How are prices determined? Is it cost of production or utility, marginal cost or marginal utility? The by far best writings on this topic have originally been provided by Carl Menger and Eugen von Böhm-Bawerk. Menger was the founder of the so-called Austrian School of Economics and also of the theory of marginal utility, a theory he published independently the same year 1871 as Walras and Jevons.
The basic idea is two or more buyers on the one side, and two or more sellers on the other side. The buyers tend to bid up prices towards their individual perceived utilities (objective or subjective) as they compete at getting the good or service at hand, while the sellers tends to bid down the price towards their cost for the good or service. Since it’s not the average seller or buyer that finally determines the price, but rather the people acting on the margin, we can refer to these buyer and sellers as marginal pairs and note that it’s the marginal utility and marginal cost that’s involved, not the averages.
Now, if there is only one buyer there might be very little of bidding up the price, and if there’s only one seller, there might be very little of bidding down the price. In most real-life situations there often is an element of buyer or seller power influencing the price determination.
One thing that I think few people can answer is how the (marginal) cost itself is determined. This is where Eugen von Böhm-Bawerk enters the picture. He wrote extensively on this, and it’s very clear and easy to follow. In his essay Value, Cost, and Marginal Utility, he has a chapter called ‘Which Is “More Ultimate,” Costs or Marginal Utility?’ that deals with this. The basic idea is that the marginal utility of a good or service to the seller also affects whether the price is bid down by sellers. The raw materials etc involved often have an alternative use that also plays a role in this. For example, we cannot drive a car without a steering wheel, so the utility of the steering wheel must make the price of it very high, right? Not really, since the marginal utility of the seller of steering wheels of this particular marginal steering wheel is very low. The seller likely has thousands of it, and perhaps even wouldn’t miss it if it was stolen or lost from inventories. However, the seller isn’t prepared to sell it at the price of zero, since he has bought inputs like plastics to make it. So how much is this plastic worth? Well, it depends on all the other potential uses of such plastics and the marginal pairs involved in determining the price of the marginal potential other uses. In practice, the seller of steering wheels often just takes the price of plastics for granted and puts the price at the marginal cost plus a mark-up to earn something. Nevertheless, there’s more to it than meets the eye, as Böhm-Bawerk explains to us so well.
It should be noted, that there’s very little about this in standard text books about economics. But understanding marginal pairs is important for many reasons, like for example bid-ask-spreads when trading stocks.
You're absolutely right that the doctrine of subjective value is central to economics, and very helpful in analyzing and understanding how markets work.
But that's separable from the philosophical, moral and/or aesthetic question of whether objective value exists. It doesn't really belong to economics to answer that question.
Suppose an educator thinks that people value the wrong things, and dedicates his life to teaching them what's really valuable. I don't think an economist has to believe this educator is deluded, it his life's work vain. An economist might even think a lot of people waste their lives on addictions and shallow consumerism, and that wholesome education can make consumer dollars direct capitalism to more worthwhile ends.
Agreed. subjective value overwhelmingly trumps Intrinsic value...most of the time. But I waver to make it an absolute...or deny ALL intrinsic value. Utility matters. Usually not most...but marooned on a desert island, the Utilitarian Value of that one pool of fresh water...has immense utilitarian value for my life... above all the ocean water surrounding the island, that chest of fine gold jewelry, a huge underground rhodium mine, or Taylor's sweat. Subjectivity be damned. [what am i missing here?]
Only, I think, that instrumental value is a species of subjective value. So, consider Adam Smith's "water-diamonds paradox," which Menger resolved. Diamonds, which we don't really need to live, are way more expensive than water. But water, which is absolutely essential for life, is cheaper. The answer lies in how we value things based on how much one needs an extra bit of them--marginal thinking is subject relative. Water is super important, and if we only had a little, it would be extremely valuable. But, because we usually have a lot of water and not many diamonds, an extra pound of diamonds is seen as more valuable than an extra pound of water. This way of thinking about value is different from Marx's. or Smith's. Marx thought that the value of something comes from how much work goes into making it, not from how much it meets one's needs or wants -- where one is an individual subject. And neither value is intrinsic or objective.
Utility matters, in your example, because you assume that I want to preserve my life. But ultimately that too has a subjective value. Perhaps I value holding Taylor Swift's sweat-soaked shirt for an hour more than living till tomorrow.
LOL! OK, and yes i do assume humanity commonly...overwhelmingly Values the utility of life/health over diamonds/erotic-sweat?, etc. The UN-common outlier here is but "the exception that proves the rule." Strategic life/health utility most-often/overwhel-mingly...trumps outlier non-strategic (teen-lusty/irrational) subjectivity. Thus, we can't argue that subjective value an absolute.
How are prices determined? Is it cost of production or utility, marginal cost or marginal utility? The by far best writings on this topic have originally been provided by Carl Menger and Eugen von Böhm-Bawerk. Menger was the founder of the so-called Austrian School of Economics and also of the theory of marginal utility, a theory he published independently the same year 1871 as Walras and Jevons.
The basic idea is two or more buyers on the one side, and two or more sellers on the other side. The buyers tend to bid up prices towards their individual perceived utilities (objective or subjective) as they compete at getting the good or service at hand, while the sellers tends to bid down the price towards their cost for the good or service. Since it’s not the average seller or buyer that finally determines the price, but rather the people acting on the margin, we can refer to these buyer and sellers as marginal pairs and note that it’s the marginal utility and marginal cost that’s involved, not the averages.
Now, if there is only one buyer there might be very little of bidding up the price, and if there’s only one seller, there might be very little of bidding down the price. In most real-life situations there often is an element of buyer or seller power influencing the price determination.
One thing that I think few people can answer is how the (marginal) cost itself is determined. This is where Eugen von Böhm-Bawerk enters the picture. He wrote extensively on this, and it’s very clear and easy to follow. In his essay Value, Cost, and Marginal Utility, he has a chapter called ‘Which Is “More Ultimate,” Costs or Marginal Utility?’ that deals with this. The basic idea is that the marginal utility of a good or service to the seller also affects whether the price is bid down by sellers. The raw materials etc involved often have an alternative use that also plays a role in this. For example, we cannot drive a car without a steering wheel, so the utility of the steering wheel must make the price of it very high, right? Not really, since the marginal utility of the seller of steering wheels of this particular marginal steering wheel is very low. The seller likely has thousands of it, and perhaps even wouldn’t miss it if it was stolen or lost from inventories. However, the seller isn’t prepared to sell it at the price of zero, since he has bought inputs like plastics to make it. So how much is this plastic worth? Well, it depends on all the other potential uses of such plastics and the marginal pairs involved in determining the price of the marginal potential other uses. In practice, the seller of steering wheels often just takes the price of plastics for granted and puts the price at the marginal cost plus a mark-up to earn something. Nevertheless, there’s more to it than meets the eye, as Böhm-Bawerk explains to us so well.
It should be noted, that there’s very little about this in standard text books about economics. But understanding marginal pairs is important for many reasons, like for example bid-ask-spreads when trading stocks.
An excellent starting point. I will be following this series keenly.
So I'd quibble with this, a little bit.
You're absolutely right that the doctrine of subjective value is central to economics, and very helpful in analyzing and understanding how markets work.
But that's separable from the philosophical, moral and/or aesthetic question of whether objective value exists. It doesn't really belong to economics to answer that question.
Suppose an educator thinks that people value the wrong things, and dedicates his life to teaching them what's really valuable. I don't think an economist has to believe this educator is deluded, it his life's work vain. An economist might even think a lot of people waste their lives on addictions and shallow consumerism, and that wholesome education can make consumer dollars direct capitalism to more worthwhile ends.
Agreed. subjective value overwhelmingly trumps Intrinsic value...most of the time. But I waver to make it an absolute...or deny ALL intrinsic value. Utility matters. Usually not most...but marooned on a desert island, the Utilitarian Value of that one pool of fresh water...has immense utilitarian value for my life... above all the ocean water surrounding the island, that chest of fine gold jewelry, a huge underground rhodium mine, or Taylor's sweat. Subjectivity be damned. [what am i missing here?]
Only, I think, that instrumental value is a species of subjective value. So, consider Adam Smith's "water-diamonds paradox," which Menger resolved. Diamonds, which we don't really need to live, are way more expensive than water. But water, which is absolutely essential for life, is cheaper. The answer lies in how we value things based on how much one needs an extra bit of them--marginal thinking is subject relative. Water is super important, and if we only had a little, it would be extremely valuable. But, because we usually have a lot of water and not many diamonds, an extra pound of diamonds is seen as more valuable than an extra pound of water. This way of thinking about value is different from Marx's. or Smith's. Marx thought that the value of something comes from how much work goes into making it, not from how much it meets one's needs or wants -- where one is an individual subject. And neither value is intrinsic or objective.
Utility matters, in your example, because you assume that I want to preserve my life. But ultimately that too has a subjective value. Perhaps I value holding Taylor Swift's sweat-soaked shirt for an hour more than living till tomorrow.
Ha, that's possible, especially if you're a depressed teenager these days.
LOL! OK, and yes i do assume humanity commonly...overwhelmingly Values the utility of life/health over diamonds/erotic-sweat?, etc. The UN-common outlier here is but "the exception that proves the rule." Strategic life/health utility most-often/overwhel-mingly...trumps outlier non-strategic (teen-lusty/irrational) subjectivity. Thus, we can't argue that subjective value an absolute.
"overwhelmingly Values the utility of life/health over diamonds/erotic-sweat"
... which does not negate the fact that value is ultimately subjective.