Why does a painting that’s almost completely blue sell for $44 million while my perfect macaroni recreation of Adam Smith still sits on the market?
It doesn’t seem fair, but it all comes down to how we determine the value of goods. The value of these art pieces aren’t determined by the costs of materials (even if I had bought my macaroni directly from Italy, it wouldn’t increase the value of my recreation) or the amount of work I put in creating them (I painstakingly glued every noodle). The value of the goods are ultimately decided by you, the consumer, whose wants are incredibly subjective.
Carl Menger was one of the first to bring up this idea of subjective value. Subjective value is a term to describe my unique evaluation of a good’s value. And, it’s unique to me only in this specific point in time. Prices of goods are determined by how much value both the buyer and the seller give the product. So if I value a burger at 12 dollars, and the burger is sold for 10 dollars, I’ll buy it.
Alright, that’s great, people like different things, but why does that matter? Frequently, we hear discussions about people who are taken advantage of by the market. In light of subjective value developed by Menger, there are no losers in trade. It’s close to lunchtime, so I’m about to go get what I value as a 12 dollar burger for 10 dollars. That means I’ll make 2 dollars off the exchange! Don’t worry about the seller; he wouldn’t sell at 10 dollars unless he saw himself making a profit as well. Every exchange is only possible if people subjectively see themselves as being better off after trading. If I didn’t see a burger as better than 10 dollars, why would I give up the 10 dollars?
Maybe you think art is way too subjective and the burger talk is making you hungry. Fine, let’s talk about the new iPhone X. The ticket price: $1,000. That seems insane to me, but people are still buying it. There are perfectly good, comparatively inexpensive Android phones that some argue are better than the iPhone X. No, this isn’t an Android commercial, but it’s still a puzzle as to why iPhones still seem to sell so well. The key is, as you might have guessed, subjective value. Through loyalty to Apple, peer pressure, or genuine enjoyment of its technology, people see more value in the iPhone X than in spending $1,000 some other way (like 100 burgers, am I right?).
Carl Menger’s contribution in the creation of the subjective theory of value was revolutionary for its time and still continues to be one of the pillars of economic thought. So, go buy what has value to you…did I mention I’m selling a limited edition macaroni Adam Smith?