Many of those who exhort others to “learn economics” barely grasp marginalism, as can readily be verified by posing the following question:
“Is the value of a capital good subjective?”
To which your typical laissez-faire ideologue will parrot something along the lines of:
“All value is subjective. There is no way to objectively ascribe value to anything. A million tons of gold could be worth a lot or worth nothing, depending on the factors at play.”
This sort of answer reveals a fundamental misconception around the Subjective Theory of Value, and economics in general. To understand why we must examine how Austrian and Marxian schools treat capital goods.
The Austrian View
The situation with capital goods differs from that of consumer goods in that capital goods are used for making money, therefore their utility can literally be measured in money. A rational entrepreneur will weigh up the productivity of the equipment verses its lifespan, running costs, service intervals, and maintenance costs. These factors can generally be gleaned from the specification, so the entrepreneur will objectively select whichever option can deliver the highest profitability for whatever outlay falls within budget, whilst also taking any other aspects such as the form factor into account.
Although the relative value of a capital good is objectively determined by profitability, the price paid for it remains dependent on supply and demand.
The Marxian View
When people purchase goods they are doing so to use them, and use value (utility) is subjective to the individual’s particular needs and aspirations. The exchange value (price paid) can objectively be measured in money, for example if someone pays $500 for a product then any observer would objectively agree that $500 had been paid.
Capital goods are used in production, therefore their use value can be quantified in money. A capitalist will weigh up the productivity of the machine verses its lifespan, running costs, service intervals, and maintenance costs. Assuming all of these can be calculated and for comparable machines, then the capitalist will objectively select whichever one generates the highest rate of profit for whatever outlay falls within their budget, whilst taking account of physical factors such as the space they have available in which to house it.
It’s important to comprehend that while the use value of a capital good is objectively determined by its rate of profit, the exchange value for that rate of profit is in turn dependent on the demand for whatever is being produced.
If an entrepreneur/capitalist were to irrationally select a capital good based on its colour or how it smelled then they’d invariably be outcompeted by more rational actors. Those subjective factors only come into play where the products are objectively equal in all other respects, and this is seldom the case. For this reason comparable capital goods tend to appear a lot more homogenous, since there’s far less commercial advantage to be gained from investing in their looks.
There are also some exceptions to this. For example if a restaurant has its coffee machine on display then greater consideration would be given to style.
Competing Theories of Value
Reading through both explanations should highlight something that anyone who has actually bothered to learn economics will already be aware of: Mises and Marx don’t actually disagree on the nature of what’s occurring, they just explain it in different ways.
Since most “learn economics” types have never read any economics beyond basic marginalism, they tend conflate explanations of utility (use value) with the competing theories of STV and LTV… so for the absolute avoidance of doubt all economists (yup, including Marx) share the orthodox view that the prices of goods arise from market forces. This has never been even remotely controversial.
Austrian economists theorise that the utility (use value) of a good is perfectly synonymous with its market price (exchange value). This is the Subjective Theory of Value. However, as we’ve just seen, in the instance of capital goods the market price is tethered to profitability; anything profitable has a non-zero value that increases linearly with said profitability. Austrians are thus highlighting that:
- …the profitability of a capital good depends on the utility of whatever it’s producing…
- …and on its purchase price…
- …which in turn depends on how much entrepreneurs are prepared to invest in order to achieve said rate of profit…
…which brings us back to the first point. Damn!
If your brain isn’t already melting from all the circular reasoning then just wait until you find out what capital is.
STV is only really applicable where value is being measured in money. Since money also functions as a store of value this approach leads to that aforementioned circularity issue.
Classical and Marxian advocates of the Labour Theory of Value suggest that the value of a product can instead be measured according to the hours of socially necessary labour time needed to efficiently produce it. The basis of this belief being that where the decision was taken to manufacture something, then someone must have persuaded workers to manufacture not only that product but consequentially all the components needed for assembly, and also to mine and refine all the raw materials that go into those. Since that would have entailed financially compensating numerous workers throughout the supply chain for the hours they variously expended on doing so, the instigator of this process must have perceived it to be worth the effort. LTV is therefore figurative in the sense that it can notionally assign value to anything, irrespective of commercial viability, based on how many worker-hours are required to manufacture it.
LTV considers value from the perspective of manufacturing a good, while STV considers value from the perspective of marketing a good. There isn’t a right way of looking at this, it’s merely a case of chicken and egg.
The Exergy Theory of Value
The problem with applying STV or LTV to production is that both ignore the impact of the second law of thermodynamics, by assuming that natural resources are ‘free’ to whomever has claimed them, rather than accounting for those as finite. STV even goes so far as to ignores the energy expended by labour.
Rather than opting to quantify value in money or labour time, we can instead consider the Joules of energy consumed by the delivery process less energy wasted. This is known as “exergy”.
A “million tons of gold” therefore has an absolute non-zero exergy value (it was created by nuclear fusion in a star) that can be quantified in Joules. Likewise should that gold be fashioned into rings then those rings will also possess an exergy value in Joules, a value greater than that of the raw unprocessed gold.
The Exergy Theory of Value is consistent with thermodynamics and even has scope to be mathematically validated. As such ETV can be considered the truth per se. This is why many anarchist economists are now advocating ETV, since that has the potential to transform economics from a social science into a physical science, and thereby unify umpteen competing ideological schools into a pragmatic scientific discipline.