Subjective theory of value

The subjective theory of value is a theory of value which advances the idea that the value of a good is not determined by any inherent property of the good, nor by the amount of labor necessary to produce the good, but instead value is determined by the importance an acting individual places on a good for the achievement of his desired ends. While the modern version of this theory was created independently and nearly simultaneously by William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century it had in fact been advanced in the Middle Ages and Renaissance but did not gain widespread acceptance at that time.

According to the subjective theory of value, voluntary trades between individuals imply that both parties to the trade subjectively perceive the goods, labour or money they receive as being of higher value to the goods, labour or money they give away. The subjective-value theory holds that one can create value simply by transferring ownership of a thing to someone who values it more highly, without necessarily modifying that thing. Where wealth is understood to refer to individuals' subjective valuation of their possessions, voluntary trades may increase the total wealth in society.

Individuals will tend to obtain diminishing levels of satisfaction, or marginal utility from acquiring additional units of a good. They will initially prioritise obtaining the goods they most need, such as sufficient food, but once their need for food is satisfied up to a certain level, their desire for other goods will start to assume more relative importance, and they will seek to bring satisfaction of their need for food into satisfaction of their need for other goods.

In a free market, competition between individuals seeking to trade goods they possess and services they can provide for goods they perceive as being of higher value to them results in a market equilibrium set of prices emerging.

Classical economists such as David Ricardo believed that individual people obtain different levels of utility or 'value in use' from a service, but did not effectively connect those with market prices, or 'value in exchange', seeing them as separately derived from the quantity of labour input and other production factors.

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