Value and Price in Austrian Economics

This post is more an exercise in clarification than (for the moment anyway) criticism.

What is the Austrian view of the relation between subjective value and price?

As explained by Mises:

“In an exchange economy, the objective exchange value of commodities becomes the unit of calculation. This involves a threefold advantage. In the first place we are able to take as the basis of calculation the valuation of all individuals participating in trade. The subjective valuation of one individual is not directly comparable with the subjective valuation of others. It only becomes so as an exchange value arising from the interplay of the subjective valuations of all who take part in buying and selling. Secondly, calculations of this sort provide a control upon the appropriate use of the means of production. They enable those who desire to calculate the cost of complicated processes of production to see at once whether they are working as economically as others. If, under prevailing market prices, they cannot carry through the process at a profit, it is a clear proof that others are better able to turn to good account the instrumental goods in question. Finally, calculations based upon exchange values enable us to reduce values to a common unit. And since the higgling of the market establishes substitution relations between commodities, any commodity desired can be chosen for this purpose. In a money economy, money is the commodity chosen.

Money calculations have their limits. Money is neither a yardstick of value nor of prices. Money does not measure value. Nor are prices measured in money: they are amounts of money. And, although those who describe money as a ‘standard of deferred payments’ naively assume it to be so, as a commodity it is not stable in value. The relation between money and goods perpetually fluctuates not only on the ‘goods side,’ but on the ‘money side’ also. As a rule, indeed, these fluctuations are not too violent. They do not too much impair the economic calculus, because under a state of continuous change of all economic conditions, this calculus takes in view only comparatively short periods, in which ‘sound money’ at least does not change its purchasing power to any very great extent.” (Mises 2009: 115).

Two points here:

(1) according to Mises, and as he says elsewhere, what is needed for economic calculation is money prices for factors of production and consumer goods. As long as the general price level does not fluctuate too sharply, these two factors – (1) money prices and (2) mild or modest inflation or deflation rates – are sufficient for economic calculation.

(2) the second important point is here:

“Money calculations have their limits. Money is neither a yardstick of value nor of prices. Money does not measure value. Nor are prices measured in money: they are amounts of money.”

At first sight, point (2) seems a curious statement, but the crucial point that Mises seems to be making is that there is no objective unit of measure for value as defined as subjective utility:

“In the market, exchanges will occur until there are no more mutually beneficial trades. The underlying subjective valuations driving acts of exchange do not involve a ‘measurement’ of value. (For an analogy, someone can rank his friends in order of importance, without implying that there is an objective unit of friendship that the person measures in each person before constructing the ranking. Someone can report, ‘Jim is my best friend and Sally is my second-best friend’ without being able to say, ‘Jim is a 24 percent better friend than Sally.’) All that is necessary is that a person be able to look at any two possibilities, and decide which he prefers.

Even though market exchanges are driven by subjective valuations that are themselves nonquantifiable, nonetheless these exchanges in turn give rise to objective exchange ratios or prices.” (Murphy 2011: 14).

“If we are referring to subjective value, then there is no ‘unit’ of measurement at all. Suppose we take an old photograph of Jill’s grandmother, and ask Jill, ‘Do you value this object?’ Jill might say, ‘Yes, very much so.’ Then we hold up her calculator, and ask if Jill values it as well. Jill might say, ‘Yes, but not as much.’

Finally, we ask Jill, ‘By what percentage does your valuation of the photograph exceed your valuation of the calculator?’ Jill would be unable to answer such a nonsensical question. She can rank the two objects according to her subjective tastes; she can report that she values the photograph more than the calculator. But this doesn’t imply that there are cardinal units of psychic satisfaction, with the photograph bestowing more units than the calculator.”
Murphy, Robert P. 2011. “Subjective Value and Market Prices,” Mises Daily, February 7
http://mises.org/daily/4907/Subjective-Value-and-Market-Prices

The upshot is, according to Austrians, that subjective value cannot be measured with any objective unit at all, but market prices are objective as units of money that emerge in exchanges between buyers and sellers.

BIBLIOGRAPHY
Mises, Ludwig von. 2009. Socialism. An Economic And Sociological Analysis. Ludwig von Mises Institute, Auburn, Ala.

Murphy, Robert P. 2010. Lessons for the Young Economist. Ludwig von Mises Institute, Auburn, Ala.

Murphy, Robert P. 2011. Study Guide to The Theory of Money & Credit. Ludwig von Mises Institute, Auburn, Ala.

Murphy, Robert P. 2011. “Subjective Value and Market Prices,” Mises Daily, February 7
http://mises.org/daily/4907/Subjective-Value-and-Market-Prices