Economists say that value is subjective. But what do they mean by that? Why is this concept so significant? In the above video, Prof. Don Boudreaux demonstrates the concept by comparing a Che Guevara t-shirt and a Milton Friedman t-shirt. Most people would value these shirts differently, and would be willing to pay more for one than the other. Yet the shirts are identical in terms of the labor and resources required to produce them. So what accounts for the difference in value? As Prof. Boudreaux explains, the key factor is consumer preference.
- Artwork and the Subjective Theory of Value [Article]: Yumi Kim emphasizes that the "value we place on goods and services is determined by the individual who is evaluating."
- Subjective-Value Theory [Article]: Robert P. Murphy explains how individual subject valuations lead to the formation of prices.
- The Relentless Subjectivity of Value [Article]: Max Borders emphasizes the importance of time and context when conducting economic analysis.
- Unearned Riches [Article]: Leonard E. Read masterfully demonstrates the subjectivity of value and the blessings of trade.
- How Markets Work [Article]: Eamonn Butler explains the fundamentals of markets and the benefits associated with market transactions (found on pp. 17-25).
- Principles of Economics [Book]: In this book, first published in 1871, Carl Menger was one of the first intellectuals to explain subjective value theory.
One of the most crucial insights of economics is that value is subjective. That means value ultimately comes from the human mind. It doesn’t inhere in the things that we value. And I want to explain that with some t-shirts that I went out and made. I went to the mall recently and bought two t-shirts, and I bought some iron-ons. And here’s one of my t-shirts. It’s of a revolutionary who’s famous from Cuba, Che Guevara, and another t-shirt of one of my heroes, Milton Friedman.
Now these t-shirts both cost me about the same amount of time to make, same amount of money, so in terms of what I spent, the resources that went into these t-shirts, it’s the same. But you know what? The value of the Che t-shirt is, in fact, a lot higher to most people than is the value of the Milton Friedman t-shirt. If for some reason Che falls out of favor in the public mind, the value of the Che t-shirt falls. If the value of Milton Friedman’s image rises, if people come to really like Milton Friedman, the value of the Friedman t-shirt increases.
But the point is, objectively, physically, these t-shirts, this one and this one, are largely identical. The only difference is the image on the front. That’s the nice thing about subjective value. Our values do differ. I would not be caught on the street wearing a Che t-shirt, because I think he was a scoundrel. I would love to wear a Milton Friedman t-shirt. In fact, I’m eager to wear this for the first time. I value this t-shirt more highly than do other people. And that’s one of the beautiful things about understanding subjective value.
It’s important to understand that the value is not in the thing itself. It doesn’t come like the Marxists believed or even the classical economists believed from the amount of labor that goes into producing it. Value is not a product of how many other resources went into producing something. Ultimately things have value only if and only because human beings want those things. The more intensely human beings want those things, the more valuable they are.
The classical economists, for all of their wonderful discoveries, did not get subjective value. The economists didn’t understand subjective value until the middle of the 19th century when particularly Carl Menger of the Austrian school realized that people pay for things only because they want those things. They don’t pay for things that they don’t want. And so the value that people have in their minds for the things they buy, that value gets transmitted through money prices into the market prices of the goods and services.
One implication of subjective value is that you can’t tell me that the fact that I prefer the Milton Friedman t-shirt to the Che Guevara t-shirt means that I’m wrong. It’s not your preference perhaps, but it’s my preference. And because you can’t read my mind and I can’t read your mind, the best you can do is say, well, if I prefer the Friedman t-shirt to the Guevara t-shirt, then in fact the Friedman t-shirt to me is more valuable. If you prefer the Guevara t-shirt to the Friedman t-shirt, then the best I can conclude is that the Guevara t-shirt to you is more valuable than the Friedman t-shirt. Neither of us are right or wrong in some subjective sense. Subjective value is just how each of us assesses the worth to each of us of each of these t-shirts. That’s one of the things that make the economic world go round. We have these different valuations of different things. We express our valuations in how much we’re willing to pay.