Austrian Subjective Use-Value

Why Its Variations Are the Primary Cause of Substantial Premiums In the Sell Prices Over the Buy Prices of Individuals When Considering Some Goods and Not Others.

The following is essentially my answer to an earlier problem posted here, which in turn was a follow-up to this.

Background

The Subjective Theory of Value, Subjective Marginal Utility, and Diminishing Subjective Marginal Utility are all irrefutable. Not accepting them as such will lead to the kind of error that Thaler makes in equating buying and selling prices in general. This error is likely a manifestion of the widely accepted fallacy that an exchange is made of items that are of an equal intrinsic value, when a voluntary exchange in fact only occurs when the participants not only subjectively value the goods exchanged in reverse order, but perceive that no alternate use or exchange of the goods given up would produce a subjectively superior result.

Introduction

The items involved in the earlier posts referenced above, a gold bar and a large screen TV ARE both economic goods that DO have subjective value, but fall into different distinct categories. It is the difference in categories that produces the large differences in the premium of selling over buying prices in some goods and not in others.

The large screen TV falls into the category of having a subjective use-value. Its value derives from the desire to watch TV in a large format, the subjective end for which the TV is utilized as a means.

The gold bar, on the other hand, falls into the category of having an exchange-value. Its value derives from its use as a conveyor of future purchasing power, ultimately being used to buy future goods with a subjective use-value, which is what gives a subjective content to what otherwise would be an objective value. Money itself also falls into this category and usually is an intermediate way station as other exchange-valued goods are first converted into money, and the money is then used for the actual purchases of subjective use-valued goods.

Subjective Use-Value

Considering the value of the TV, if everyone had the same subjective use-value for a TV, sellers would set their price just low enough to allow everyone to make a purchase. However, since there are enormous variations in subjective use-values, sellers are going to have to strike a balance between sacrificing the price to be obtained from the most willing buyers and sacrificiing the entire potential sale to the least willing and able buyers. This results in a lower price.

For a consumer, this means that unless you are THE least willing and able buyer that the seller is expecting to sell to, you would be paying too much if you simply were to be willing to pay the full price which reflected your subjective use-value. In addition, even if you WERE the least willing and able buyer for a single product, it would be less and less probable that you would remain so as additional products were brought into consideration.

This means that as a rational strategic plan, consumers should refuse to pay any price that doesn't reflect a significant bargain discount in terms of what their subjective-use value for every product is, and expect, in general, to be able to still make purchases in doing so. To the extent that consumers in general do this, the effect is self-reinforcing, as sellers must further reduce their asking prices as they must deal with the discounted demanded prices and not the consumers' subjective use-values themselves.

Thus, it is a result of the fact of the wide variation in subjective use-values that goods which are valued for their use-value will virtually always be available at bargain prices. While I might feel that a large screen TV is worth say, $3000 to me, and it may seem reasonable to be willing to either buy or sell at that price, I would be leaving $1000 on the table to buy at that price as the pure variability of subjective use-values mandates that sellers set their prices at $2000. OTOH, I certainly have no reason to sell for a price lower than $3000 as that is the value that I realize by simply employing or consuming the product. It also makes little sense to try to sell for a higher price than $3000 since I would be competing with sellers pricing at $2000 and offering a brand new warranteed product. In addition, the mere attempt of a sale reclassifies the TV as an exchange-valued good, and no longer a subjective use-valued good.

Furthermore, all of the above applies in the case of monopoly sellers. Actual competition between sellers will produce even larger bargains and lower prices relative to subjective use-values.

Also operating in the same direction to reduce prices is the fact that the subjective use-value of successive units of the same good falls through the operation of the Law of Diminishing Marginal Utility. If sellers want to sell more than one unit to a given consumer, their prices must be further lowered to reflect that.

Exchange Value

In the case of exchange-valued goods, such as a gold bar, the situation is entirely different. The purpose of holding exchange-valued goods, including money itself, is to ultimately enable the future purchase of subjective use-valued goods. The purpose of holding exchange-valued goods other than money itself is to protect against the risk of loss of the future purchasing power of money primarily due to government inflation of the supply of money. However, all exchange-valued goods face the risk of loss of purchasing power due to both long and short term variations in supply and demand. Successful allocation of exchange-valued goods requires a contrarian approach.

If I spend $2000 for a gold bar, I end up with the same CURRENT purchasing power as I had when I started out with $2000 in cash, less the effects of spreads and other transaction costs. It is only over time that variations in the purchasing power of different exchange-valued goods acquire significance.

Thus, in contrast to subjective use-valued goods, there is almost never reason to expect a bargain discounted price for an exchange-valued good. Exchange-valued goods typically are repriced by markets in real time.

In Summary:

Buying a subjective use-valued good produces an immediate psychic profit that reflects the difference between its subjective use-value and the exchange value of the money price paid. This also can be thought of as the discounted present value of the future subjective use-values of the goods to be ultimately purchased if the money were held instead. To hold on to this psychic profit means being unwilling to sell the good for less than its subjective use-value.

Buying an exchange-valued good, in contrast, produces an immediate real and psychic loss due to the buy/sell spread and other transaction costs. You might wish to sell for a much higher price than you paid, but you will not be able to do so until the market price shifts, if it ever does.

There is also another difference. While an exchange-valued good MUST at some point be sold in order to realize its value, a subjective use-valued good can simply be employed or consumed without facing market risk.

ADDENDUM --

Talking about a sell price at all for a subjective use-valued good tends to combine concepts that do not need to be combined. If I have a large screen TV, the primary question is how much I am willing to accept to give up the satisfaction that I can derive from its use. This is a question which is independent of the state of the market for second-hand TVs. Maybe your upstairs neighbor is willing to pay you to keep your set turned off because of the noise and the sidewalk crowds it attracts.

Also the wrong order of events can tend to conceal reality.

The very first step is to imagine if you had the subjective use-valued good in question, what would you accept to give up its use. Say that this is $3000. This is then the starting point for deciding to buy it in the first place. If the price is greater than $3000, there should be no question of buying.

Now your general buying strategy can come into play, looking for the significant discounts in price that will almost certainly exist as sellers must address the widely varying subjective use-valuations of multiple individuals and optimize their own well-being. If you end up with little or no discount for a given good, then your scarce supply of money will be relatively restricted in pursuing other satisfactions.

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But first... I had a moment

But first...

I had a moment where I felt like I got it, y'know?

If you have a good that has a use value for you, you won't sell it for less than that value. So if you value that TV at $3k, that's your reserve price. But on the other side of the transaction, you're willingness to pay for it is less than that because -- best as I understand it -- you expect to receive some amount of consumer surplus. So while your buy price is conditioned by your expectation of a bargain (and this expectation is reasonable, empirically), your sell price is "floored" by your use evaluation, thus creating the gap.

Is that the basic idea?

I had a short response that

I had a short response that turned into a veeeeeery long one. As Ahhhnold says, I'll be back!

Noah, "If you have a good

Noah,

"If you have a good that has a use value for you, you won?t sell it for less than that value. So if you value that TV at $3k, that?s your reserve price. But on the other side of the transaction, you?re willingness to pay for it is less than that because ? best as I understand it ? you expect to receive some amount of consumer surplus. So while your buy price is conditioned by your expectation of a bargain (and this expectation is reasonable, empirically), your sell price is ?floored? by your use evaluation, thus creating the gap.

Is that the basic idea?"

Pretty close. As long as you don't try to push the concepts of 'reserve price' and 'consumer surplus' I can live with it. There IS a general complication in that that you can't easily value cash for its future purchasing power if the degree of bargains changes. If the degree of bargains increases, the purchasing power of money increases. If the purchasing power of money increases, you would be even less willing to give it up in a specific purchase, but more willing to give it up in general if you have too much compared to your current consumption. I refuse to twist my mind around that one.

Regards, Don

i suppose this deals with

i suppose this deals with psychology as opposed to praxeology, but do the austrians have an explanation for why, for example, the price i'm willing to pay for the tv is $3000 (or less)? how does one come up with that number? why not 2900? 3300?

"No, what you?ve described

"No, what you?ve described is a short-sale, short-cover cycle involving an exchange-valued good by your choice."

And why isn't that a good reason to sell the TV for a $500 (or $300) profit in your orginal example?

"Also it requires a really

"Also it requires a really good salesman to sell a second-hand product for 25% more than a new one assumed to be readily available."

The original question was what one would be willing to part with the TV for, not what one could get for it.

JTK, It strikes me as

JTK,

It strikes me as peculiar to expect a consumer to make an effective arbitrageur if he only has access to unit quantities of goods at full retail price.

That's like submitting a business plan that says that you intend to prosper by picking up stray $100 bills off the sidewalk.

Regards, Don

Don, you originally asked

Don, you originally asked the subject what he'd be willing to take for the TV, not whether he expected to get it or whether he thought buying TVs retail and selling them in the parking lot was likely to be a profitable business.

JTK, "Don, you originally

JTK,

"Don, you originally asked the subject what he?d be willing to take for the TV, not whether he expected to get it or whether he thought buying TVs retail and selling them in the parking lot was likely to be a profitable business."

This dates back to another original error by Thaler, I see now. He presented the problem in terms of how much you'd be willing to accept for tickets that you've already purchased. This is jumping into the middle. The very first step has to be to establish a subjective use-value. This MUST exist BEFORE you decide whether or not to buy the tickets in the first place. So the $3000 is the dollar equivalent of the subjective use-value of the TV before you make a purchase. This means that you expect to be better off after the purchase for any purchase price of $3000 or less. In that light, there is no question of accepting less than $3000 AS THE ENDING TRANSACTION. If I only paid $2000, I have an effective sunk psychic profit of $1000. Any additional transactions must stand on their own and not eat into that profit.

Regards, Don

In that light, there is no

In that light, there is no question of accepting less than $3000 AS THE ENDING TRANSACTION.

Fine, but that wasn't a stipulation of the example.

"OTOH, I certainly have no

"OTOH, I certainly have no reason to sell for a price lower than $3000 as that is the value that I realize by simply employing or consuming the product."

You do have good reason to sell it for $2500 if you can turn around and get an identical item for $2000 again. Then you can enjoy and consume the same product plus $500.

JTK, "You do have good

JTK,

"You do have good reason to sell it for $2500 if you can turn around and get an identical item for $2000 again. Then you can enjoy and consume the same product plus $500."

No, what you've described is a short-sale, short-cover cycle involving an exchange-valued good by your choice. It happens to be a good which you already have so you can effectively loan it to yourself, but it could be any good and doesn't necessarily affect the subjective use-valued good.

Also it requires a really good salesman to sell a second-hand product for 25% more than a new one assumed to be readily available.

Regards, Don

Stating subjective use

Stating subjective use values as monetary amounts is an economic theory that poses some problems for an individual attempting to use it to make more rational economic decisions.

For one thing, it's like the joke about Marx and his cheap cigars: He said he was saving enough by smoking them to live on. Unless you are engaged in a business of reselling, there isn't a bankable profit in purchasing, only imaginary profit, or the subjective value of having a particular item compared to what else you could have done. You can count savings by buying bargains or more efficient items as real savings only to the extent that those bargains undo prior commitments to real spending at nonbargain prices that you count in your budget first.

Another reason stating subjective use values as monetary amounts is misleading: You can't add the values up in any meaningful sense. The values expressed in dollars are each an estimate of a counterfactual price: what a consumer would have paid at the maximum if the price of one sort of good had been higher, for no particular reason, but not so as to strike the consumer as an unusual temporary high, and all else had been equal. The total of values for the ingredients of a meal I make will be higher than the value of the complete meal, because I would be willing to pay a high price that happens to be necessary for any one ingredient, in order to make the meal complete.

Once the complication of the possibility of reselling is added to the demands on a consumer, he has to adjust his subjective use values moment by moment to reflect his shifting preferences and expectations of use he may make of purchases he has made. Or does he? When asked how much he would take for something he has already purchased, a rational consumer wouldn't just set a number from a memory of how much he felt he profited when he bought it plus the retail price, but he also wouldn't just set a number from a quantity of subjective liking of the item that he has been feeling. To make a rational decision, a consumer-become-trader would have to consider something completely different from how much he felt he wanted the item before he bought it, or how much he has been appreciating it lately. He has to consider the question: Would he feel better with all the consequences of giving up the item and getting cash for it than he would keeping the item? That's a matter of ranking subjective values, considering various possible futures, not just plugging in values that are already felt and expressable as monetary amounts.

A fourth problem only applies if the consumer accepts the strategy Don Lloyd stated for applying subjective use value theory to personal economics. If the consumer refuses to pay any price higher than his subjective use value minus a percentage bargain discount, then he is, in effect, participating in a boycott of prices he would otherwise like to pay, in order to drive prices down. How is that in accord with his own rational interests? If the consumer forsees that prices actually will go down and he will be able to get what he wants at a savings countering the subjective expenses of the strategy, and he's right, then it's a good decision. Otherwise he's just denying himself an item he wants for a pointless protest of economic reality.

Playing this strategy at the right times depends on an individual knowing that witholding his purchase will have the desired marginal effect on prices. However, on the whole, the strategy amounts to shopping as if one has less income and must represent subjective use values by lower dollar amounts. That means either an individual increases his savings rate, or shifts purchases from those that are not bargains by his subjective values to purchases that are bargains. In other words, Don is telling us: Buy fewer things that you feel are not bargains, and either invest more or buy more things that you are very happy with for the price. Well, that's always good advice.

So given these considerations, why would a consumer rationally refuse to pay $3000 for a product that he values as equivalent to $3000 worth of other goods and services for him, and hold out for a price of $2000 or under? He's either got a good chance of getting it for $2000 and thinks it's worth taking the risk, or he's acting as a peaceful collectivist who is making an individual sacrifice that does not violate others' rights, for the collective good of lower prices. If all prices are lower that's an increase in the value of the dollar, by means of holding more dollars off the market. So if the strategy works, peaceful collectivists would probably only apply it to those categories that they believe would be good to keep at lower relative prices. If you think the poor need local firewood at lower prices, and so buy shipped in firewood although it costs more, or if you prefer milk to coffee but drink coffee instead of milk so the poor will have lower priced milk, then you are following this strategy.

I don't expect that reduction of the volume of a market for a product necessarily implies reduction of its price. Therefore, the boycott of items to reduce their prices is a strategy undertaken at risk of being wrong about the effect on producers and increasing their prices, or reducing the prices of the substitute items, or changing any other economic quantities or anything else in the world in desirable or undesirable ways. Far better to buy what you want, when you can afford it, and leave boycotts to be used for directly reducing sales of immorally produced goods.

I was shy about posting this because I was embarrassed I worked on it so long for no particular reason, but I decided to post in case anyone is interested in reading it, because I've gotten a lot out of the Internet from what others have written as amateurs.

Solomon, "If the consumer

Solomon,

"If the consumer refuses to pay any price higher than his subjective use value minus a percentage bargain discount, then he is, in effect, participating in a boycott of prices he would otherwise like to pay, in order to drive prices down."

No, this is not what I was suggesting. There was no intent to affect the market price at all, but rather a recognition of the fact that the market prices that exist have already been lowered as the sellers look after their own self-interest in addressing as much of a statistically diverse and potentially profitable market as possible.

You ARE correct that values cannot be expressed in dollars in general, but we DO need an external handle of some kind. The value of all exchange goods, including money (and dollars) relates to the balancing of demand to hold future purchasing power vs the demand to consume in the present. When we attach a dollar amount to a good we are making a prediction as to whether we would prefer to be left with satisfaction to be derived from the use of the good or the marginal amount of money that would have to be given up to purchase or sell it. If we keep the money, we are enabling future choices at future times.

Your time and effort are appreciated.

Thanks, Don

I like it. It explains the

I like it. It explains the original example, and is sufficiently general to explain other phenomena, such as the unwillingness of eBay bidders to just bid their willingness-to-pay.

BUT...

I don't like the distinction between "use-valued goods" and "exchange-valued goods". First, because exchange is a use, albeit a unique one. Second, "exchange" or "use" isn't a property inherent to the good, it arises from how we perceive we can utilize it. A single good could fulfill both roles, e.g. as gold does when it's made into jewelry.

I also object to the blithe quantitative treatment of subjective values. As someone else pointed out, doing so is problematic because it implies a degree of objectivity and arithmetical manipulability that doesn't exist. More importantly, though I don't dispute that at a given time for a given person for a given good that a money-equivalent subjective value doesn't exist, that value is rarely if ever known to the individual, and is in fact not truly a discrete value. Rather, there are fuzzy-bordered zones where an individual would clearly refuse an offer, clearly accept it, and (for lack of a better word) an indifference zone where one must carefully weigh available alternatives. The individual's reservation price, if it can be said to exist, lies in that indifference zone, but putting your finger on it precisely is very, very difficult, even for a person actively considering a purchase or sale.

In that light, it's inappropriate to speak of identifying one's numerical subjective value as "step one", as it is in fact typically "step never". Following that line of reasoning, I would contend that your statement, "[Subjective use-value] MUST exist BEFORE you decide whether or not to buy...," is half-true at best. Yes, that value exists, but you don't necessarily have to know it, and likely never will.

Also Don, from your responses to the posts about the hypothetical TV sale, it seems you and they are arguing from different premises. If I understand him right, JTK began from the assumption that you already have the TV and someone makes you an offer and the market price is known to you, whereas you are starting from the assumption that you do not have the TV and have not even yet investigated the market price.

You contend that your starting point is the proper one, but I am unconvinced. I would contend that the starting point is wherever you happen to be when making the decision in question. In the TV case above and in your prototypical example of superbowl tickets, I think post-purchase is a more relevant set of circumstances than pre-purchase, given the way actual people behave.

Noah, Thanks for the

Noah,

Thanks for the comment. I will break my responses up into separate comments.

"I don?t like the distinction between ?use-valued goods? and ?exchange-valued goods?. First, because exchange is a use, albeit a unique one. Second, ?exchange? or ?use? isn?t a property inherent to the good, it arises from how we perceive we can utilize it. A single good could fulfill both roles, e.g. as gold does when it?s made into jewelry."

I'm afraid that you'll have to take the distinction up with Austrian School founder(?)Carl Menger. In his 1871 text, 'Principles of Economics' his chapter VI is entitled 'Use Value and Exchange Value'. You are quite correct that the type of valuation is not an intrinsic property of a good, but rather a matter of individual choice. From Menger, page 230 -

"In all cases, therefore, in which a good has both use value and exchange value to its possessor, the economic value is the one that is the greater."

This, of course, may change at any time.

Regards, Don

Noah, "I also object to the

Noah,

"I also object to the blithe quantitative treatment of subjective values. As someone else pointed out, doing so is problematic because it implies a degree of objectivity and arithmetical manipulability that doesn?t exist. More importantly, though I don?t dispute that at a given time for a given person for a given good that a money-equivalent subjective value doesn?t exist, that value is rarely if ever known to the individual, and is in fact not truly a discrete value. Rather, there are fuzzy-bordered zones where an individual would clearly refuse an offer, clearly accept it, and (for lack of a better word) an indifference zone where one must carefully weigh available alternatives. The individual?s reservation price, if it can be said to exist, lies in that indifference zone, but putting your finger on it precisely is very, very difficult, even for a person actively considering a purchase or sale."

Reading carefully, I don't think that I really disagree with any of this, except your possibly over-precise interpretations of what I said.

As you noted, a subjective use-value can be associated with an amount of money in order to make a choice between the good and the cash. In this sense, a $3000 value is simply a shortcut means of expressing that association. If I had said the value was $3141.59, I would be guilty of over-precision, but $3000 has only one significant digit. If you can suggest an alternative to noting a $3000 value without 2 pages of footnotes, please do so.

"In that light, it?s inappropriate to speak of identifying one?s numerical subjective value as ?step one?, as it is in fact typically ?step never?. Following that line of reasoning, I would contend that your statement, ?[Subjective use-value] MUST exist BEFORE you decide whether or not to buy?,? is half-true at best. Yes, that value exists, but you don?t necessarily have to know it, and likely never will."

Again, I don't think that we have a substantive disagreement. Whether I decide in advance whether there is an approximate dollar price which I can use to immediately reject all posted higher prices, or whether I simply compare each dollar price as it comes along with my subjective use-value of the good in question is not relevent. In all cases, a comparison must be completed BEFORE a purchase is made. If I have the ability to compare any possible price that comes along, then an approximate threshold price must, at least in theory, exist, and whether I have consciously produced it doesn't really matter.

Regards, Don

Noah, "Also Don, from your

Noah,

"Also Don, from your responses to the posts about the hypothetical TV sale, it seems you and they are arguing from different premises. If I understand him right, JTK began from the assumption that you already have the TV and someone makes you an offer and the market price is known to you, whereas you are starting from the assumption that you do not have the TV and have not even yet investigated the market price.

You contend that your starting point is the proper one, but I am unconvinced. I would contend that the starting point is wherever you happen to be when making the decision in question. In the TV case above and in your prototypical example of superbowl tickets, I think post-purchase is a more relevant set of circumstances than pre-purchase, given the way actual people behave."

There are two issues.

First, we have to decide if we are talking about a stand-alone resale or a sale and replace.

In the stand-alone resale, all that counts is whether the price received is sufficient to more than make up for the loss of satisfaction that the use of the TV provides. Whatever was originally paid, $2000, for example, is now an irrelevent sunk cost and unless I have grown tired of the TV, or there is another reason for change, it can still be assumed to have the $3000 equivalent subjective use-value. The stand-alone resale won't go through unless the price to be paid is at least $3000 or whatever the new, changed subjective use-value might be.

If we are talking about a sale and replace, we have combined two things which do not logically need to be combined, and in some cases, cannot be combined at all.

If I have found someone who doesn't know what the retail prices are, I may be able to sell him my TV for $2500 and buy a new one for $2000. But if this is true, the fact that I already have a TV is irrelevent. I can just take his $2500 and drive down to Circuit City to buy a new one for $2000 and deliver it to his house. If my TV is walnut and he wants oak, it HAS to be done that way, still with equivalent results.

Realizing this, the entire problem collapses back to the premium of the dollar equivalent of my subjective use-value over the price I need to pay on the market. This is the point where it becomes clear(?) that the premium is due to the low price set by sellers as they must accomodate with a single price many buyers with widely varying subjective use-values, and they must accomodate selling competition as well, if they are not monopoly sellers. This is the reason for starting with nothing but an approximation as to the dollar equivalent of the satisfaction that can be derived from the use of the TV. You could pay this dollar equivalent, but if you did so for every good you would end up with a lot less satisfaction bang for your scarce bucks.

What is now left over or still not clear?

Thanks, Don

While I work on my long

While I work on my long response, I'm curious, what is it about "reserve price" and "consumer surplus" that you object to? Other than being unfashionably neoclassical, that is ;)