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Subjective Value Theory

It sounds like a big complicated concept, but really it isn't. Subjective Value Theory basically means that the value of something, what is worth, what someone is willing to pay for it, is subjective....that something may be worth more to one person than it is to another.

Maybe someone has gone 2 days without water and is dying of thirst and has a pocket full of money....another person has plenty of water, and only a bit of money....will they both be willing to pay the same price for a glass of water ? Of course not.

I hate marshmallows. Lots of people love them...if there is one bag of marshmallows left in the world will I be willing to pay as much as someone who LOVES marshmallows ? Of course not, I wouldn't pay anything at all for them !

Without subjective valuation the whole concept of an auction would make no sense. If everyone was only willing to pay some certain particular "objective" price for an item....some absolute price that is above and apart from people's individual tastes, wants, and desires...then how could an auction exist ? The price would be known in advance...but the truth is some people will pay ridiculous sums of money for things that other people could not care less about.

This seems like a silly thing to talk about, it's really pretty obvious. However it is a fundamental concept of economics, and if misunderstood causes serious fundamental flaws with economic calculation.

Adam Smith, for example, was a proponent of the "Labor Theory of Value" which was a theory that the "proper price" of an item could be determined by examining the cost of the materials to make an item, plus the cost of the labor...this type of price or value theory was common in times before Adam Smith, but it is a flawed is an excellent article on the topic. The mince pies vs. mud pies argument drives the point home very well.

Marx then used this type or valuation model to state that any amount charged over and above the "just price" was exploitation of the worker...a ridiculous concept, mostly because it claims that there is some way to determine exactly what that "just price" might be, which as we discussed just a few paragraphs ago, is a most impossible thing to do.

So there you have it, the basics of Subjective Value Theory....easy to describe, easy to understand...and dangerous if misunderstood...I discuss it mainly to move on to the next topic which depends on it....the Mutual Benefit of Exchange"