“Learn Economics!“

Many of those who exhort others to “learn economics” barely grasp marginalism, as can readily be verified by posing the following simple question:

“Is the value of a capital good subjective?”

To which your typical poorly read 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.

OK then…

That sort of answer belies confusion around the meaning of the term “objective”.

objective is a matter of perception

When an entrepreneur assesses a machine, although not in possession of perfect information, that assessment is being made as objectively as possible. The entrepreneur is not deciding whether the machine is nice looking, pleasant sounding, or tasty… but rather attempting to calculate how much money it will make. While different entrepreneurs might reach different conclusions, they are each attempting to be as an objective as possible in doing so. Furthermore there’s no requirement for an objective analyses to be 100% accurate! Being objective isn’t synonymous with being right. It’s about being free from feelings and bias.

More crucially:

At the end of a machine’s life, when all its utility has been realised, it’s possible to precisely determine how profitable it has been in retrospect, by deducting its purchase price and lifetime running costs from its total productivity plus whatever can be realised for it as scrap. This is objectively the value realised from that capital good expressed in monetary terms.

Not only is this evidently the correct answer, it doesn’t actually contradict the STV.

This misconception around how capital goods are valued highlights a common misinterpretation of the Subjective Theory of Value, and also economics in general. It’s usually indicative of someone who imagines that there’s very little overlap between the various schools of economics, when in fact they all treat capital goods much the same way, take for instance Austrians vs Marxians

The Austrian View

lots of Austrian economists

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

Karl Marx & Friedrich Engels

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.

Subjective Exceptions

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 other 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.

looks can be important dependant on the setting (photo credit: saravutpics/Shutterstock.com)

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

is value subjective or does it depend on labour? (photo credit: AlexLMX/Shutterstock.com)

Reading through both explanations should highlight something that anyone who has actually bothered to learn economics will already be aware of: Menger and Marx don’t actually disagree on the nature of what’s occurring, they just explain it in different ways.

marginal utility

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.

is value subjective?

The STV is not about the value of everything being subjective, which is how “learn economics” types understand it. It’s about how market prices (exchange values) are ultimately dependent on the marginal utility of goods.

As highlighted above by von Mises, 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:

  1. …the profitability of a capital good depends on the utility of whatever it’s producing…
  2. …and on its purchase price…
  3. …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!

There’s an easy way to exit this circular reasoning though – since capital goods only exist to produce consumer goods for profit, the utility of a capital good does not arise by its consumption. Very few people purchase a lathe for entertainment or to act as an ornament. The purpose of a capital good is to make money, so it can be objectively valued on how much money it’s likely to make/is making/did in fact make, at any given moment in time.

Carl Menger
Founder of the Austrian School
Architect of the Subjective Theory of Value

So there you have it in the words of Menger himself (click on his photo for the full text). How valuable is my tractor today? Well it made me $500 after taking account of operating costs and depreciation. That’s an objective measurement, one that can be itemised on a balance sheet.

The basis of STV is that all value is dependent on the marginal utility of consumer goods (and services), which also impacts on the profitability of capital goods since this is dependent on the prices consumer goods are being exchanged for. STV is far more complex that the glib assertion that “all value is subjective”. A more accurate way of phrasing it is “all value arises subjectively”, because that’s the phenomenon that the theory is actually describing.

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.

or is value derived from labour?

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 the socially necessary labour time required to manufacture it.

value is a matter of perspective

According to LTV a good is only viable if consumers feel that it’s worth exchanging at least as much of their own labour for it, as went into producing it. LTV is predicated on socially necessary labour time rather than money, which is why it’s more applicable in scenarios such as mutualism and collectivism where money is eschewed in favour of labour vouchers.

LTV considers value from the perspective of manufacturing a good, while STV considers value from the perspective of marketing a good. Setting logical fallacies aside, 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 ignore 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”.

exergy is energy used less energy wasted

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.

labour without energy is a corpse, capital without energy is a sculpture

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.

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