A Return to Value Theory
After a prolonged hiatus, I want to return to my discussion of value theory. A workable theory for value plays such a fundamental part in economic theory, regardless of the school of thought, that it cannot be overemphasized. Because The Free Market Center Journal advocates the validity of the Subjective Theory of Value, which many people may find unfamiliar (or not fully understand), it deserves special emphasis. Because of its importance in understanding other economic concepts, I will return to the subject of economic value many times in future posts on this blog.
In a series of articles in the next few blog posts I will address some of the details and implications of the subjective theory of value. I will outline some of those topics here. Then, in the next post I will begin to fill in some of the details.
Conflicting Theories of Value
Although I don’t find any of them logically sound, I must acknowledge the other theories of economic value. I will attempt to describe some of those and explain why they are logically flawed.
The Subjective Theory of Value
In short, the Subjective Theory of Value says that the subjective judgment of individuals provides the only source of economic value. Without looking at motivation, psychological inclination, or other influences, only individuals can determine value. The measure of value, which cannot be quantified, comes from the preferences of those individuals.
The Source of Economic Value
How can the subjective judgments of individuals play such a foundational role in economic theory? I will answer that question in an article addressing the source of economic value.
The Measure of Economic Value
The next question becomes, how can an economic system operate effectively and efficiently with a value system measured only by the preferences of individuals — and preferences that only can be ranked on an ordinal scale? Even the individual cannot tell precisely how much more or less he values one economic good from another. Yet, clear explanations of all economic activity originate from this measure of value.
The Relationship of Value & Price
The answer to the question of how a complex economic system depends on a value system based on the subjective judgments of individuals comes from the relationship of value and price. When economic actors act based on their subjective preferences they create an objective measure of economic activity — prices. Objective prices that originate from the subjective judgments of individuals makeup the measure by which others can make economic decisions.
The Importance of the Individual
Because the individual provides the only source, and measure, of value, he plays a foundational role in the structure of any economic system. Ludwig von Mises referred to consumers (i.e. individuals) as having sovereignty in the market. He meant to emphasize the importance of the individual in the marketplace.
Placing the individual in such a prominent role turns many of the accepted models of economic structure on their heads. All economic activity, at all levels, seeks to satisfy the needs of the individual (a.k.a. the consumer).
In a future article I will expand on the importance of the determination of value by individuals.
This outline describes some, but not all, of the articles that I plan to write covering the subject of economic value. I will begin this series in my next post, but I don’t plan to treat the subject of value as if these explanations were complete. As questions arise — based on comments about this blog and topics that I address in the future — I will expand on the subject of economic value. I also plan to assemble the content of these articles in a more comprehensive discussion that I will post on The Free Market Center homepage.