Lesson 4 of 7
Value is a fact about people
Value and cost here are things somebody holds, not properties an object carries. The consequences reach as far as what a cost figure means.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Value here is the importance a person attaches to a good because some satisfaction depends on having it. It is not a property the good carries around.
- Cost is subjective too: the cost of a choice is the best thing given up to make it, which is a fact about the chooser and is never printed anywhere.
- The same commitment makes value comparisons between people impossible in this framework, and that is a limit rather than a feature.
Ask where the value of a thing is located. One answer puts it in the thing: in the labour that made it, or in its physical usefulness. This tradition puts it in the person, and almost everything else follows from that choice.
Where the value is located, on two accounts
Value in the object
- Set by what went into making it.
- The same for everyone who holds it.
- In principle readable off the thing.
- Cost is a sum of inputs.
Value in the person
- Set by what depends on having it.
- Different for two people at the same moment.
- Never readable off the thing at all.
- Cost is the best alternative given up.
One account looks at the object. The other looks at the person in front of it.
Menger's statement of it
Menger defines value in chapter III of Principles of Economics as the importance a good takes on for a person once they become aware that the satisfaction of some need depends on their command of it. Three things are packed into that. The good has to be scarce relative to what the person wants it for. The person has to notice the dependence. And the importance is theirs, so it moves when their circumstances move even if nothing about the good changes.
He is explicit that labour is not the source. In the same chapter he treats the idea that value comes from what was spent producing a good as an error, and his account of higher-order goods in section 3 runs the causation the other way: the machine is valuable because of what the product it makes is expected to be worth.
Cost is subjective as well, and this is the harder half
If value sits in the person, so does cost. The cost of committing capital to one project is the best other thing that capital could have done, as judged by the person committing it. That number is not in any ledger. It was never invoiced, it has no supporting document, and two people looking at the same decision can put a different figure on it honestly.
This is not an argument against accounting. A cost figure in a filing is a real record of cash or of an obligation. It is an argument that the recorded figure and the cost that governed the decision are two different quantities, and the second one is the one the decision was actually made on.
What it costs the theory
Taking subjectivism seriously has a price, and the tradition pays it. If value is an ordering inside one head, there is no defensible way to add one person's value to another's, so the framework cannot produce the kind of aggregate welfare statement that a great deal of applied economics is built on. Caplan argued in 1999 that the stricter versions of this position, in particular the refusal to allow that a person can be indifferent between two options, are not supported by the argument given for them. That objection is taken up properly later in this track.
Check yourself
On Menger's definition, when does a good have value to a person?
- When labour was spent making it
- When they are aware that satisfying some need depends on having it
- When it has a market price
Show the answer
Answer: B.
Chapter III of Principles of Economics ties value to a perceived dependence of a satisfaction on command of the good. A price is a separate phenomenon, treated in chapter V.What is the cost of a decision on this account?
- The cash recorded in the accounts
- The best alternative given up, as judged by the person deciding
- The market value of the inputs
Show the answer
Answer: B.
Cost is subjective in the same way value is. The recorded cash is a real record of something else, and the two quantities routinely differ.Which limitation follows from subjective value?
- Prices cannot be observed
- Accounting figures are meaningless
- One person's valuations cannot be added to another's
Show the answer
Answer: C.
If value is an ordering held inside one person, there is no unit in which to add two people's orderings. Prices and accounting records are observable facts about something else.Sources
- Menger, Principles of Economics, 1871, English translation 1950, chapter III, on the nature and origin of value, on the subjective character of the measure of value, and on the value of goods of higher order following from the expected value of the product.
- Mises, Human Action, 1949, part one, on preference shown in action.
- Caplan, 'The Austrian Search for Realistic Foundations', Southern Economic Journal, 1999, on the rejection of indifference and on preferences not revealed in action.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The press example uses round invented figures to make one point about where value sits. It is not a valuation method and not a description of any asset.
- Subjective value does not mean prices are arbitrary. Prices are public facts produced by many people acting; how that happens is the subject of a later course.