Introduction

In yesterday’s post, I introduced the fundamental principle that only individuals act. This principle applies always and everywhere, no matter where the individual exists or in what activity they are engaged.

In today’s post, I will address the source of value upon which these actions are based.

Body

Economic theory — from all schools of economics — incorporates the concept of value. Most schools believe that the source of value comes from the good itself—intrinsic value. Based on that belief, they devise horribly inconsistent descriptions of how value affects economic decision-making.

The Austrian school alone has discovered the real source of economic value — the subjective judgments of individuals. This principle applies at all levels of the structure of production. No good has value not given to it by one or more individuals.

This principle, along with the principle of methodological individualism, turns standard economic theory on its head. It puts the source of economic power squarely in consumers’ hands — as I will discuss under consumer sovereignty.

Only the subjective theory of value provides a consistent explanation for all value in a logically consistent structure. Individuals take action based on a set of preferences that they decide for themselves.

Exercises

No one other than the actor can know someone’s source of value. Many times the actor himself does not know. To demonstrate that, I ask that you do just a few exercises. They may seem silly at first, but if you think about it, we can make few objective statements about the measure of economic value.

Clothes

Take a look at your clothing and consider why you wear what you wear. Do you wear the clothes that you wear to be part of a group, be comfortable, or for some other reason? Even if you wear a uniform, you’ll probably find personal touches all your own.

Automobile

Apply the same questions to the automobile you drive. Can you state in detail and with clarity why you bought the vehicle you drive?

Dining out

Many different restaurants exist in the marketplace. For all these restaurants to survive, their customers must have a subjective reason for choosing them. When you dine out, why do you pick one restaurant over the other, and why do you pick one food item over the other?

Conclusion

I intended for the exercises I asked you to perform to stimulate a little bit of introspection. Examining your own behaviors and why you choose them will open the door to a deeper understanding of the “Subjective Theory of Value,” which I believe represents the primary characteristic of the Austrian method.

Many people can recite the book definition of subjective value, but few take the time to consider the critical role it plays in economic action. Business owners and executives act based on their own subjective values, and not yours. Politicians act based on their subjective values, not yours. Investors act based on their subjective values, not those on a spreadsheet.

I will frequently refer to the subjective theory of value in this newsletter because of its importance for understanding real economics.