The Subjective Theory of Value

Photo Natalia Motyl
Natalia Motyl

Bachelor of Economics (UBA). Economic Analyst of Libertad y Progreso.

Natalia Motyl and Juan Manuel Redolfi explain what the subjective theory of value consists of and what this economic concept implies to understand the formation of prices.

Carl Menger was born in Vienna, Austria, and carried out most of his work at the birthplace of Ludwig Von Mises, Lviv, Ukraine. Menger is known for developing the subjective value theory.

This theory understands that goods are those “useful things” that have the property of satisfying needs and for this, they must meet four conditions:

1 – It must satisfy a human need.

2 – That the thing has such qualities that enable it to maintain a causal relationship or connection with the satisfaction of said need.

3 – Knowledge, by man, of this causal relationship.

4 – Disposition power over the thing, so that it can be used in fact for the satisfaction of the mentioned need.

For certain assets to have “utility” two instances must occur:

1- Indeed, these goods must provide me with utility (in the sense that meets my needs).

2 – Appropriation and significance of the concept of utility by the individual (I as an individual must recognize that this good is useful to me).

Clearly this conception of “value” is subjective, it is not rooted in the good in question but depends on the assessment that the individual gives to said good.

Pausing at this point we must understand how we attach importance to the satisfaction of “x” needs, that is, of the needs that I have that can be met by and quantities of goods (a couple of cars, some departments here and there, books of yesterday and tomorrow) to which of them I put them at the beginning of the “pending” list and to which list I put them in “buy in the supermarket”.

In a simple way we could explain this by affirming that the value of things is given by supply and demand. There are thus many examples to which we could turn, be they pictures, works of art, sculptures or even precious metals. It should be noted that, for many years, between 1500 and 1600, Europeans exchanged gold for silver with China, because in the Asian country, silver was more expensive than in Europe, something unthinkable on the old continent. If in China you exchanged one gold for every 5 grams of silver, in Europe you had to give 12 grams of silver to get one gold. This was simply given by the preferences of each society. While in Europe silver was valued less, in China its value was higher because society demanded more of this metal because it was the basis of its monetary system.

In our beloved country, Argentina, it seems that we are not very clear about these concepts, or they are simply ignored by a large majority when talking about price makers or the increase in costs to explain the price of some good. Not to mention the exorbitant state regulations and interventions in our economy that year after year have plunged us more and more into a delicate situation that I suppose we all know and needless to describe.

 

By Natalia Motyl and Juan Manuel Redolfi

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