Subjective Value, a Useful Example

An astronaut sits at home in Telluride, Colorado, a month before leaving on an expedition to help found the first permanent human colony on the planet Mars.

In his den, he has two small statues of horses, one on each end of his fireplace mantle.

On the left end is a commercially produced statue made of sterling silver.

On the right end is another statue, the unique and signed work of a famous sculptor, now deceased, and made of bronze.

He is quite fond of both statues, but today he must choose between them one to pack up and send off to accompany him to Mars. Because of space and weight limitations, he cannot take both statues with him. Neither statue is significantly larger or heavier than the other, so this doesn't figure into the choice.

After contemplation, he packs up the sterling silver statue, demonstrating that it ranks higher on his subjective scale of value and that he would prefer to have it with him on Mars.

In the course of events, the expedition is cancelled as the lead sponsor pulls out to fight an anti-trust indictment on the part of the European Union.

The sterling silver statue is returned and once again takes its place on the left end of the mantle.

Two weeks later, returning from shopping, he finds his den in flames.

He barely has time to rescue one statue, but not both. Which statue will he choose to rescue?

If he chooses to rescue the bronze statue, this would demonstrate a preference for it, implying that it is now ranked higher on his subjective scale of value. Can this be reconciled with his earlier preference for the sterling silver statue, assuming no change in the intervening time in his relative fondness for both?

If he cannot imagine anything other than ending up with just one of the two statues, then he would still choose the sterling silver statue to rescue.

However, in contrast to ending up on the Mars colony, he is not necessarily limited to a single statue. If the unrescued statue can be reproduced, replaced or substituted for, then the possibility exists to end up with two statues.

While the unique bronze statue cannot be reproduced, this is not necessarily true for the sterling silver statue. If he goes to the owner of the company that produced the statue and offers to pay for the raw materials and labor to produce a replacement, the owner is likely to agree and forego any profit to accomodate a famous astronaut.

If the dollar cost of the materials and labor ranks below the unique bronze statue on his subjective value scale, then he will choose to rescue the bronze statue. In effect, the ranked value of the sterling silver statue is set by the perceived lower cost of its production factors.

Normally, Austrian Economics tends to appear to say that the value of production factors is imputed from the subjective value of the final products that employ them. This is still true, but in a more complex way that involves whether production factors are specific or non-specific for a given final product. This is a subject for some future discussion.

Besides the cost of its production factors, the ranked value of the sterling silver statue can be depressed below that of the bronze statue by other considerations.

The sterling silver statue may still be available for a replacement purchase, whether through its normal retail channel, at a dollar store, or on ebay.

The astronaut may have a substitute sterling silver statue stored away in his attic, whether it is identical or whether it may have some minor flaw.

In general, an individual's subjective scale of value is subject to re-arrangement due to possible exchanges, reproductions, replacements, substitutions, etc.

Also, an individual's subjective value scale is not independent of a specific purposeful action that calls it forth and demonstrates its preference rankings. We have seen in this example that different action details result in differently arranged ranked subjective value scales.

Reference :

Mises, The Theory of Money and Credit

...What has been said should have made sufficiently plain the unscientific nature of the practice of attributing to money the function of acting as a measure of price or even of value. Subjective value is not measured, but graded....

...That is to say, opportunities for exchanging induce the individual to rearrange his scales of values. A person in whose scale of values the commodity "a cask of wine" comes after the commodity "a sack of oats" will reverse their order if he can exchange a cask of wine in the market for a commodity that he values more highly than a sack of oats. The position of commodities in the value scales of individuals is no longer determined solely by their own subjective use-value, but also by the subjective use-value of the commodities that can be obtained in exchange for them, whenever the latter stand higher than the former in the estimation of the individual. Therefore, if he is to obtain the maximum utility from his resources, the individual must familiarize himself with all the prices in the market....

From George Reisman and Böhm-Bawerk:

this and this

...This leads to some important consequences. The first is that in this way the value of goods having a higher individual marginal utility occupies the same rank as the value of the “marginal product”; and hence also the same rank as the means of production from which both emanate. The identity which exists in principle between “value” and “costs” therefore obtains in this instance as well. But it is to be carefully noted that here the coinciding is brought about in quite a different way from that which was followed in the case of costs and marginal product. In the latter instance the two coincide because the value of the means of production accommodates itself to the value of the product. The value of the product is the determinant factor, the means of production is the factor that is determined. In our present case it is the other way around, and it is the value of the product that must do the accommodating. Ultimately it accommodates only to the value of another product. But initially it accommodates also to the value of the means of production from which it emanates and which brings about its substitutional connection with the marginal product. The transmission of value proceeds, so to speak, along a broken line. First it goes from the marginal product to the means of production, fixes the value of the latter, and then ascends in the opposite direction from the means of production to the other products which it is possible to produce from them. In the end product, then, the products of higher immediate marginal utility derive their value from their means of production. Let us translate the abstract formula into terms of concrete practice. Good B or good C is, in general, a product of higher immediate marginal utility. If now we consider what good B or C is worth to us our first response is, “Just exactly as much as the means of production are worth to us from which we can at any moment replace the product.” If we then inquire further and ask how much the means of production themselves are worth, we arrive at the marginal utility of the marginal product A. But on innumerable occasions we can spare ourselves this further inquiry. Time and again we already know the value of the goods that comprise the cost, without any necessity for working it out from its foundation and proceeding onward from case to case. And on all these occasions we simply determine the value of products by their costs, and in doing so we are taking advantage of an abbreviation which is as accurate as it is convenient. ...

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