The Subjective Theory of Value vs. the Labor Theory of Value

Where does the economic value of a thing come from? The labor theory of value answers that value is objective — a substance embodied in the good by the labor that produced it, measurable in labor-time and prior to any act of exchange. The subjective theory of value answers that value is not in the good at all: it is a judgment, the importance an acting individual attaches to a good because the satisfaction of one of his wants depends on commanding it. The dispute is not over whether labor matters — it plainly does — but over whether labor is the source and measure of value, or one scarce means whose own value is imputed backward from the wants its products are expected to satisfy. On the first answer rests the classical–Marxian system, with its account of price as embodied labor and of profit as unpaid labor; on the second rests the marginalist and Austrian tradition, in which prices, costs, capital, and interest are all derivatives of individual valuation. The displacement of the first by the second is the substance of what is called the marginal revolution.

The dispute is older than either name for it, but it crystallized into a clean opposition in the 1860s and 1870s. In 1867 Karl Marx published the first volume of Capital, giving the classical labor theory its most rigorous and consequential statement. Four years later, in 1871, Carl Menger published Principles of Economics, one of the founding texts of the marginal revolution, which grounded value in subjective want-satisfaction. The two books answer the same question — what makes a thing worth what it is worth — with mutually exclusive theories.

The contrast is not a verbal dispute about whether value means usefulness, exchangeability, or price. It is a difference in causal architecture. Marx begins with the commodity, abstracts from use-value, identifies abstract human labour as the common substance expressed in exchange-value, and measures magnitude by socially necessary labour-time. Menger begins with acting persons, wants, scarce goods, and the dependence of a satisfaction on command of a concrete good — and then explains exchange, price, wages, rent, interest, and capital goods by tracing value from expected satisfactions back through the means that help produce them. Ludwig von Mises later generalized Menger’s account into a full theory of action, while Eugen von Böhm-Bawerk turned it into a direct weapon against Marx’s system.

The Question: What Is the Common Element in Exchange?

Both theories begin from the same observation and the same distinction. A useful thing has a use-value — a capacity to satisfy some want — and, when it enters trade, an exchange-value: it commands definite quantities of other goods. Marx opens Capital from exactly this two-fold character and asks what makes commodities commensurable at all. If a quarter of wheat exchanges for some quantity of iron, the two must share a third thing to which both are reducible:

A simple geometrical illustration will make this clear. In order to calculate and compare the areas of rectilinear figures, we decompose them into triangles. But the area of the triangle itself is expressed by something totally different from its visible figure, namely, by half the product of the base multiplied by the altitude. In the same way the exchange values of commodities must be capable of being expressed in terms of something common to them all, of which thing they represent a greater or less quantity.

— Karl Marx, Capital

The whole dispute turns on the identity of that common element. Marx argues that it cannot be any physical property and cannot be use-value, since in exchange “one use value is just as good as another, provided only it be present in sufficient quantity”. Setting use-value aside, he concludes that the one property all commodities still share is “that of being products of labour”. The subjective theory denies that the commensurable element is any objective property residing in the goods, and locates it instead in the valuing mind of the person choosing. The same fact that any theory of value must explain — that intensely useful water can be nearly worthless while comparatively useless diamonds command fortunes — receives opposite treatments: the labor theory dissolves use-value out of the value question, while the subjective theory makes the relation between want and quantity the whole of the answer.

The Labor Theory of Value

In Marx’s hands the labor theory is built by abstraction. Stripping away the physical qualities of products and the concrete forms of the labor that made them — a coat and a length of linen differ as useful things and as the work of tailoring and weaving, but as values they are treated alike — what is left is undifferentiated human effort. The residue of that abstraction is value itself:

Let us now consider the residue of each of these products; it consists of the same unsubstantial reality in each, a mere congelation of homogeneous human labour, of labour power expended without regard to the mode of its expenditure. All that these things now tell us is, that human labour power has been expended in their production, that human labour is embodied in them. When looked at as crystals of this social substance, common to them all, they are – Values.

— Karl Marx, Capital

Value is therefore objective and embodied: “A use value, or useful article, therefore, has value only because human labour in the abstract has been embodied or materialised in it”. Its magnitude is then a quantity of that substance — measured by labor-time. To forestall the obvious objection that this would reward the slow and clumsy worker, Marx specifies that the relevant labor is not any individual’s actual effort but the social average, the labor “that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time”. From this he draws the law: that which determines the magnitude of value is “the amount of labour socially necessary, or the labour time socially necessary for its production”. Productivity therefore bites by changing that requirement — if better looms cut the labor needed to weave cloth, the value of the cloth falls even though the cloth serves the same use. Compressed to a slogan, the doctrine is unmistakable: “Now we know the substance of value. It is labour. We know the measure of its magnitude. It is labour time.”

Two qualifications keep the theory from being misread, and both matter for the contrast that follows. First, labor is the sole source of value but not of material wealth: Marx himself grants that “labour is not the only source of material wealth, of use values produced by labour” — nature supplies the matter and labor only alters its form — so a thing whose utility owes nothing to labour — “air, virgin soil, natural meadows” — has use-value but no value. The labor theory is thus not the crude claim that labor is the only physical ingredient of goods; it is the claim that, considered as exchange-values, their value-substance is abstract labor and their value-magnitude is socially necessary labor-time. Second, utility is a precondition but not a determinant. As Marx puts it, “nothing can have value, without being an object of utility”, and indeed “If the thing is useless, so is the labour contained in it; the labour does not count as labour, and therefore creates no value.” Yet how useful a thing is contributes nothing to how much value it has; value enters through labor at the point of production and is carried into exchange. It is this architecture — labor as source and measure — that later lets Marx build the theory of surplus value: labor-power is bought at its value, but in production it yields more value than its wage costs.

The Subjective Theory of Value

Menger begins from the opposite end — not the product and its conditions of production, but the human need and the scarcity that makes a particular good matter to its satisfaction. A thing becomes a good when it can be connected with the satisfaction of a need, people know that connection, and they can command it for that purpose; it becomes an economic good when the available quantity is insufficient for all the needs it could serve, so that command of a definite portion comes to matter. Value is the recognition of that dependence:

Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.

— Carl Menger, Principles of Economics

Because value is this relation between a person’s needs and the goods at his command, it cannot be a property carried inside the good. Menger states the point as the structural denial of the entire objective-value tradition:

Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being.

— Carl Menger, Principles of Economics

The same good can therefore have great value to one person, little to another, and none to a third, for “not only the nature but also the measure of value is subjective”. This is why a good can be useful yet valueless. The inhabitant of a virgin forest who needs twenty trees a year and has hundreds of thousands attaches no value to any single tree, because the loss of one impairs no satisfaction; a pail of water has no value beside an ample brook for the same reason. Let drought cut the flow below need, and each pail at once acquires value — the thing’s physical capacity to quench thirst has not changed, only the dependence of a satisfaction on commanding a definite quantity. Where Marx’s nature-given goods lack value because no labor made them, Menger’s lack value because their available quantity exceeds the needs they could meet: the determining variable is scarcity relative to want, not origin in labor.

Marginal Utility: How Subjective Value Is Determined

The decisive analytical move of the subjective theory — the one that turns “value is subjective” from a slogan into a determinate theory of magnitude — is marginalism. Since the units of a supply are interchangeable, a stock is allocated to wants in descending order of importance, and the loss of any one unit costs the actor only his least important use of the whole stock. The value of a unit is therefore set neither by the most urgent want the good could serve nor by an average, but by the least urgent satisfaction the available quantity actually provides for:

The value of a particular good or of a given portion of the whole quantity of a good at the disposal of an economizing individual is thus for him equal to the importance of the least important of the satisfactions assured by the whole available quantity and achieved with any equal portion.

— Carl Menger, Principles of Economics

This is what resolves the ancient paradox of value. Mises, in Human Action, reconstructs how the paradox defeated the classical economists: on the eve of the marginal revolution they “observed that things whose “utility” is greater are valued less than other things of smaller utility. Iron is less appreciated than gold.” Mises argues the apparent contradiction “was the outcome of a vicious formulation of the problem involved”. No one ever chooses between all gold and all iron; an actor chooses, at a time and place, between definite quantities — so what governs choice is marginal, not total, utility. When faced with the value of one unit of a homogeneous supply, “man decides on the basis of the value of the least important use he makes of the units of the whole supply; he decides on the basis of marginal utility.”

Mises sharpens the subjectivism in two respects that distinguish his version from any objective account. First, value attaches not to the physical thing but to the service expected from it: “The law of marginal utility does not refer to objective use-value, but to subjective use-value.” Second, valuation is ranking, never measurement. Action grades alternatives; it does not assign cardinal quantities of value, because “valuing that results in action always means preferring and setting aside; it never means equivalence”, and “Action does not measure utility or value; it chooses between alternatives.” Where Marx measures value as a homogeneous substance in labor-hours, Mises denies that value is a measurable quantity at all. He folds the whole law into praxeology, his deductive science of action: marginal utility is no psychological hypothesis but a logical implication of the fact that men act, so “the law of marginal utility is already implied in the category of action”, and the statement “is formal and aprioristic and does not depend on any experience” — the methodological-dualist ground on which value reduces to choice rather than to any embodied substance. The condensed statement is his definition of value itself:

Value is the importance that acting man attaches to ultimate ends. Only to ultimate ends is primary and original value assigned. Means are valued derivatively according to their serviceableness in contributing to the attainment of ultimate ends. Their valuation is derived from the valuation of the respective ends. They are important for man only as far as they make it possible for him to attain some ends.

Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment.

— Ludwig von Mises, Human Action

Cost, Imputation, and the Direction of Causation

The theories meet head-on over a single question: does the labor — or cost — sunk into a good determine its value? Menger devotes an explicit section, headed “Labor and value. Error.”, to denying it. Value tracks the importance of the dependent satisfaction and nothing else; the history of a good’s production is irrelevant to what it is worth now:

Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command. Goods on which much labor has been expended often have no value, while others, on which little or no labor was expended, have a very high value.

— Carl Menger, Principles of Economics

From this Menger draws the flat negation of the labor theory’s central claim: “The quantities of labor or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good.” Nor, he adds, can the cost of reproduction be the determinant, since some valued goods — antiques, the paintings of old masters — cannot be reproduced at all.

The deeper inversion concerns the direction of causation between final goods and the factors that make them. The cost-of-production tradition holds that goods derive their value from the value of the productive factors expended on them; Menger reverses the arrow. Productive factors — what he calls goods of higher order, which include labor, land, and capital — have value only because the consumers’ goods they yield are expected to have value:

The value of goods of lower order cannot, therefore, be determined by the value of the goods of higher order that were employed in their production. On the contrary, it is evident that the value of goods of higher order is always and without exception determined by the prospective value of the goods of lower order in whose production they serve.

— Carl Menger, Principles of Economics

Crucially, this imputation principle covers labor rather than excluding it. Labor services are valuable when, and to the extent that, satisfactions depend on commanding them; cost does not confer value on the product, but the anticipated value of the product confers value — and hence price — on the labor, land, and capital used up in making it. Menger therefore rejects special value laws for wages, rent, and interest: land, labor, and capital services are all appraised under one general theory of value, with their particular prices governed by their contribution to anticipated products and by the values of complementary factors. Böhm-Bawerk put the same point against the classical premise directly: in Capital and Interest he allows that expended labor exerts “a powerful influence on the value of many goods” yet insists that labor is “not an ultimate cause” — an ultimate cause would have to be common to all phenomena of value — but only a particular and intermediate one. This is the precise point on which the two systems cannot be reconciled, because each makes the other’s first cause its own derived effect: the labor theory runs the arrow from labor to value, the subjective theory from the valued final good back to the labor.

Exchange, Price, and Profit

The subjective theory also dissolves the premise that exchange is a swap of objectively equal values. For Menger, trade occurs precisely because the two parties rank the goods in opposite order: each gives up what is less important to him for what is more important to him, and both come away better provided for. There is no underlying equality being conserved — “such an equality of the values of two quantities of goods (an equality in the objective sense) nowhere has any real existence.” Price is therefore an outcome of valuations, scarcity, and bargaining, not the visible form of an equal labor substance: in isolated exchange it falls within limits set by the two parties’ valuations, and competition narrows those limits as marginal buyers, marginal sellers, and excluded bidders press in.

Mises extends the same structure into a general theory of choice and market process. Costs are the value of the forgone alternative, and profit in the primary sense is the increase in satisfaction from reaching the preferred state of affairs. Money prices then make economic calculation possible in a market society — but they do not turn subjective value into an intrinsic magnitude. Monetary profit and loss express how other market participants appraise an entrepreneur’s contribution; they are not a physical measurement of psychic satisfaction. Value remains, in Mises’s words quoted above, not in things but in the acting men who react to them.

Böhm-Bawerk and the Close of Marx’s System

The most sustained confrontation between the two camps came from Böhm-Bawerk, Menger’s foremost successor, who turned the subjective theory into an explicit weapon against the classical–Marxian system on two fronts.

In Capital and Interest, his critical history of theories of interest, Böhm-Bawerk treats the socialist exploitation theory — developed by Rodbertus and Marx — as the logical consequence of the Ricardian premise that labor is the sole source of value. If labor alone creates value, the laborer has a natural claim to the whole product, and the interest or profit taken by the capitalist can only be value extracted from the worker through the wage contract. Böhm-Bawerk’s strategy is to attack the foundation: having surveyed and rejected the productivity, use, abstinence, and exploitation theories in turn, he clears the ground for an account in which interest is not unpaid labor but the agio — the systematic premium — on present goods over future goods, an expression of time preference rather than of embodied labor. The interest question thereby becomes a corollary of the subjective theory of value; this is the lineage the wiki develops under time preference and interest.

In Karl Marx and the Close of His System, written after the posthumous third volume of Capital appeared in 1894, Böhm-Bawerk argued that Marx’s completed system contains an internal contradiction the labor theory cannot survive. In Volume I, commodities exchange in proportion to the socially necessary labor embodied in them. But Volume III concedes that, because competition equalizes the rate of profit across industries with very different ratios of labor to capital, commodities actually sell at “prices of production” that diverge systematically from their labor-values. Marx had announced this divergence as a seeming contradiction to be resolved in the later volumes; whether Volume III in fact delivers that resolution is exactly what is in dispute. Böhm-Bawerk denied that it does — where the labor-time rule was meant to explain the very exchange ratios that competition now governs by average profit, he found not a reconciliation but, in his words, “the bare contradiction itself.” On his reading the theory fails on precisely the ground, the determination of real prices, on which it was meant to be strongest. The transformation problem he posed has been contested in the Marxian tradition ever since; what is not in doubt is that he located the fault line where the two systems most directly collide.

Why It Matters

The contest between these two theories of value is the fault line beneath two whole traditions of economics, and very little above it is left untouched by which answer one gives.

For the marginalist and Austrian side, the subjective theory is foundational in the literal sense: nearly every later result is built on it. Mises locates the modern theory of value in the near-simultaneous work of “Carl Menger, William Stanley Jevons, and Léon Walras”, and on the Austrian branch its consequences ramify outward. If value is imputed from valued ends back to means, then the prices of the factors of production, the formation of capital, and the rate of interest are all expressions of individual valuation rather than of embodied cost — and market prices become the indispensable carriers of that valuation, the market’s only way of making heterogeneous plans, inputs, and outputs comparable for action. That is why their absence under collective ownership generates the economic calculation problem: without prices for exchanged goods and factors, there is no way to convey valuations or steer production. The subjective theory is, in this sense, the seed from which the rest of the structure grows.

For the classical–Marxian side, the stakes are equally high, because the labor theory does load-bearing normative work. The theory of surplus value — the claim that profit is unpaid labor appropriated from the worker — presupposes that labor is the source and measure of value. If value is instead the subjective, marginal importance imputed by consumers, and if the value of labor itself derives from the prospective value of its products, then the inference from labor as the sole source of value to profit as appropriated surplus is cut at its first link. This is why Böhm-Bawerk’s critique was not a technical quibble but an assault on the system’s foundations, and why the marginal revolution was experienced as more than a refinement.

In the history of economic thought the displacement was decisive: after the 1870s the objective cost-and-labor theories that had dominated classical political economy gave way, in the marginalist and Austrian tradition followed here, to subjective marginal value as the starting point of value-and-price theory, while the labor theory persisted chiefly in the Marxian line. That divide — the labor theory’s persistence among Marxists, its rejection by the marginalists — remains the clearest single marker separating the two. The wiki traces an earlier anticipation of the subjectivist insight, value from utility and scarcity rather than from cost, to the School of Salamanca.

See Also

• Praxeology — Mises’s deductive science of action, from which he derives marginal utility as a logical implication rather than a psychological hypothesis.
• Time Preference and the Theory of Interest — the interest theory Böhm-Bawerk built in place of the exploitation theory once the labor theory of value was rejected.
• Economic Calculation Problem — the downstream consequence of subjective value: without market prices there is no way to convey valuations and steer production.
• Capital — the Austrian capital theory in which higher-order goods are valued by the prospective value of the consumers’ goods they yield.
• Methodological Dualism — the epistemological ground on which Mises treats the law of marginal utility as aprioristic.
• School of Salamanca — the sixteenth-century scholastics whose utility-and-scarcity account of value anticipated the subjective theory.
• Austrian Economics — the school built on Menger’s subjectivist value theory.
• Carl Menger — founder of the subjective/marginal theory of value.
• Principles of Economics — Menger’s 1871 founding statement of subjective value.
• Karl Marx — author of the most rigorous version of the labor theory of value.
• Capital — Marx’s primary statement of the labor theory in Volume I, Chapter 1.
• Eugen von Böhm-Bawerk — the marginalist who pressed the subjective theory directly against Marx’s system.
• Capital and Interest — Böhm-Bawerk’s critical history, where the exploitation theory is traced to the labor theory of value and rejected.
• Karl Marx and the Close of His System — Böhm-Bawerk’s argument that Marx’s Volume I value theory contradicts the Volume III theory of prices.
• Ludwig von Mises — generalized subjective value into the praxeological theory of action.
• Human Action — Mises’s treatment of value, marginal utility, and the paradox of value.
• Free Trade and Comparative Advantage - The economic case for free trade: by comparative advantage, even a party worse at producing everything gains by specializing where it is relatively best and trading
• Capitalism - The economic system of private property, voluntary exchange, and free prices — social cooperation through the market — routinely confused with the very things it forbids: crony privilege, fraud
• Georgism and the Land-Value Tax - Henry George’s proposal to fund government by a single tax on the unimproved value of land — and the Austro-libertarian critique that land is legitimately owned, speculation is useful
• Mutualism and Individualist Anarchism - The market-anarchist tradition of Proudhon, Warren, Spooner, and Tucker: no state and free exchange, but with a labor-cost theory of value, mutual (interest-free) banking
• Say’s Law - The classical principle that production is the ultimate source of demand — goods are paid for with goods — so a general glut of everything is impossible

Sources

• Principles of Economics — Chapters I–V (Full Text) — Carl Menger, Principles of Economics (Dingwall–Hoselitz translation). Ch. III (“The Theory of Value”): “The Nature and Origin of Value” (value as the importance of a dependent satisfaction; value as nothing inherent in goods; the subjective nature and measure of value; the virgin-forest and brook examples); “The Original Measure of Value” (the marginal principle — value equal to the importance of the least important satisfaction provided for); “The subjective character of the measure of value. Labor and value. Error.” (the diamond example and the explicit denial that quantity of labor or cost of reproduction determines value); “The Laws Governing the Value of Goods of Higher Order” (the value of factors derived from the prospective value of their products); and the chapter on price (no objective equality of values in exchange; limits of price under isolated exchange and competition).
• Capital, Volume I — Chapter 1: Commodities (Full Text) — Karl Marx, Capital Vol. I, Ch. 1 (Moore–Aveling translation). §1 (use-value vs. exchange-value; the search for the common element; abstract human labor as the residue and “social substance”; magnitude of value as socially necessary labor-time; use-value as a precondition but not a determinant; value vs. material wealth) and §2 (the two-fold character of labor; “Now we know the substance of value. It is labour.”).
• Capital and Interest: A Critical History of Economical Theory (Full Text Aggregate) — Eugen von Böhm-Bawerk (Smart translation). The “Exploitation Theory” survey: the exploitation theory of interest (Rodbertus, Marx) as a consequence of the Ricardian doctrine that labor is the sole source of value; labor as “not an ultimate cause” but a particular and intermediate one; and Böhm-Bawerk’s rejection of that foundation as ground-clearing for his own (time-preference/agio) theory of interest. (Uncorrected OCR source; the two short quoted fragments were verified verbatim against it, the broader argument paraphrased.)
• Karl Marx and the Close of His System (Full Text Aggregate) — Eugen von Böhm-Bawerk (Macdonald translation of Zum Abschluss des Marxschen Systems). The argument that Capital Vol. I (value = socially necessary labor-time) contradicts Vol. III (commodities sell at “prices of production” diverging from labor-values because competition equalizes the rate of profit), with Böhm-Bawerk finding “the bare contradiction itself” rather than the promised reconciliation. (Uncorrected OCR source; the quoted fragment was verified verbatim against it, the surrounding argument paraphrased.)
• Human Action: A Treatise on Economics (Full Text) — Ludwig von Mises. The chapters on value and on the law of marginal utility: value as the importance acting man attaches to ends and as “not intrinsic, it is not in things”; the resolution of the paradox of value (gold vs. iron) through marginal rather than total utility; valuation as ranking, not measurement; marginal utility as implied in the category of action; and the marginal-revolution attribution to Menger, Jevons, and Walras.