One of the oldest economic debates concerns the nature of value. Is value subjective or objective? What variables determine value? Throughout Antiquity and the Middle Ages, thinkers like Aristotle and Saint Augustine noticed that value from the perspective of human beings (and not in the divine sense) had to do with people’s desire for its use. However, it was still maintained that an item’s value was objective and intrinsic to the item.
A subjective theory that rejects any objective component wasn’t stated until the 16th century (by Covarrubias). The modern subjective theory of value (STV), with its marginal component, is attributed primarily to Carl Menger, founder of the Austrian school of economics, as well as William Stanley Jevons and Leon Walras.
The STV states that there is no intrinsic objective value to an item, but instead an item is valued differently from person to person, from moment to moment. Including marginal utility theory, an individual that acquires multiple of the same item will value each additional item less than the one before it. (For example, ten dollars is very valuable to you if you don’t have any money, but barely anything if you are already a millionaire.)
The STV is by no means universally accepted. There are objective theories of value that seek to quantify value in “utils” that can be added and subtracted. There are cost-of-production theories of value, and there is the famous labor theory of value, held by both Karl Marx and Adam Smith.
However, when looking at actions that all of us do fairly regularly, it becomes pretty clear that the STV best describes how we value things. Although we may not consciously think of value every time we trade, the results are clear.
Spare Change
All currencies are issued in different denominations. The dollar can be split into cents, and bills can be worth $1, $5, $10, etc. Yes, these are, in a sense, “objective” valuations of currency, but 100 cents is not always valued the same as a dollar bill.
An arcade is one example. In some arcades, the machines take quarters, and there is usually a change machine that will accept small bills and produce their “equivalent” in quarters. But if four quarters is always worth a dollar, and value isn’t subjective, it seems pretty strange that so many people would waste their time interacting with a machine that exists to do nothing but make equal transactions. Why would anyone devote time to giving someone a dollar, only to receive a dollar in return?
Of course, the actual reason people interact with these machines, trading dollars for quarters, is because, at the circumstance of wanting to play arcade games and being short on quarters, four quarters is actually more valuable than a dollar bill. In other circumstances, a dollar is worth more than four quarters.
If you are at a bank and wish to withdraw $100 from your bank account, do you want that in pennies, quarters, dollar bills, or maybe $20 bills. What does it matter if all of these are objectively the same? Why get mad at a bank that would only pay you in pennies? Because, in the circumstance of withdrawing money that you expect to carry around with you in your wallet, five twenties are more valuable to you than 10,000 pennies. Unless you like to collect pennies. Then maybe the opposite is true for you. It differs from person to person.
Grocery Shopping
Every so often we all go grocery shopping. Some people buy organic foods from farmers’ markets. Some people eat so healthily that you’d have to pay them quite a bit to eat a sugary snack food. Other people routinely buy lots of snack foods every time they go grocery shopping. This is a quick proof of subjective value. People have different tastes, so they will buy what tastes good to them and avoid what doesn’t. Some foods are, in their view, incredibly overpriced because they taste awful, while other people are buying them because they like the taste. Who’s shopping wrong? Nobody, because their valuations of certain foods differ.
Values differ for individuals across time, as well. Someone routinely buys snack food, and then suddenly stops. They begin dieting and start eating healthier. Now that they’ve chosen to eat better, unhealthy foods, although they still taste good, are now worth less to that same individual than they were before.
The vendor you are buying groceries from must value these foods differently than you. If there was one, true, objective value, then one of you may be losing out. If it is underpriced, you are winning while the vendor is losing. If it is overpriced, you are losing while the vendor is winning. If it is priced to reflect the exact value of the food being sold, then what’s the point? It’s like trading a dollar for a dollar. Nobody does it because it’s a waste of energy.
But if value is subjective, then it makes sense. Both can gain because they value the thing they are receiving more than the value of what they are giving.
But then add the marginal utility component. Why is grocery shopping such a routine? Why are we buying the same food items over and over and over again. Why not just save time and buy it all at once? It can’t be accurate to say “because food expires” because, although that’s true of some foods, many times people buy the same items every week or month when those items last much longer. What about toilet paper and paper towels? They don’t expire, and yet most people buy them routinely. Why not buy two or three years worth at a time? Or five?
This is explained by marginal utility theory. If you buy one package of toilet paper, then that’s significantly better than having none. Some people buy two or three, to stock up. But at a certain point, having one additional package of toilet paper isn’t really worth the price. If it was free, we might stock as much as we could, but at the regular price we stop at some point. This means that each package, even though they’re the same, can’t possibly be worth the same to us. We buy the first package, and maybe the second, etc. But even though the price is unchanged, we suddenly decide that an additional package isn’t worth the price. Someone else will eventually buy the next one, but it’s not worth it for you, because you already have some. But as you start to run out, even if the price is still unchanged after all that time, it becomes worthwhile to buy more again.
Human behaviors like these are evidence that our valuation of things changes from moment to moment, from person to person. If value is subjective, this all makes sense. If value is objective, we’re all insane.
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