value, subjective theory of

DEFINITION: The subjective theory of value is the idea that the economic value of a thing is determined by the subjective preferences of the buyer and the seller as revealed through the autonomous operation of the free market.

USAGE: The subjective theory of value was developed independently in the 1860s and 1870s by three different economists: the Englishman William Stanley Jevons, the Austrian Carl Menger, and the Frenchman Léon Walras.

It effectively replaced the earlier labor theory of value of Adam Smith, David Ricardo, and other founders of classical economics. Only Karl Marx and his followers have continued to reject the subjective theory in favor of the labor theory.

The shift from the labor theory of value to the subjective theory was one of the most important elements in the construction of modern economic analysis. Much of our modern understanding of supply and demand and the functioning of the market stems directly from the subjective theory of value.

One of the reasons why it was so difficult for economists to arrive at the subjective understanding of value was the widespread belief that “science” has to rest upon entirely “objective” foundations.

However, it is precisely the fact that the apparently objective labor theory of value is profoundly mistaken, while the self-avowedly subjective theory of value is essentially correct, which demonstrates that the social sciences rest upon an entirely different metaphysical foundation from that of the natural sciences.

The metaphysical foundation of the social sciences is human agency. The existence of human agency, in turn, implies that human actions exhibit objective purpose, value, intention, and meaning. (See Ludwig von Mises, Human Action [1949].) Therefore, there is a sense in which the “subjective theory” is a bit of a misnomer.

Rather, the existence of human feelings, needs, desires, wishes, and interests (in short, “preferences”)—together with human free will—is itself an objective fact about the universe of which human beings form a part.