Subjective theory of value

Glossary definition: Value is not inherent in goods; it arises from the appraisals of acting individuals.

In plain words

A thing has value because someone considers it useful for his ends, not because it contains a quantity of “value”. The same umbrella is worth a lot on a rainy day and very little on a sunny one.

That is why both sides gain in an exchange: each gives something he values less to get something he values more. If they valued things exactly alike, they would have no reason to trade.

An example

Robinson has more fish than he can eat, while Friday has coconuts. They swap a fish for a coconut: for Robinson the coconut is worth more than one more fish, for Friday the reverse. Both leave better satisfied.

The Austrian viewThe subjective theory of value has been the foundation of the Austrian School since Carl Menger’s Principles (1871). It replaced the classical labour theory of value, and Eugen von Böhm-Bawerk used it to show the contradictions in Marx’s theory. Because value is subjective, no planner can know what things are “worth” to others; only free-market prices reveal it.

Definitions are from the site’s Glossary; the examples and the “Austrian view” are Praxeologos’s reading. Links to outside sources open in a new tab.