By Practically all schools of contemporary economic thought recognize that value is subjective. Although mainstream economists merely pay lip service to value subjectivity—and, in practice, treat value as objective so that they can analyze so-called utility functions—it is still a core assumption in modern economic thought.
This is very different from classical economics, which typically treated value as objective and determined by production costs. Marxists still subscribe to this anachronistic view by claiming that the objective value of any good is the labor that goes into producing it. However, all other schools of economic thought in existence today are subjectivist and have been since the marginalist revolution in the 1870s.
Many who have not been exposed to proper economic reasoning are somewhat stupefied when learning that the queen of the social sciences (economics) is built on such “loose ground.” In fact, many even resort to using the concept of value subjectivity as a reason for dismissing economic thinking altogether. Their doing so is typically based on misunderstanding the meaning of the term. However, those in mainstream economics are also to blame for allowing critics to use this core assumption as a critique when it really is not.
“Subjectivity” is colloquially used as a reference to something that is without explanation, seemingly random, and without basis. This is not what the term means, however. It simply means that something is personal rather than necessarily shared and equally understood by everyone. Per Merriam-Webster, “subjective” can mean “of, relating to, or constituting a subject,” “a characteristic of or belonging to reality as perceived rather than as independent of mind,” and “peculiar to a particular individual.”
There is nothing “random” about value, but it is certainly personal. It is value that motivates people to take specific actions, thus giving rise to the economic phenomena that we study—such as prices, resource allocations, and economic growth. There are perhaps reasons (or causes) for why we value one thing but not another and why our valuations change over time, but those are issues in the realm of psychology. Economics does not and needs not deal with why people value something (or not). What matters is that they do and that they take actions motivated by that value, which have consequences in the physical and social world.
This is also where mainstream economists (and some Austrian economists too) contribute to the confusion. By focusing on utility functions and the choice between alternatives (rather than actions), these economists are perhaps able to explain behaviors in the present. They can also extrapolate from statistical data to make predictions about the future, such as what wheat prices will be given the current area of farmland used to grow wheat or the effects on employment by raising the minimum wage by a certain amount.
These predictions are used to assess policy, but they always turn out to be wrong (to some degree) because people in the real world do not make the choices they were presumed to make. This, in turn, is typically taken by economists as a rationale to revise the model and—because the aimed-for outcome is “optimal,”—suggest incentives to get people to behave more in line with the original expectations.
There are several things wrong here. One problem is that people do not choose between given alternatives that are merely ranked using subjective value (approximated by a utility function). They act in the way they think is best (highest value) given the means they have at hand and the ends they imagine they can attain. What the acting individual considers as means, what ends are valued, and how means and ends relate to each other are just as subjective as the value itself. Imagined possibilities that we think we can attain—whether they exist, must be created, or are recognized by others—are also part of our individual rankings.
Another problem is that what any one of us considers an economic good is by virtue of its value—not the thing in itself but the services we recognize that it will provide us. Mainstream economists will teach that a hot dog and a bun are complements of each other whereas a hot dog and a hamburger are substitutes for each other. This may be statistically true simply because many people eat hot dogs with buns and choose either hot dogs or burgers. However, someone who is gluten intolerant will not consider hot dogs and buns to be complements and neither will a vegan (but for different reasons). Also, people enjoying a cookout with friends might enjoy a plate of hot dogs and hamburgers more than hotdogs or hamburgers.
There are many more problems with mainstream economics, but core to them is the treatment of the economy as objective and therefore measurable, whereas any economic phenomenon is necessarily based on value subjectivity. This does not make economics less reliable as a field of scholarship. On the contrary, pretending (or “simplifying”) that people make objective choices between objective alternatives is the cause of many errors by economists.
For example, some economists might be confused about the so-called endowment effect, which states that goods have higher value when owned than before they are acquired. They fail to realize that this can often be explained simply by using value scales. These economists may also wonder why so-called Giffen goods have higher demand at higher prices in apparent contradiction to the law of demand. However, they miss that the asking price is part of the good offering and thus part of how the actor values it, which means some goods offered at a higher price may be considered different from the physically identical product offered at a lower price (brand-name versus off-brand jeans, numbered prints versus mere copies of art). Why should economics treat two physically identical products as the same good if consumers do not?
Misesians avoid these problems (and more) by not only consistently recognizing that value is subjective but also by studying the economy—observable social structures and phenomena—from the perspective of its ultimate cause: human action. This may seem like a minor difference from studying choice, but it is in fact a genius move—a true breakthrough in economic reasoning. Action places subjective value center stage as the individual’s motivation for causing change to the external world. To use Ludwig von Mises’s terminology, actions are taken to remove felt uneasiness. Action is the link between value subjectivity (the internal world) and human-caused change to the objective (external) world, whether in the social or physical realm.
To study mere choice excludes much of the creative, value-motivated, temporal process of action and therefore the cause of social and economic phenomena. While the economy can be studied from the perspective of objective, measurable data, the problem is that no actor within the economy—whose actions in effect make up the economy—acts based on objective parameters. Value is at the core of the individual action—what motivates it—and, therefore, value is also what causes and gives rise to all economic phenomena. The fact that many economic phenomena are objective, or at least intersubjective, is in fact irrelevant to the study of economics because economic phenomena cannot be understood without recognizing and consistently applying value subjectivity.
