Subjective-Value Theory

In a previous article I explained some of the major problems with a cost theory of value. In the current essay I will lay out the basics of the modern subjectivist approach to price theory and show how it is a clear improvement over the cost theory.
The Austrian Approach Starts with Individual Preferences

Although the "marginalist revolution" of the 1870s involved three independent discoveries of the concept by Léon Walras, William Stanley Jevons, and founder of the Austrian School Carl Menger, I am going to focus on price theory as it developed in the hands of the Austrians. Furthermore, I will present a modern statement of the theory, as taught in Murray Rothbard's Man, Economy, and State.

The older Austrians, like Böhm-Bawerk, who actually worked out the details of the theory, would have had different nuances and (from our perspective) may have even gone down cul-de-sacs that a modern exposition avoids. The present essay is just intended to give the basics of the modern subjectivist approach, not a history of its development.

The starting point of Austrian price theory views individuals as holding rankings of successive units of goods (and services). Austrian theory does not need to assume that individuals assign cardinal units of happiness or "utility" to various goods, but merely that they can be ranked from most to least preferred.

If we work through the numerical example of pages 107–10 of Man, Economy, and State, we can see how a modern Austrian explains market-price formation. Consider two men, Smith and Johnson. Smith currently possesses a large number of barrels of fish, while Johnson owns a horse. The following diagrams show how the two men subjectively rank various amounts of fish and the horse: CLICK TITLE TO READ MORE