Subjective theory of value
This article is part of the Basic Course on Libertarianism and the Austrian School of Economics-> Module 5: Austrian Economics and Free Market
Last updated: 2026-09-13
Subjective Theory of Value
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 formed part of the so-called "Marginalist Revolution" and permanently transformed economic science.
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 held that the value of a good was determined to a large extent in an objective way by the cost of production or the quantity of hours of labor embodied in it in the past.
Menger destroyed the logical basis of this claim by showing that value is not an intrinsic property of objects nor does it come from their productive past.
Value arises from each person's individual perception of the object (Subjectivism.)
Pure subjectivity:
- An object possesses value only if a human being perceives that the 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 may spend millions of hours of labor and resources manufacturing a good, but if in the end final consumers do not desire it or do not value its usefulness for the future, that product will be worth absolutely zero.
- It is consumers' valuations regarding future utility that determine the value of everything that precedes them.
2. The Law of Imputation (Structure of Production)
At the methodological and political-economy level, Menger introduced the concept of goods ordered hierarchically according to their closeness to final consumption:
- First-order goods: Goods of direct consumption (e.g. a piece of bread).
- Higher-order goods: Factors of production necessary to make them (e.g. flour, wheat, the oven, the baker's labor, arable land).
Under the Law of Imputation,
- the Austrians explain that value is not transferred from higher-order goods (costs) toward the consumer good.
- It is exactly the reverse: the subjective value that the consumer places on the bread (first-order good) is "imputed" or carried 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 expected to be obtained in the future.
3. Philosophical and Political Implications
The adoption of methodological Subjectivism equips the Austrian School with critical tools against other economic and political currents:
Refutation of the Marxist Theory of Exploitation:
Once it is shown 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 secure present goods, such as the worker's wage, for uncertain future goods that depend on the risk assumed by the entrepreneur).
Impossibility of Economic Calculation under Socialism:
If value is purely subjective, internal, and changing in each individual's mind, it is impossible for a centralized planning board or a state dictator to know, add up, or determine mathematically the value of things.
The free market, through the free price system, 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 labor to extract and cut it.
- Subjective theory of value: the diamond is worth more because individuals, in their current situation, value that diamond marginally more than the glass of water (even though water is objectively more necessary for life).
If you are lost in the desert, the valuation reverses immediately. Value changed without anything “objective” about the diamond or the water changing.
This article is part of the Basic Course on Libertarianism and the Austrian School of Economics-> Module 5: Austrian Economics and Free Market
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