Jack Sprat could eat no fat,
His wife could eat no lean.
And so betwixt them both you see,
They licked the platter clean.

“At that time, in that context, from my perspective, his quarter was worth at least a dollar to me.”
Time. Context. Perspective. All are aspects of the way we value something—or better, the way an individual values something. Value is subjective; our perspectives are inward, intimate, and individualized. When we forget that, we open the door to theoretical missteps that tread not only upon our own economic theories, but also upon on our freedom. When we supplant the technicolor immediacy of our perspectives with macroeconomic math, for example, we can come to fetishize aggregates. To be sure, thinking in aggregates is often useful. In the complex world we inhabit, cognitive shortcuts are necessary. But relying too much on this type of economics can cause us to throw the proverbial baby out with the bathwater.

The failure fully to appreciate subjectivity has plagued economics from the 18th century to the 21st. Sometimes that failure occurs in methodological oversight; other times it occurs in one’s willingness to operate within someone else’s framework of assumptions. Either way, the problems and possibilities of subjective valuation get lost in translation. And that’s dangerous for reasons we’ll explore.

Some years ago, I was living in an apartment complex with a coin laundry. One day, when I put the quarters in to dry the laundry, I found myself $.25 short. I was in a hurry. I couldn’t wear my sweats to dinner. I needed clean, dry slacks. Fortunately, a man with a basketful of whites and a Ziploc bag, quarters jingling, wandered into the laundry room. I fished a dollar bill from my pocket.

“Excuse me, sir,” I said. “Would you take a dollar for one of those quarters?” He smiled. “Sure, no problem.” At that time, in that context, from my perspective, his quarter was worth at least a dollar to me. That afternoon I wore clean, dry pants. Could I have made a better choice? And, if so, by whose lights? Certainly not mine.

The point of this story is that value is not inherent in things. There may be objective proxy-measures of value—like market value—but these depend primarily on the subjectivity of the individuals who make the choices. The prices of things, in other words, result from people’s subjective valuations of things. How else could one account for the fact that, recently, an iPad, whose retail price is about $500, sold for about $5,000.1 This means that all economics originates (or terminates) in something squishy: private states of mind.

The Labor Theory of Value

The classic failure to consider subjective value comes from Karl Marx (and David Ricardo). Communism, some say, wasn’t good in practice. It wasn’t good in theory, either. Once we had pulled the objective valuation thread from the Marxist garment, it unraveled.

The Labor Theory of Value2 goes something like this: A factory worker uses $50 in materials and capital to produce a batch of Ché Guevera T-shirts. Transporting the batch costs $10. The worker spends two hours producing a batch that sells for $100 to college kids. According to the Labor Theory of Value, the worker’s labor increases the product’s value. The laborer combines the materials, capital, etc. to make the batch’s value go from $60 to $100. Thus, the worker is, under Marxism, entitled to $40—i.e. the “full” fruits of his labor. That’s $20 per hour! If the factory owner pays the worker “only” $10 per hour, then the owner is stripping $10 per hour from the worker—unjustly. Why? Because the owner hasn’t done anything to create the $10 per hour he takes in “surplus value.” He merely controls the means of production—thanks to the institutions of the bourgeois state. According to Marx, this is how workers are “exploited.”

Passing over the factory owner’s knowledge capital, personal risk, and delayed gratification, it turns out that the value of the batch is contingent not upon labor at all, but on the preferences of college students. The factory could have expended exactly the same amount of labor, time, materials and so on producing a batch of David Hasselhoff shirts. Even if none of these shirts sold, Marx’s theory would seem to fix the value of the shirt. But that’s absurd. A T-shirt may be valuable to one person but not to another. Two T-shirts with the same “labor value” may sell for $2 and $20, respectively. (Price paid is an ex post indicator of ex ante preferences.) If Ché chic is passé two years from now, not only will the factory owner need to redesign, but he’ll also be competing within a dynamic system where market value is determined by millions of individuals with diverse preferences. An entrepreneur’s virtue lies in his ability to organize resources in such a way as to satisfy such preferences. Profit, far from being “surplus value,” is—ceteris paribus—an indicator that resources are being used efficiently to satisfy desires. Of course, the value of the worker’s labor is also subjective. That doesn’t mean that there is no determinate labor-market value. It means that all such values are determined by people’s unique preferences in an inter-subjective ecosystem Marx failed to appreciate.

Some Marxist apologists cite epicyclical arguments from Das Kapital, in which Marx defends his labor theory slipup based on “socially necessary” abstract labor.

The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour-power. The total labour-power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour-power, composed though it be of innumerable individual units. Each of these units is the same as any other, so far as it has the character of the average labour-power of society, and takes effect as such; that is, so far as it requires for producing a commodity, no more time than is needed on an average, no more than is socially necessary. The labour-time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time.3

It would help if Marx’s claptrap shed more light. But it does not. There is neither a God’s-eye view nor an abstracted average that rescues the labor theory from either the strange metaphysical commitment of intrinsic value or the illogic of its circularity. The bottom line here is: There ain’t no such thing as value without a valuer. And no amount of claptrap can change that.

You may be thinking: Apart from your philosophical detour, that’s just Econ 101. Fair enough. But there are slipperier examples in contemporary economics.

Choice Architects and Planners

Certain economists employ an objective standard of both the good and rationality when doing economics. Consider the basic idea of Nudge by Richard Thaler and Cass Sunstein. Their idea is that there is a reasonable middle ground between simply maximizing choices and banning bad choices outright. People should be free to choose, as it were, but only within a more rational “choice architecture” planned by wiser elites. In the end, they will be ‘nudged’ towards better choices. Thaler and Sunstein write:

The paternalistic aspect lies in the claim that it is legitimate for choice architects to try to influence people’s behavior in order to make their lives longer, healthier and better. In other words, we argue for self-conscious efforts, by institutions in the private sector and also by government, to steer people’s choices in directions that will improve their lives.4

For more on Nudge, see What Nudge Really Says, by David R. Henderson. EconLog, April 8, 2010. For related podcasts see Richard Thaler on Libertarian Paternalism and Ed Glaeser on the Economics of Paternalism with host Russ Roberts on EconTalk.

The authors go on to say that if people paid more attention, were smarter and had more complete information, they would make better choices on their own. But most people lie on a continuum—with all-knowing philosopher kings at one end and the insane at the other.

There are a lot of problems with this way of thinking, but a significant issue lies at its root. By what standard can we determine a given choice to be “better”? It’s as if Thaler and Sunstein were in possession of God’s Measuring Stick of Objective Value. But they’re not. Nor are choice architects in Washington. To be fair, perhaps we could somehow reframe “nudging” in terms of subjective value. In other words, what if the criterion were something like: ‘People should be nudged when they themselves would clearly choose X given improved cognitive ability, attention and information.’ The trouble is, we can’t know counterfactuals, much less subjective counterfactuals.

Furthermore, nudgers are usually establishing choice architectures for aggregates, not individuals. That is, they’re setting policy. So it’s not exactly like offering to pay your 15-year-old son not to tattoo his girlfriend’s name on his behind. The woulda-shoulda-coulda considerations will always differ from one person to the next, at different times and in different contexts. Government policy almost never does a good job of addressing particular circumstances. Nor does government policy tease out the degree to which a particular person possesses cognitive ability or information—dimensions that are facets of subjective valuation. Worse still, nudgers are seldom any smarter, more attentive or better-informed than the rest of us. They can be. But more often than not, even old-fashioned good advice requires local knowledge that bureaucrats simply aren’t privy to—even if values were objective. Before making our lives better, the choice architectures they dream up in their marbled rotundas end up in perverse dead ends. Weren’t Americans effectively nudged towards home ownership via the tax code and loose qualifying standards for mortgages? How’s that working out for us?

Generally, when we want the counsel of experts, we seek it out and pay for it. But all this Utopian nudging amounts to the privileging, however slight, of one set of values over another—all via the coercive apparatus of the state. Any way you slice it, however, no such independent set of “better” choices exists. The most one can hope for is strong inter-subjective agreement—that is, people with similar or overlapping preferences. This point is both theoretical and practical. Subjective preferences masquerade as objective good only because people in government and academia have formed a “club.” Claims to objective value discard the perspectives, local circumstances and risk thresholds that are unique to each of us.

Consider Waits and Weil. Waits is a musician who has lived much of his 61 years on bourbon, loose women and cigarettes. Weil, a 67-year-old holistic physician, thrives on organic food and yoga. Each, from his own perspective, leads more or less the kind of life he wants to. Both can be fulfilled. Without actually being them, how can we tell? Waits sings bitter-sweetly of his ‘misspent’ life. Weil writes, in self-help books, about healthy living. We could observe their behavior or ask them to take an MRI. Otherwise, we have to trust each man’s report to determine whether or not they are well or fulfilled. When the government embraces some idea about how people ought to live (value), the instinct might be to tax Waits and subsidize Weil. But why?

Ironically, government sometimes inadvertently nudges us towards unhealthy lifestyles. Recall the food pyramid of the 1980s and ’90s, which most researchers now think recommended too many servings of carbohydrates for optimum health and nutrition.5 Of course, some people like less-healthful food. So whatever the recommendations, many people will want to consume less-healthful foods and be willing to accept the risks involved.

Nudging assumes a universal standard of well-being that simply cannot exist. For example, is it really that great to live longer? If foregoing scotch and bacon allows me to increase my life expectancy from 88 to 90, is it worth it to me? Will any amount of information possessed by folks at the Department of Health and Human Services cause me to see the light? I doubt it. I value my nightcap more than I value three more years at Shady Oaks. And I don’t want to hear “you’ll thank me when you’re 90” because, a) I’m not 90 and b) I may or may not enjoy the life of incontinence at Shady Oaks. Call me irrational, but if you do, you’re simply substituting your preferences for mine. Time, context and perspective count for a lot. Of course, none of this is meant to argue that your preferences or mine can’t be changed by either nudging or thoughtful advice. The point is that architecting choices means rigging the incentives in favor of another’s preferences, with no objective standard of value.

That’s why when it comes to institutions, it’s time we abandoned fashioning utopias that seek to make people healthier, wealthier or longer-lived. These may not be your values or mine. We should replace that form of economics-cum-policycraft with one that analyzes rule-sets designed to maximize pluralism. As James Buchanan recently wrote:

How do markets work? Standing alone, this is an inappropriate and unanswerable question. It must be replaced by the question: How do markets work under this or that set of constitutional and institutional constraints? Economists’ scientific expertise can be brought to bear on the predicted effects of alternative sets of constraints. The relevant question is not that of asking how this or that end-state or outcome may be put in place through possible collective or political action. The question becomes, instead, how can this or that set of constraints be predicted to operate so as to allow the generation of an order that meets certain criteria of desirability? The difference between the two methodological stances may appear minor, but much ill-advised effort might be avoided if economists would recognize the limits of their own discipline.6

In short, Buchanan’s latter stance may let us analyze what sets of institutions are most likely to accommodate plural conceptions of the good (where his “criteria of desirability” resist importing end-states like ‘longevity’ or ‘income’).

“Free Market” Welfare Economics

As I suggest above, two problems with uncritical fidelity to welfare economics are: a) it slides into talk of aggregates, which simply ignores or assumes value subjectivity; and b) it relies on social utility calculations that can abandon the individual, as well as any rights he may claim. Cost-benefit analysis of a policy, for example, is all well and good. But cost-benefit alone is little better than Benthamite7 hedonic calculi. Both leave economics vulnerable to the nudgers, modelers and planners. Aggregates as proxies—properly limited—can be useful. I often find myself wanting to see unemployment go down, GDP go up, or various Pareto improvements. But none of these should be the telos of policycraft. Said paradoxically: The goal is to allow for goal-pluralism. Fetishization of “aggregate social welfare” (whatever that is) can be just as wrong-headed as the fetishization of GDP.8 “That we are all better off” is something that can only be approximated. Again, treating people as statistical abstractions or modeled agents—without reference to particular preferences, contexts and choices—is necessary and useful. But it can lobotomize people. And too often this way of thinking slides from subjectivity to false objectivity. Once you concede the existence of objective good to the statist, you must argue with him on his terms.

Free-market economists stray into the territory of false objectivity, too. For example, a way to reform Social Security, some of them say, would be to require people to make “good” long-term choices such as saving for retirement, but allow these funds to be managed privately instead of by Congressman Ponzi.

Hoover Institution economist Edward Lazear asks:

What does the current system do? What should be the goals of the system? Would private accounts achieve the desired goal more efficiently? The answer is that the current system performs some desirable functions but creates undesirable consequences. Private accounts accomplish the desired goals but eliminate most of the undesired consequences.9

Desirable to whom? He may be referring to poll numbers, popular wisdom, or the hunches of bureaucrats. I don’t know. But Lazear probably considers himself a free-market economist.

Such incremental policy changes might be an improvement over the status quo. But they still leave considerations of subjective value at the periphery. And that’s unfortunate. Why? Because when we end up erecting golden calves, such as longevity or bigger nest eggs, there are opportunity costs. We can either raise the costs of personal sovereignty and subsidize others’ preferences, or we can create incentive systems in which individuals can learn and thrive in their own ways. If the government forces me to put a certain percentage of my paycheck into an IRA, those are resources I can’t use to buy a fridge or start a business.10

In short, the circumstances of time, context and perspective are like delicate filaments that connect the economic actor to the world. We risk destroying these filaments with too many aggregates, abstractions and models divorced from reality. And when we make concessions to a collective good that doesn’t exist, we may win the argument, but lose the individual.

Indeed, I urge that we return the concept of subjective value to a central place in economics.


Will Park. IntoMobile.com “Ebay Shows Apple iPhones selling for $5000”, April 6, 2010.

David L. Prychitko. Library of Economics and Liberty—The Concise Encyclopedia of Economics, 2nd ed. “Marxism”

Karl Marx. Capital, Vol. I, Chapter One, par. I.I.14 “Commodities”, originally published 1867 as Das Kapital.

Richard Thaler and Cass Sunstein. Nudge: Improving Decisions About Health, Wealth, and Happiness, p. 5. Yale University Press, 2008.

Food and Drink Weekly, “USDA’s food pyramid faces criticism” June 24, 2002.

James M. Buchanan. Working paper for Perspectives in Moral Science, “Economists Have No Clothes”, 2009, p. 151-156.

Max Borders. TCS Daily, “Happily Burying Bentham”, May 19, 2006.

David R. Henderson. Library of Economics and Liberty “GDP Fetishism”, March 1, 2010.

Edward Paul Lazear. Hoover Digest, “Private Accounts for Social Security?” (2005 no. 2).

Entrepreneurship may involve subjective risk thresholds that would make many of us shudder. But that doesn’t make one kind of risk (defined contributions) better than another (starting a business).


*Max Borders is the executive editor at Free To Choose Network. He was formerly managing editor of Tech Central Station.