2. The Subjective Theory of Value

The study of Austrian economics has helped me in many ways to understand what happens in our economy, and the excuses of the establishment economists as to why we’re not achieving the paradise that politicians promised if only their legislation were passed. It is time, of course, for them to do some serious explaining, since after 70 years of intervention, conditions have gotten worse, and we face an international banking crisis unprecedented in all of history.

Of all the important contributions of the Austrian School, the subjective theory of value has proven most helpful to me in understanding why things aren’t as the interventionists say they ought to be. According to the soothsayers, there’s always an easy excuse. In Russia, it’s always the weather. In the interventionist United States, it’s “timing,” “the technicians,” “the residuals of capitalism,’’ “tax policy,” “too little spending,” “assistance to the wrong special interest,” etc. The excuses are endless.

Except for a few other Members, no one in Congress has ever heard of the subjective theory of value (or the labor theory of value, for that matter), and none really care. Yet I believe it is crucial for them to understand the theory if true reform is to be achieved. Since little thought has been given to the fundamentals, smatterings of the labor theory of value still motivate many in Congress to promote legislation that will secure a “fair” return for the working man. The explanation of how individuals, acting freely in the market, determine values and prices of specific goods, dispels the myths spread by both the Keynesians and the monetarists. Keynesians blame the Arabs for the inflation; the monetarists, limiting their thoughts to quantity of money as the sole determinant of prices, raise more questions than they answer. It has only been through a basic understanding of how price is determined subjectively that I have not yielded to the “plausible” arguments of the planners who are able to dwell on partial truths and short-term consequences. When viewed from an Austrian viewpoint, “stagflation” is hardly the mystery it was proclaimed to be in the recession of 1974 to 1976.

There are some who have heard of the subjective theory of value but are hesitant to accept it because they prefer “objectivity” to “subjectivity.” Yet if consumers subjectively set prices and values by affecting supply and demand (and thus sales), this is an important objective finding. Just because we can measure monetary aggregates, or hours spent producing a product, we decide these objective facts can be used to determine value. Yet it is really not the way prices are determined, so these facts are not objectively useful for this purpose. Those who would use these “objective” facts for calculating future “price levels” are quick to reject the objectivity of certain economic laws that are glaringly apparent, e.g., government planning leads to chaos; printing money creates no new wealth; fiat money cannot replace commodity money without force and fraud, etc. They thus reject subjectivity where it is important—in understanding how individual prices are set—and ignore objective economic laws so that their schemes of planning can be pursued. This is a mechanism of both convenience and ignorance. It allows planners in Washington to persistently defy all economic laws so the politicians can pursue preconceived and erroneous notions of what is best for everyone.

Once they accept the idea that prices are an “objective” consequence of certain previous events—money supply, oil boycotts, wage settlements, or farm policy—they naturally feel that prices can be altered easily. Legislation to establish wage, price, credit, dividend, and profit controls have been introduced in the House and conceivably could be passed if conditions “warrant” it. Although free-market pricing is crucial for sending necessary messages to entrepreneurs and consumers, its origin is totally misunderstood in Washington, so it is no wonder our economy remains threatened.

If there is no general understanding of the essentials of a free pricing structure, the market economy will always be threatened. And without a free pricing structure, the market cannot function. To understand how prices are determined, one must understand the subjective theory of value.