Relative Theory of Value: For Dummies

  1. The Labor Theory of Value says the value of good is derived from the labor inputs that went into that goods production. This is wrong because it is the relative value of a good that determines how much labor and other resources go into producing that good. If value were truly determined by labor inputs, producers would never be concerned with making a profit or avoiding loss since they would be guaranteed to recoup all the cost of producing that good. You dont see the vast majority of goods that arent brought to market because they were thought to be unprofitable.
  2. The Intrinsic/Objective Theory of Value says the properties of a good solely determine its value.  This is wrong because the abilities of the consumer to utilize the properties of the good are just as important in determining the value of the good.
  3. The Subjective Theory of Value says the only thing that matters in determining the value of a good is the consumer’s mind and rejects the importance of the properties of the good.  This is wrong because the mind is trying to determine relative value. Given the mind is composed of imperfect information and imperfect intelligence to process this information, the likelihood of error in determining the relative value of a good is virtually certain.
  4. The Relative Theory of Value says that all value is relative. The value of a good to a consumer is a subset of all value.  The value of a good to a particular consumer is the marginal utility extracted by the consumer after consumption (utilization of the good to satisfy a goal). This result is consequential. The subjective valuation of a good is the EXPECTED MARGINAL UTILITY BEFORE CONSUMPTION.
  5. This implies that the relative value of a good to a consumer is dependent upon the inherent properties of the good.  If the goal of the consumer is to insulate against cold weather, then it is not up to the consumer’s mind on how well a certain material (cotton, down, plastic, metal) can satisfy this goal since this ability is inherent in the good itself and therefore merely an objective fact.  The consumer is trying to ascertain each material’s ability to retain body heat and select the best material for their purpose.  They don’t have perfect knowledge and can and often make mistakes.
  6. it makes no sense to refer to the value of a good without the perspective/state, and not the mind, of the consumer. it analogous to asking what is the state of water without providing a temperature. The important aspects of the state of the consumer that is necessary in determining the relative value of a good include the consumer’s ability to utilize the good toward those goals.
  7. the consumer variable is the state of the consumer, it has no direct relation to the consumer’s mind making it non-subjective. just like height/weight/age of a person; the objectives, abilities, and external conditions of the consumer are relative and NOT subjective
  8. like a chemical reaction between reactants, the relative value of a good to a consumer is a reaction of the inherent properties of a good and the abilities of the

    consumer to use the good to accomplish a goal.

  9. relative value of a good to a consumer = r(inherent properties of a good, particular consumer (goals, abilities))
  10. alternate versions of function using consequences, and opportunity costs. r=costs-benefits= profit (includes all profit throughout time. morality =max(r)= economic profit
  11. how RTV explains subjective valuation and thus pricing. subjective valuation as a function of relative value.
  12. RTV is a relation of the variables
  13. But it is clear that the determinants of price are only the subjective utilities of individuals in valuing given conditions and alternatives. There are no “objective” or “real” costs that determine, or are co-ordinate in determining, price.16. p 343 subjective valuation is a function of mind and relative value.
  14. long term prices and RTV
  15. p.278 man econ state “Suppose that an ultimate consumer buys a product and then finds he was mistaken in this purchase and the good has little or no value to him. Thus, a man might buy a cake and find that he does not like it at all. Ex ante the (expected) utility of the cake was greater than the marginal utility of the money forgone in purchasing it; ex post he finds that he was in error and that if he had it to do over again, he would not have bought the cake. The purchase was the consumer’s responsibility, and he must bear the loss as well as the gain from his voluntary transaction”
  16.  rothbard doesnt realize the senses are just an indication of relative value.
  17. subjective value function (mind, relative value)
  19. austrians want to make the subject irreproachable

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