The Subjective Theory of Value

The subjective theory of value is an economic theory that states the value of a good or service is determined by the personal preferences and desires of the individual consumer. This is in direct contrast to theories that argue value is inherent in a good’s production, such as the labor theory of value.

Core Principles

The subjective theory of value is based on a few key ideas that form the foundation of modern neoclassical economics:

• Utility: A good’s value comes from its utility (its usefulness or the satisfaction it provides) to the consumer. What one person finds valuable, another may not.
• Marginal Utility: This is a crucial concept. The value of a single unit of a good is determined by the additional satisfaction that one more unit provides. For example, the first glass of water to a person dying of thirst is immensely valuable. The second glass is less so, and the tenth is worth almost nothing. This concept helps explain the “diamond-water paradox”: water is essential for life but cheap, while diamonds are non-essential but expensive. The subjective theory explains this by noting that the marginal utility of a single diamond is high, while the marginal utility of an additional glass of water is generally very low.
• Scarcity: A good’s value is also influenced by its scarcity relative to demand. If something is scarce and many people want it, its value will be high. If it’s abundant, its value will be low, even if it’s very useful.

How It Differs from the Labor Theory of Value?

The subjective theory of value emerged in the late 19th century as a response to the labor theory of value (LTV).

• LTV: Value is objective and determined by the labor time required to produce a good. The labor put into a good creates its value.
• Subjective Theory: Value is subjective and determined by the individual’s perception of a good’s usefulness. The desire for a good is what gives the labor and resources used to produce it their value.

A classic example of this difference is a mud pie. A person could spend an enormous amount of labor making a mud pie, but its value would be zero because no one wants to eat it. The subjective theory explains this simply by saying the mud pie has no utility, and therefore no value. The labor theory, however, would struggle to explain why something made with so much labor has no value.