Economic Value

The economic value of a good or service is what an individual would exchange for a given good or service.

The economic value of a good or service is what an individual would exchange for a given good or service (usually in terms of money). Economic value is personal (“economically subjective”) to the context of an individual. It is not intrinsic to the good. [1] Writes economist Carl Menger:

“Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.” [1]

For example, a glass of water is of more value to someone dying of thirst who has been stranded on a deserted island, then the diamond necklace they are wearing. Put that same individual at home where they have sufficient access to all the water they want, and they would be hard-pressed to give up their expensive necklace for a glass of water. This explains the “paradox of value” that puzzled earlier classical economists like Adam Smith: why are diamonds sold for a higher price than water, given that water is biologically more important to life?

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When two individuals believe they gain more value from exchanging goods or services, they will make a trade, and exchange a value (say shoes) for a value (say a shirt), creating a win-win situation, as both personally value the goods they are receiving then the goods they are exchanging.

The market price (or market “value”) of a good or service is the price it actually trades for at a given time in terms of money.

 

Notes

[1] Quoting Carl Menger, founder of the Austrian School of Economics and co-founder of the Theory of Marginal Utility, remarks in his Principles of Economics (1871):

Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men. It is, therefore, also quite erroneous to call a good that has value to economizing individuals a “value,” or for economists to speak of “values” as of independent real things, and to objectify value in this way. For the entities that exist objectively are always only particular things or quantities of things, and their value is something fundamentally different from the things themselves; it is a judgment made by economizing individuals about the importance their command of the things has for the maintenance of their lives and well-being. Objectification of the value of goods, which is entirely subjective in nature, has nevertheless contributed very greatly to confusion about the basic principles of our science.

By “subjective”, Menger means personal to the individual, and thus cannot be determined by an outside figure.

Capitalism FAQ

Intellectually “chew” the ideas brought up in the tour by exploring the Capitalism FAQ (Frequently Asked Questions).

 

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