critical tools against other economic and political currents:
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Refutation of the Marxist Theory of Exploitation: By demonstrating that value does not come from accumulated labor, the capitalist's profit ceases to be seen as a "theft" of surplus value. Instead, later economists such as Eugen von Böhm-Bawerk argued that profit derives from time preference (the voluntary exchange of present secure goods, such as the worker's wage, for uncertain future goods that depend on the risk assumed by the entrepreneur).
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Impossibility of Economic Calculation in Socialism: If value is purely subjective, internal, and changing in the mind of each individual, it is impossible for a central planning board or a state dictator to know, sum up, or mathematically determine the value of things. The free market, through the system of free prices, functions as the only decentralized mechanism capable of coordinating and transmitting those dispersed individual valuations.
Practical example
A diamond and a glass of water under normal conditions:
- Labor theory of value: the diamond is worth more because it requires much more work to extract and cut it.
- Subjective theory of value: the diamond is worth more because individuals, in their current situation, marginally value that diamond more than the glass of water (despite the fact that water is objectively more necessary for life).
If you are lost in the desert, the valuation is immediately reversed. The value changed without anything "objective" about the diamond or the water changing.
This article is part of the Basic Liberalism Course -> Module 5: Notions of Austrian Economics
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Last updated: 2026-05-21
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