The Subjective Theory of Value and the Incompleteness of Austrian Economic Theory

Abstract

Menger, among the founders of marginalism, was the least mathematical and the one most interested in individual subjective valuations. These characteristics allowed for the development, by his successors, of what has become known as the Austrian School of economic theory. Among their notable contributions to economic thought were the integration of financial theory with the real economy and the emphasis on the disaggregation of capital to explain the dynamics of the economy. Nevertheless, in moving from micro to macroeconomics, the followers of Austrianism came to depend heavily on marginal theory in what were labelled the higher orders of production. The initial subjective evaluation of goods by consumers was imputed to these higher orders with the additional value distributed among them through market forces. This held true across the economic spectrum, from employment to the production of plant and equipment. Subjective value was brought to bear only at one point, final consumption. For the remainder of the transactions, the economic actors were little different from the homo economicus of what eventually became neo-classical economic theory. This paper examines this defect in Austrian theory in detail and constructs a micro-economic model which allows for the full bilateral application of subjective value. The result is an economic theory which is far more flexible and dynamic, and which generalizes in a fuller way to other areas of human action in which exchange and reciprocity play a critical role.