Value: A Subjective Concept

Oscar B. Johannsen

[Reprinted from Fragments, Summer/Fall 1997]

Value is order of preference. It is a subjective concept which resides in human minds. You judge the order of preference. You value an orange above an apple. In the order of preference which exists in your mind, the orange has a higher place than an apple.

More exactly, value is order of priority of desires. The desire for the orange is greater than the desire for the apple. Your preferences may be due to any number of factors, some so subtle that you may not even be aware of them. The determining conditions may lie hidden within the deepest recesses of the insoluble mystery comprising the human personality.

You could not begin to list the order of all the things you prefer, for almost from the moment you did, it would change in your mind. Even if you could, the fact that the one at the list's head was satisfied might change the order of the rest. Although you may convince yourself that your first choice is an orange, the second an apple, the third a pear, once you have eaten the orange you may prefer the pear to the apple -- or prefer neither. You are not a robot. It is a cliche of men to say that a woman changes her mind constantly; but that propensity is true of all of us. Our evaluations change constantly.

As people begin to value items, value is ascribed to goods. A pair of shoes is valued at $10; a painting at $1,000. Individuals may wonder why shoes are valued at $10 when a painting, which is not as "useful," is valued 100 times more. They are not aware that these valuations are the result of subjective judgments.

Theories have arisen which assumed that value is part of the article itself. The term "intrinsic value" became common. The suave salesman in an antique shop may claim that the "intrinsic value" of a beautiful piece of Ming pottery is $5,000, but, out of the goodness of his heart, he will let you have it for a mere $500. Many people believe that "intrinsic value" is as much a part of an article as its atoms. They seem to have forgotten, or do not know, that value is merely a personal judgment.

Men may say that a woman is beautiful. What is meant is that in their subjective judgment her physical endowments are such that they prefer them to other women. Beauty is no more a part of a woman than value is a part of a good.

Probably the most that can be said about value is that, by some psychological process, you arrive at a decision that you will give two apples for an orange. But that does not mean that such will be the exchange ratio, for, when you come into the marketplace, you may find someone willing to accept an apple for an orange. You will then consider that you have obtained a "bargain."

In civilized societies, price is the ratio at which goods are exchanged for money. The ratio is determined subjectively by each individual. The price an individual is willing to pay is modified by the effect of other individuals, all of whom are making independent -- subjective -valuations. The interactions of all these exchange ratios, or prices, through the higgling and haggling of the individuals concerned, results in a particular price at a particular time in a particular place.

In making judgments, people seek objective means to help them evaluate. By associating such objective factors as dark clouds, as well as certain pressure and atmospheric changes, individuals have a means whereby to predict the weather. It is not perfect. The decision on what objective factors are involved is itself subjective. That erroneous evaluations are made is only too apparent when the fair weather predicted is actually a howling rainstorm.

Similarly, observation has taught people that often certain factors may have a bearing on the evaluation of goods. An obvious factor is the labor required to produce an article. It seems logical to assume that the more labor expended on producing an article, the more valuable it must be. This is known as the labor theory of value, and many variations of it have arisen. Such theories, while apparently explaining why some articles are valued higher than others, run counter to experience in many instances. A Frans Hals spends an hour on a painting, but it is valued at, perhaps, a thousand times one on which an amateur spends a hundred hours. Obviously, the value of the Hals work of art is not determined by the amount of laborexpended.

One variation of the labor theory of value is that value is determined by the amount of labor which the ownership of an item will save the possessor. If you estimate that an article would save you an hour's work, presumably you would be willing to buy it for the amount you would receive for an hour's labor, but this is not necessarily true. You may pay more or less -- or nothing -- depending on how you feel about it.

The labor saved or expended may not be involved at all in determining value. Probably, all one may say about labor is that, for continuous production, the price of an article must be greater than the cost of producing it. But that is not to say the labor and other costs determine price. It is the other way around. The price which consumers are willing to pay determines the point beyond which labor and other costs cannot go. If no one can produce at costs which are lower than the price the consumers will pay, the article ceases to be produced. The labor theories of value, while presumably they have some degree of validity, simply are erroneous.

For instance, Henry George's negative theory of value -- the labor saved theory -- cannot explain why a Rembrandt masterpiece sells for millions, as there is no current labor saved, much less expended. The same goes for the value of land, on which no labor has been expended. George gets around these "exceptions" by creating a "value from obligation." But that, in effect, destroys his "labor saved" theory of value. For a theory of value to be consistent, it must take into account all items: a pound of butter, an art work by some long-dead master, and the value of land. The Austrian School theory of value does take into account all of such items. That is why the Austrian theory -- based on subjective evaluation -- is a valid theory. George's is not.

In the production of wealth, as more and more people are involved and divisions of labor become more minute, each product tends to be the specialty of some individual or of a relatively small group of individuals. The value these individuals place on such articles tends to be based on what such items can be sold for, rather than on the personal desires of these people. In economic literature, this distinction is emphasized by stating that exchange value tends to be of more importance than use value. To a farmer producing 100,000 oranges, any one orange obviously occupies so low a point in his scale of preferences that it can be said to be virtually non-existent. This does not mean that he does not desire to eat oranges. It merely means that he has so many available that any one of them means very little to him. His actions with respect to oranges are geared to what he can exchange them for in the open marketplace. With so many people employed in the production of articles, they (the articles) tend to be considered in terms of exchangeability rather than in terms of individual preferences. While this is true, articles still are dependent upon the scale of preferences of millions upon millions of consumers. If people did not like oranges, they would not be produced.

You cannot add, subtract, multiply, or divide valuations. The most that can be said about valuations is that we prefer one desire to another. Possibly, for a fleeting instance, we can set them up in some order or scale, but we cannot say that we prefer Debussy's hauntingly beautiful "Clair de Lune" two and a half times as much as we prefer Gershwin's "Rhapsody in Blue." We cannot apply mathematics to valuations. We are not dealing with inanimate matter. We are dealing with thinking individuals, often irrational, who have ends and purposes in mind and whose psychology and mental processes are simply not reducible to numbers.

Value is a subjective concept. It is order of priority of desires -- and it is to the Austrian School of economy that we are indebted for the correct determination of that elusive concept: Value.