Since the 1870s, economists have agreed that value is subjective, but, following Alfred Marshall, many argued that the cost side of the equation is determined by objective conditions. Marshall insisted that just as both blades of a scissors cut a piece of paper, so subjective value and objective costs determine price...But Marshall failed to appreciate that costs are also subjective because they are themselves determined by the value of alternative uses of scarce resources.
—Peter J. Boettke, "Austrian School of Economics", Concise Encyclopedia of Economics.
The doctrine that all value is subjective raises
some important issues. It appears to create a bias against government
intervention. Therefore it may explain the correlation between the
methodological outlook of Austrian economists and their typically libertarian
policy orientation. Put another way, do non-Austrian economists believe that
value can be calculated objectively, and are such calculations important for
interventionist policies?
When an individual arrives at a decision, to
what extent are the costs and benefits of that decision measurable by an
objective expert who is not involved in making the decision? One could argue
that perhaps the detached expert will be more informed than the individual.
However, what I am calling the doctrine of subjective value says that the
detached expert is less informed than the individual.
For example, suppose that my spouse and I are
considering whether or not to have children. A social scientist in the field of
happiness research reports that couples without children are, on average,
happier than couples with children. Does this tell us that we should not have
children?
As another example, suppose that I am deciding
whether or not to give a raise to an employee. A social scientist in the field
of human capital research reports that, based on the correlations between
earnings, education, and experience, the productivity of my employee is
expected to be 10 percent higher than his current wage. Does this tell me that
I should give the employee a raise of 10 percent?
In these examples, I think that an Austrian
economist could make a fairly convincing case that the decision-maker is likely
to have knowledge that makes the expert's research close to irrelevant.
In the case of deciding whether or not to have
children, even for the people surveyed, the researcher does not know whether
the couples with children would be happier without, or vice-versa. It could
easily be the case that there are some couples who, whatever their level of
happiness, are happier with children than they would have been without. Could
my spouse and I be in that category? There is no way for the researcher to
know.
In the case of deciding how much to pay the
employee, the researcher also is likely to lack important information. As the
employee's manager, I know much more about the value of what the employee
contributes than the researcher who knows only the worker's education and
experience. I can observe how well the employee actually uses his education and
experience on the job. This is an example of what Friedrich Hayek would call local knowledge.
For over one hundred years, various commentators
have hoped that social scientists would in fact develop sufficient knowledge to
provide expert guidance in economic decision-making. Recently, for example, the
United Kingdom Office of National Statistics issued a report on happiness data.
A news story by the BBC quoted Glenn Everett, the project's director, as
saying, "Understanding people's views of well-being is an important
addition to existing official statistics and has potential uses in the policy
making process and to aid other decision making."1
The case for government intervention in economic
decision-making would appear to depend on two prerequisites. One is that
government experts have knowledge that individuals lack. In addition, simply
having government experts communicate their knowledge must be insufficient:
stronger government action is required because otherwise people will not act in
accordance with the knowledge made public by experts.
A classic example might be air pollution caused
by a particular type of gasoline. As an individual, I lack the expertise to
evaluate the cost of this pollution. Moreover, even if I had this knowledge, I
might not worry about the cost, because it will largely be borne by others. In
this example, both prerequisites for government intervention are satisfied. (An
Austrian, however, could argue that all we know is that there is some component
of the cost of gasoline, associated with pollution, that individuals do not
take into account. The exact measurement of the cost of pollution requires
subjective determinations that are beyond the capabilities of even an expert
scientist.)
The doctrine of subjective value tends to deny
that even the first prerequisite—superior knowledge—is likely to be satisfied.
Individuals know their own tastes. This means that they also know the
opportunity cost of their labor. Individual managers have local knowledge about
productivity. This information is not accessible to the policy maker.
I should emphasize that these are not merely
abstract issues. When a local government bans large servings of sugary drinks
at restaurants, there is an implicit claim that the government officials have
calculated an objective value that is more appropriate than the subjective
value. When government sets the compensation of teachers by a formula rather
than giving discretion to school principals, there is an implicit assumption
that objective value is more appropriate than subjective assessment. Government
formulas for paying physicians under Medicare and Medicaid substitute some
measure of objective value for the subjective value that would be used if
patients were spending their own money and bargaining over price and service.
Because government intervention implicitly
assumes that value can be calculated, or at least approximated, by technocrats,
it is not surprising that economists put a lot of effort into trying to arrive
at objective measures of value. For example, for regulatory purposes,
economists calculate the value of a life saved. How should they do this?
One approach is to measure how much a person is
willing to pay, on average, to avoid a given risk of death. That is, if I will
pay $1,000 to avoid something that gives me a one percent risk of death, then
you can argue that I value my life at $100,000. Note that this calculation
requires a linear relationship—in effect, it says that because I would pay
$1,000 to avoid a one percent risk of death, a linear extrapolation would say
that I would pay $100,000 to avoid a one hundred percent risk of death.
As the value-of-life methodology illustrates,
there can be clever ways to arrive at a number that purports to represent
objective value. However, the validity of that number can be highly
questionable. From the Austrian perspective, such calculations are
pseudo-scientific and misleading.
Policy issues are often discussed as if the
issue of subjective value were not relevant. One context in which it was raised
was during the "socialist calculation debate," over whether central
planners would have enough information to allocate resources efficiently.
Although the socialist side of the debate never conceded, I think it is fair to
say that today there are few economists who would claim that the socialist side
won. A centrally planned economy will suffer from lack of information, as the
doctrine of subjective value would claim.
These considerations would seem relevant to
government interventions in sectors like health care, education, housing, and
bank regulation. All such interventions end up replacing subjective values with
values arrived at by government experts. One would think that defenders of such
policies would be trying to engage with the issues raised by Austrians in the
socialist calculation debate.
Instead, advocates of government instead have
chosen to attack Austrians for "free market fundamentalism." Rather
than wrestle with the questions that Austrians raise about whether technocrats
have the requisite information to calculate value accurately, mainstream
economists accuse Austrians of believing that markets are "perfect,"
meaning that they satisfy ideal characteristics, such as having many firms and
perfectly informed consumers. If those characteristics are not satisfied,
markets are said to "fail" and the need for government intervention
is presumably demonstrated. However, given the doctrine of subjective value, an
Austrian would not concede that just because a market is imperfect, government
intervention will succeed.
Suppose that mainstream economists were to
engage in a debate over whether measures of value created by independent
researchers have validity. What might they say?
One argument might be that the doctrine of
subjective value is too nihilistic. If there is no way to measure value
objectively, then how can we say anything interesting about economic performance?
For example, how can we say that market economies generally work better than
communist economies? If you have no way to compute objective value, how do you
know that government intervention is wrong?
If asked to demonstrate that capitalism works
better than communism, one's natural instinct is to compare GDP per capita in
otherwise similar countries, such as North Korea and South Korea. However, what
is GDP but yet another attempt to arrive at an objective measure of value?
My own view is that GDP has some use as a rough measure
of value. Large differences across country or over time are meaningful.
However, it is a mistake to treat GDP or other computed values as if they were
exact or, even worse, more accurate than the information that individuals use to
arrive at their own decisions.
For me, the doctrine of subjective value does
not automatically preclude government intervention. Nor does it preclude any
attempt to arrive at objective estimates of value. However, it does remind us
to be aware of the information that is discarded when a social researcher
attempts to estimate value, and not to treat such estimates as if they embodied
absolute truth. The standard practice, I am afraid, is instead to treat such
calculations as if they were fully accurate. This implicit assumption leads
proponents to over-estimate the likely success of government intervention. In a
world where knowledge of value has a large subjective component, acting as if
value were objective is a dangerous practice.
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