Ludwig von Mises
Remarks on the Fundamental Problem of the Subjective Theory of Value
1. Exchange Ratios
The subjective theory of value traces the exchange ratios of the market back to the consumers' subjective valuations of economic goods. For catallactics the ultimate relevant cause of the exchange ratios of the market is the fact that the individual, in the act of exchange, prefers a definite quantity of good A to a definite quantity of good B. The reasons he may have for acting exactly thus and not otherwise?for example, the reasons why someone buys bread, and not milk, at a given moment?are of absolutely no importance for the determination of a market price. What is alone decisive is that the parties on the market are prepared to pay or to accept this price for bread and that price for milk. Individuals as consumers value goods exactly so much and no more or less at a given moment because of the operation of the social and the natural forces that determine their lives. The investigation of these determining factors is the task of other sciences, not that of economics. Economics, the science of catallactics, does not concern itself with them and, from its standpoint, cannot concern, itself with them. Psychology, physiology, cultural history, and many other disciplines may make it their business to investigate why men like to drink alcohol; for catallactics what is alone of importance is that a demand for alcoholic beverages exists in a definite volume and strength. One person may buy Kant's works out of a thirst for knowledge; another, for reasons of snobbery. For the market, the motivation of the buyers' actions is indifferent. All that counts is that they are prepared to spend a definite sum.
This and nothing else is the essential element of the economic theory of wants. Only the historical development of economics as a science can explain why the meaning of this theory could be so much misunderstood that many even wanted to assign it entirely to psychology and to separate it altogether from catallactics, and still others could see in it only a materialistic theory of value and utility. The great problem with which economics has been incessantly occupied since its founding in the eighteenth century is the establishment of a relationship between human well-being and the valuing of the objects of economic action by economizing individuals. The older theory did not recognize that economic action in a social order based on private property is never an action of the whole of mankind, but always the action of individuals, and that it generally does not aim at the disposal of the entire supply of a good of a given type, but merely at the utilization of a definite part. Hence arose the problem of the paradox of value, which the earlier theory was helpless to resolve. Accordingly, in the treatment of the problem of value and price determination it was shunted onto a wrong track, became entangled more and more in a morass of untenable theorems, and finally failed completely.
The great service that modern economics performed consists in resolving the paradox of value. This was effected by the realization that economic action is always directed only toward the utilization of definite quantities of a good. "If I have to buy a horse," said Böhm-Bawerk,
- it will not occur to me to form an opinion about how much a hundred horses, or how much all the horses in the world, would be worth to me, and then to adjust my bid accordingly; but I shall, of course, make a judgment of value about one horse. And in this way, by virtue of an inner compulsion, we always make exactly that value judgment which the concrete situation requires.
Economic action is always in accord only with the importance that acting man attaches to the limited quantities among which he must directly choose. It does not refer to the importance that the total supply at his disposal has for him nor to the altogether impractical judgment of the social philosopher concerning the importance for humanity of the total supply that men can obtain. The recognition of this fact is the essence of the Modern theory. It is independent of all psychological and ethical considerations. However, it was advanced at the same time as the law of the satiation of wants and of the decrease in the marginal utility of the unit in an increasing supply. All attention was turned toward this law, and it was mistakenly regarded as the chief and basic law of the new theory. Indeed, the latter was more often called the theory of diminishing marginal utility than the doctrine of the subjectivist school, which would have been more suitable and would have avoided misunderstandings.
 Cf. Böhm-Bawerk, "Grunz?ge der Theorie des wirtschaftlichen G?terwerts," Jahrb. f. National?konomie und Statistik, New Series, XIII, 16; also Kapital und Kapitalzins (3rd ed.; Innsbruck, 1909), Part II, p. 228.