I grow tomatos. I would like some wheat. You grow wheat. You would like some tomatos. We get together and swap some tomatos for some wheat. Who got the better deal? We both did. This is mutually beneficial exchange. One of the things that chokes most proponents of other economic systems is the idea that every economic exchange is a win-win situation. They just can’t get it. The Austrian School does.
The socialists will tell you that every exchange is exploitative, and the Keynsians, and Friedmanites will tell you that one party benefits more than the other. Only the Austrian school will point out the the obvious fact that both parties benefit equally.
Why would you trade with me if you weren’t going to benefit? Why would I trade with you if I wasn’t going to benefit? We wouldn’t. So now the socialists, Keynsians, and Friedmanites will ask which commodity has more value, my tomatoes or your wheat? Only the Austrian school will answer correctly: both.
I have tomatoes. But I don’t have wheat. I would really like some wheat. For you it’s reversed, you have wheat and not tomatoes. So you would really like some tomatoes. So at the time that we agree to trade I value your wheat more highly than the tomatoes I trade for it, and you value my tomatoes more highly than the wheat you trade. So we both have a different valuation of the same commodities in the same transaction. This is called the Subjective Theory of Value.
As you might imagine a theory of value, or how to rate the value of a commodity, is a key point in any economic system.
Socialists subscribe to the Labor Theory of value. They rate the value of a commodity as equal to the value of the labor required to make that commodity. This is obviously insufficient. It does not consider the cost of materials, the cost of transporting the materials or finished product, or the cost of acquiring the skills to make the commodity, just to name a few.
Other economic systems subscribe to other theories of value that take some of these things into consideration, but only one of them considers everything. The Austrian School considers every factor in the production of a commodity, plus one thing that no other school of economic thought considers: subjectivity.
The Subjective Theory of Value is the theory that after ALL other factors of production have been considered, the final valuation is affected by the subjective valuation of the commodity by consumers. Simply put, if you don’t need something or want something then it will be of little value to you no matter much it cost to make. If you need or want something badly then it will be of considerably greater value to you.
If you live in a first world country where water is cheaply available from 3 or 4 faucets in every home then water is not very valuable to you. You wouldn’t pay $50 for a bottle of water under those circumstances. But if you were in a dessert and dying of thirst then you might very well be willing to pay $50 for a bottle of water.
So we have two concepts so far which set the Austrian School of economics apart from all other schools of thought on the subject. Mutually Beneficial Exchange, and the Subjective Theory of Value. But wait, there’s more. Well, there’s too much more to explain here and now. Visit www.mises.org .