An Introduction to the Theory of Value

on the Lines of Menger, Wieser, and Böhm-Bawerk

Second Edition – 1910

by William Smart (1853-1915)

Chapter XI
Subjective Valuations the Basis of Price

ITV-E2-11.1 It was said in the introductory chapter that we should find Objective Exchange Value to be a superstructure on Subjective Value. The typical scheme in last chapter will abundantly prove this. It is the valuations with which the parties on both sides enter the market that decide; – first, what parties will take part in the competition; second, what is the degree of each party’s “capability of exchange”; third, who are the parties that actually come to terms; fourth, who is the last buyer and who the last seller; and fifth, the price. Thus we arrive at Böhm-Bawerk’s formal proposition: Price is the resultant of subjective valuations put upon commodity and price-equivalent within a market.
ITV-E2-11.2 Unless, however, we remember what has been said in early chapters of the essential nature of value, we shall be apt to stumble over this word “valuation.” The price with which a buyer comes to market as the maximum which he is willing to give, does not indicate anything of the absolute amount of wellbeing which the goods he proposes to purchase represent to him. We saw that the subjective value of anything is given by the dependence of a want upon it, and that this dependence is measured by two factors: the want which the good is capable of satisfying and the state of provision already existing to meet that want – in ordinary circumstances, the income or wealth of the valuer. To put it concretely: the valuation of 16/6, which the buyer puts on the barrel of apples in our illustration, is determined by a calculation, first, of the position the fruit takes in his household economy as compared with other forms of food, and, second, of the money figures in which the amount of his income or available wealth enables him to express that position. This, among other things, will explain how two very different classes of competitors may be the “capable” ones; those whose needs are urgent and those whose resources are plentiful. The valuation of 16/6 may be either the expression of a poor man’s necessity, interpreted and limited by the few shillings he can spare from his wages, or the expression of a rich man’s whim, measured by the loose money in his pocket.1
ITV-E2-11.3 If, then, the subjective valuations on either side do not necessarily say anything of what we might call the absolute worth of things to the valuers, much less does the price which is the resultant of these valuations. It is not even an average of the valuations. However high the valuations of buyers, and however low the valuations of sellers, in an organised market the goods will exchange at the marginal price. And however many be the excluded competitors – the buyers whose subjective valuations do not allow them to buy, and the sellers whose valuations do not allow them to sell, at the marginal price – they are unable to affect the price one way or other.
ITV-E2-11.4 It should not be necessary to point out that the determination of price in actual life is not the conscious resultant of all these valuations. The analysis of price into its factors is as different from the practical synthesis of price as a statue is from an anatomist’s plates. The practical man no more knows the machinery set in motion to determine each day’s market quotations than the child knows the rules of grammar by which he speaks. It is the same in most economic matters. The theory of money, for instance, is one of the most difficult and complicated parts of economical science, and yet we all grow up with a perfectly definite idea of the relation which a shilling bears to English commodities in general – so definite, indeed, that when traveling in a country where there is an inconvertible paper currency and where prices are turned upside down by a protective tariff, we do not notice the leap we take when we turn the quarter-dollar note, in our mind, into a silver shilling, and calculate prices on the English basis. In the same way, a business man applies unthinkingly and unerringly all those canons of marginal price and value which we find so puzzling.
ITV-E2-11.5 But in the business world itself, there is one great simplification of the law of the Marginal Pair. In modern industry, producers do not make for themselves but for the market, and the amount of their own product which they could use in their own consumption is insignificant. Consequently it may almost be said that such goods have no subjective value for the sellers,2 and we lose one whole side of our valuations. But, on the other hand, this very fact enormously increases the numbers of buyers, and brings their subjective valuations all the closer. Practically, then, our law takes this form: Price is determined by the valuation of the Marginal Buyer.
ITV-E2-11.6 It will probably be thought that only in the last paragraph have we come to the normal state of things, and so to the only state of things which has any practical interest for us. All the tedious discussion about peasants selling horses, or buyers and sellers wishing to trade for just one barrel of apples each, is beside the mark, it will be said, when we consider that the questions of value which are of importance to us are questions between the innumerable persons who compete with each other in the business of making and buying and selling, and the innumerable persons who buy goods for their own consumption at fixed prices from the shops. The answer to this has already been suggested. As well might we expect to understand the organisation of industry by taking our stand on an omnibus in Cheapside, and watching the surging life below, as begin our study of the phenomena of value with the smooth running machinery of exchange which is the growth of generations. The only way to understand the completed theory of value is to go back to the simplest cases of exchange – perhaps even barter; find what principles are involved in all exchange; and then work out the complications and simplifications which come with developed trade. It is impossible to explain the “short cuts” till we know the roundabout road.
ITV-E2-11.7 It will not have escaped the notice of the critical reader that there are many resemblances between the law now formulated and that known as the law of Supply and Demand. It would be strange if there were not. As in ethics, all theories lead very much to one practical code of morals, so theories of price must be all more or less accurate analyses of the actual transactions of the market. For instance, the zone within the limits of which price is determined is, as we have seen, that lying between the valuations of the Marginal Pair. But every one will have noticed that in this zone supply and demand come, quantitatively, to equilibrium, and hence it is quite correct to say that the market price is found in that zone where supply and demand balance each other.
ITV-E2-11.8 The resemblance will become clearer if we look at our individual determinants of price. There is –
ITV-E2-11.9 1st, The Extent of Demand, – that is, the number of people who wish to buy goods because they attach a certain value to them.
ITV-E2-11.10 2d, The Intensity of Demand, – that is, the subjective valuation which these buyers attach to the commodity they wish to obtain, and the subjective valuation of the money they part with.
ITV-E2-11.11 3d, The Extent of Supply, – that is, the number of people who wish to sell goods because they attach a certain value to the money they expect to get in exchange.
ITV-E2-11.12 4th, The Intensity of Supply, – that is, the valuation which these sellers attach to the money they wish to obtain, and which they attach to the commodity they part with.
ITV-E2-11.13 We shall cease to wonder at resemblances, however, if we remember that our law of value cannot be a rival of any other law which has been recognised as giving, within its sphere, a satisfactory explanation of actual phenomena, except in the qualities of breadth of basis or accuracy of details. The impression which most of us, I imagine, have had in relation to the law of Supply and Demand as usually formulated, is that what it says is undeniable, but that it does not say enough. It devotes ample space to the phenomena of supply, but it leaves demand almost entirely without analysis. While it pays lip-service to value as a relative between the two, it gives the impression that the side of supply is so overwhelmingly important that demand may be taken for granted. [Online editor’s note: These last two sentences, absent from the first edition, perhaps reflect Smart’s shift from a pure Austrian to a Marshallian approach; see Appendix II. – RTL] What the theory which has been developed in the preceding pages does is indeed to make price a resultant of Supply and Demand, but at the same time carefully to analyse these ambiguous expressions, and make price rest finally on subjective valuations of commodities and of price-equivalents made by buyers in the one side and sellers on the other.

ITV-E2-11.n1.1 1 In connection with this, the following passage is worth attention. “Goods which can only be obtained in very small quantities and which only the rich are likely to demand, will obtain the highest prices. Goods, again, of common quality, suited to the wants of the poor, obtain very low prices, along with those goods of better quality which are so numerous that the poorer classes are able, to a considerable extent, to purchase them. Medium prices, lastly, will rule in the case of goods of which the middle classes are the principal buyers, while poorer people either do not compete or compete only so far as compelled by their most urgent feelings of want. It will readily be understood that changes in the economical provision and power of great classes must be followed by changes in the prices of goods. The greater the inequalities of wealth, the greater will be the differences in price. Luxuries will rise in price as great fortunes increase and fall as they diminish. ... Thus it is that diamonds and gold stand so very high; they are luxuries of the rich and richest, and are valued and paid for in the measure of the purchasing power of these classes. Food and iron are at the other end of the scale because they are goods for the people, their value being decided by the valuation and purchasing power of poor men.” – Wieser, Der Natürliche Werth, pp. 44, 45.
ITV-E2-11.n2.1 2 This is not quite true. They have subjective exchange value just as money has. The product of labour which has been paid by 20/ of wage has the same sort of subjective value to the wage-payer as the 20/ had. But as the professional producer anticipates demand the subjective value is not so calculable.

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