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Economic Values As Objective

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There is some confusion and misunderstanding among Objectivists interested in Austrian economic theory and vice versa about the phrase "subjective theory of value" used by Austrians to describe their view of economic value. It is a common mistake by both to take the "subjective" aspect of the theory too far, and misapply an essentially correct economic theory to reach erroneous ethical and epistemological conclusion. This is not a trivial error since Ludwig von Mises himself never recovered from it. Understanding why requires a grasp of what the terms "objective" and "subjective" actually mean.

My argument is that the "subjective theory of value" is essentially correct, but incorrectly named, and should be distinguished from two contrasting erroneous views of economic value by calling it the objective theory of value, since market prices are in fact objective.

Broadly speaking, there are three theories of economic value: intrinsic, subjective, and objective. By "economic value" I refer to a measure of the relative worth of an end relative to the value of some other good or end. The question is - what is the standard by which to measure value – and who is to do the measuring.

The intrinsic view is the most commonly held today. According to this theory, economic goods have some kind of intrinsic value determined either by their nature or by their method of production. For example, according to the labor theory of value espoused by Marxism, the value of a good is determined by the amount of labor put into it. Another common intrinsic baseline is the rarity of a good (say, diamonds versus wood), or the amount of machinery needed to manufacture it, or the cost of materials needed to produce it, or how badly it is needed for one's survival, or how many consumers want it, or the infallible judgment of some earthly or heavenly authority.

Whatever the standard is used, the theory is easily disproved by simple counterexample. A book may take years to write, yet it is worthless if the plot stinks. Two-headed chickens are much rarer than diamonds, but not nearly as valuable. Last year's computer may cost twice as much to make as this year's, but it will sell of half as much. Water is necessary to human life, but truffles sell for much more.

A basic grasp of economics will point the flaw with the intrinsic theory of value: economic value is set by the marginal utility provided by one more item. Water is cheap in a city because one more gallon provides little value – but that additional gallon is priceless if you're stranded on a desert island.

Before moving on to the subjective theory of value, I have to clarify exactly what I mean by the terms "objective" and "subjective."

Objectivity, according to Ayn Rand, is "volitional adherence to reality by the method of logic." In other words, an objective fact (a redundancy, there are no "subjective facts") is one that we determine by observing reality and using reason to come to a conclusion about it. In other words, objectivity is "reality, as understood by a rational mind." Reason is the tool man uses determine what he values, depending on what benefit it will have on his life. An "objective value" in the philosophical-ethical context of Objectivism is one that is reached by the process of reason. Of course, reason is fallible by its very nature, and besides that, many people cannot or will not use logic, so many people do not choose their values by rational means.

A subjective value on the other hand is one that is NOT reached by observing reality and reasoning about the evidence. For example, oftentimes our tastes in music or food cannot be rationally explained – this does not make them bad or illegitimate, just not open to rational explanation. Other subjective values are subject to negative moral judgment – for example, a taste for crack cocaine, or mindless thrill seeking, or hurting others. Therefore, a "subjective value" in the philosophical-ethical sense is one not reached by the process of reason.

According to Objectivism, since life is the standard of value, we can say that (given a certain context) some values are objectively good (such as a new car) or objectively bad (such as crack cocaine). At this point, some might attempt to equivocate moral values with economic values – but this would be a mistake.

Objective ethical values are NOT equivalent to objective economic values. This is trivially true since some values are obviously not rational or objectively good for us, yet they are still economic values – just note the high price of cocaine.

In the Austrian understanding, the subjective theory of value dispenses with the analysis of why certain ends are chosen, or what beneficial or harmful effect they may have. It is only important that we value an end, and how much we value an end relative to other ends that we would act to attain, as well as other individuals seeking these same ends. (The stress here is on individual value judgments, rather than absolutist (aka interpersonal) standards required by the intrinsic theory.) Therefore, no explanation for whether an economic good is rational or irrational, moral or immoral is necessary.

Some Austrians (Ludwig von Mises) go further to say that no explanation for the rationality or morality of a choosing one end over another is possible, apart from the fact that someone does value it. This is wrong. Economic values are not necessarily rational or moral –they may be chosen by rational or irrational, conscious or subconscious means, but the particular method is irrelevant to economic analysis. The essential fact is that people choose (and express through action) some ends over others by some means.

While we may not act rationally in choosing our values, consistently pursue the ultimate values we rationally choose, or even choose values at all, we do express our actual values in our actions. This is true by definition -- an economic value IS an end that we act to attain. In other words, our actions are not arbitrary, but determined by our actual values. In other words, economic values are objective because they objectively reflect the values that people hold.

In a monetary economy, economic values are expressed as prices. A price is the intersection of the values two individuals are willing to give up in a voluntary transaction to attain mutually beneficial states. Therefore, market prices are objective expressions of the aggregate valuations of individuals of certain ends.

Contrast this with a subjective view of economic value, that is one derived from the meaning of the word "subjective." The layman's understanding of this is of the corporation that arbitrarily sets prices, and helpless consumers who buy whatever is in the store. In this understanding, individuals do not act on their actual values – they accept whatever arbitrary figure the "greedy" corporation chargers. In this perspective, prices are subjective – that is, not determined by the facts of reality (the actual demand of consumers) but by the subjective whim of the seller.

Note that both the intrinsic and the subjective theory of value are conductive to arguments for regulating the market because they claim that market prices are arbitrary. If economic values are intrinsic, then prices distract and distort the actual value of goods, and regulation is necessary to keep prices in live with the "real" values of goods. If economic values are subjective, then regulation is necessary to keep the capitalist bosses from exploiting the helpless masses. This is one of the reasons why it is important for capitalists to explain that prices are neither "proxies" for some "ideal" value, nor subjective choices, but objectively reveal the actual values that individuals hold.

Edited by GreedyCapitalist

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Well done GC!!! This post was very enjoyable for me. My favorite section is when you effortlessly prove the false theories of value wrong with simple counterarguments.

This helped immensely when trying to understand what a arbitrarily set price by a government entity would be:

You said "economic values are objective because they objectively reflect the values that people hold." Arbitrarily set economic values (prices) are objective because the objectively reflect the values that the government hold (which are indeed disvalues). This seems simple enough but it gave me a brain cramp.

I remember you saying that you were about to read a bunch of economics books. Which ones did you find the most valuable?

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