On the Subjective Theory of Value
The subjective theory of value's chief rival — the labour theory of value advocated by David Ricardo, Adam Smith and Karl Marx — is deeply problematic. Adam Smith defined the labour theory of value as follows: "Labour is the real measure of the exchangeable value of all commodities. The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people."
The great trouble with this is the notion of a real (or fundamental, or intrinsic) price. Prices are just functions of market participants' decisions. While Smith is right to note that what every thing really costs is the toil and trouble of acquiring it, this cost can be anything from nothing to the full of effort of producing it. The toil and trouble to acquire something merely describes the nominal cost of acquiring a thing; a multi-dimensional variable, not a fundamental truth. It may take a lot of toil and trouble to make a finely-adorned mud pie, but it might be extremely difficult to find a buyer to compensate the labourer well for his labour. The subjective theory of value is more flexible. In the subjective theory of value an individual's preferences can be based on the toil or trouble to acquire an item, or something else entirely. Which factors matter are entirely an individual's preference. In a subjective theory of value, value is not a matter of fundamental value (or "real price") at all, but a matter of differing opinions.
As Carl Menger — one of the three originators of the subjective theory of value alongside William Stanley Jevons and Leon Walras — put it: "There is no necessary and direct connection between the value of a good and whether, or in what quantities, labour and other goods of higher order were applied to its production. A non-economic good (a quantity of timber in a virgin forest, for example) does not attain value for men since large quantities of labour or other economic goods were not applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labour is completely irrelevant for its value." Menger concluded: "Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being."
The subjectivist revolution in economics took place at the same time as the subjectivist revolution in philosophy and metaphysics exemplified by Nietzsche and Kierkegaard. These were both a huge revolution — and a huge challenge to prevailing orthodoxies of objective value theorists who envisaged a universe more ordered and intentioned than it really was. Finally, economists and philosophers were beginning to describe the world as it was — in which value is a matter of individual's opinions and desires — instead of an idealised world where value is something objective and measurable and quantifiable.
The classical economists who preceded the subjectivist revolution invented absurd and convoluted objectified systems of measuring an individual's preferences such as the util. And indeed, even since the advent of the subjective theory of value many economic thinkers have tried to subtly re-objectify value. The neoclassical descendants of Walras and Jevons like Samuelson and Hicks developed toybox models based around unrealistic (or semi-realistic) assumptions — rational preferences, utility maximisation, perfect competition, informationally efficient markets, etc. These act as an framework to objectify and solidify human behaviour. Similarly the later Austrians like Mises and Hayek sought to depict the market as a framework as much for organising human morality — rewarding what they conceived of as good behaviour, and punishing what they conceived of as bad behaviour — as for allocating resources. And of course, Marxists have continued to use the labour theory of value and the notion that capitalists make a profit by appropriating surplus value, as opposed to by satisfying market demands (for wages and jobs, for goods and services, etc) in a manner that expends less than it brings in.
The relevance of the subjective theory of value today is not just that it is true, and a basis for sound economics. It is also that it should be an inspiration to economists to describe the economic sphere as it is — messy, challenging to quantify and objectify — not as the ordered, quantifiable and comprehensible thing they often wish it were. Reasoning from an idealised state is not good enough.