The theory of subjective value, which is a cornerstone of microeconomics, says that
value is not inherent in things. There may be objective proxy-measures of value—like market value—but these depend primarily on the subjectivity of the individuals who make the choices. The prices of things, in other words, result from people’s subjective valuations of things.
When a 92-year old survivor of the Great Depression says something like “no car is worth $30,000,” he thinks that he’s stating an objective truth. In fact, he’s only saying something about the amount that he’s willing to pay for an automobile, which is somewhere south (probably way south) of $30,000.
Here’s a homely proof by example of the theory of subjective value. I’m wearing a pair of warm crew socks on this cold morning. I’ll be wearing those socks when I drive to the post office to mail a letter. (It’s an important letter, and I don’t want to wait for our mail carrier to pick it up at our curbside mail box.)
I won’t have to stand in line to mail my letter, but there will be a line of people who are waiting for window service. If I walk up to the line and ask everyone in it if they’d like to buy my crew socks, most of them will think I’m nuts and ignore me. If a sporting soul were to ask me how much I want for the pair, I’d say $20. That’s a lot more than I’d have to pay for a replacement pair, but I’d have to remove my shoes, remove my socks, don my shoes, walk out into the cold minus the comfort of warm crew socks, and go to the trouble (sooner rather than later) of buying a replacement pair.
The sporting soul, on the other hand, would probably laugh and say “no thanks.” He’s probably already wearing socks, and doesn’t need a pair at the moment. Even if he didn’t mind handling socks that I’ve been wearing, he’d have to be an unusual person to pay $20 — or even $1 — for a pair of used socks that he doesn’t need at the moment.
That’s subjective value for you. Each of us has a “price schedule” that depends on our constantly changing tastes, preferences, and circumstances. Nothing has a “correct” price. For everything that changes hands at a particular price because buyers and sellers happen to be willing to transact at that price, there are many, many things that don’t change hands because of differences in the valuations placed on them by buyers and sellers.
Politics and Prosperity 