Subjective Value

For an undetermined period of time I felt myself cut off from the world, an abstract spectator. . . . The road kept descending and branching off, through meadows misty in the twilight.

–Jorge Luis Borges, “Garden of the Forking Paths”

The eye of the beholder—that’s where beauty lies. I look at all those paint spatters, and I see, well, paint spatters. You see an interesting, colorful feast for the eyes. Sure, we’re looking at the same object. But we appreciate the painting in different ways. And our differences don’t just lie in the aesthetic domain. All value is subjective.

I may want to take that bottle of water and put it to my parched lips in order to survive. You may want to load your squirt gun. I’d pay a thousand dollars for that water in the right circumstances. You might only be willing to give a buck. So perhaps we can at least agree that the circumstances of time and place can cause us to value things differently. But matters run even deeper. We are different, you and I—on the inside. We are likely to value things differently even in identical circumstances.

Allow me to share an experience I wrote about a few years ago:

I was living in an apartment complex with a coin laundry. One day, when I put the quarters in to dry the laundry, I found myself $.25 short. I was in a hurry. I couldn’t wear my sweats to dinner. I needed clean, dry slacks. Fortunately, a man with a basketful of whites and a Ziploc bag, quarters jingling, wandered into the laundry room. I fished a dollar bill from my pocket.

“Excuse me, sir,” I said. “Would you take a dollar for one of those quarters?” He smiled. “Sure, no problem.” At that time, in that context, from my perspective, his quarter was worth at least a dollar to me. That afternoon I wore clean, dry pants. Could I have made a better choice? And, if so, by whose lights? Certainly not mine.

A key element in that story is perspective. Even if the circumstances had been identical in every respect from one person to the next, we can imagine someone who likes wearing wet clothes. Or perhaps there are some who would only be willing to beg the guy for a quarter, or pay as much as 75 cents but not a dollar. These are people who simply don’t share my subjective valuations—my inner states, which motivate me to act or not.

Subjective value can be a tough idea for some people to grasp. It can be even harder for people to accept. But here’s the hard truth: Value does not inhere in things. Sunsets are not inherently beautiful. Vanilla ice cream is not inherently tasty. Jazz is not universally loved. Prices are objective—that is, publicly observable. We can each walk into a store and see that the avocado is $1.50. But our inner states will determine whether the fatty fruit winds up in any of our baskets.

The implications of this idea are profound. All economics begins and ends with something rather illusive: the private states of people’s minds. And it’s a good thing, too. In many respects we should celebrate that we value things differently. I’ve always liked this rhetorical question from Murray Rothbard: “How can both parties benefit from an exchange?” He answers:

Each one values the two goods or services differently, and these differences set the scene for an exchange. I, for example, am walking along with money in my pocket but no newspaper; the newsdealer, on the other hand, has plenty of newspapers but is anxious to acquire money. And so, finding each other, we strike a deal.

That countless exchanges happen all over the world at every second is due to interconnected systems that start with subjective valuation and are facilitated by the price system.

Unfortunately much of modern economics overlooks this key insight. Either economists take subjective valuation for granted in order to dabble in the arcana of mathematical macro, or they make a fateful two-step into the false objective theories of value like the one Karl Marx embraced. While there are only a few economists who wouldn’t say “we’re all subjectivists now,” some are propagating ideas which, at minimum, rely on sliding back and forth between objective and subjective views. Fashionable theories like “libertarian paternalism” and “happynomics” come to mind. Failure to appreciate subjective value can cause people at best to err in their understanding of prices. At worst, it can lead people to embrace illiberal policies such as those designed to force us to do what others consider to be for our own good.

Policymakers almost never do a good job of making choices for us, because they cannot appreciate our particular circumstances. “Nudgers” and other paternalists are rarely any better informed than the rest of us. Sometimes they are. But more often than not, even old-fashioned good advice requires local knowledge and a perspective no bureaucrat has. Most of the time, the “choice architectures” that policymakers dream up for us create perverse effects the policymakers weren’t smart enough to anticipate. Will Michael Bloomberg really be able to nudge Americans to slim down by banning Big Gulps in New York? Weren’t a lot of Americans “nudged” into mortgages they couldn’t afford?

George Mason University economist Peter Boettke reminds us how subjective valuation underlies so much of economics: “In deciding courses of action, one must choose; that is, one must pursue one path and not others. The focus on alternatives in choices leads to one of the defining concepts of the economic way of thinking: opportunity costs”—the highest value forgone as the result of any choice.

The process of weighing benefits to make choices is fundamental to human action. As a precondition of human action, subjective valuation is the prime mover. Yet it cannot be measured. There are no units like “hedons” or “utils.” All that is observable is the action. And that means much of economics—especially welfare economics—is predicated on a false concept of value. That inner fire, unique to each of us, is the prime mover of that economic unit known as the individual. We forget this fact at our peril.