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.1

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.

• 11Cf. Eugen von Böhm-Bawerk, “Grunzüge der Theorie des wirtschaftlichen Güterwerts,” Jahrbücher für Nationalökonomie und Statistik, New Series XIII, 16; also Böhm-Bawerk, Kapital und Kapitalzins (3rd ed.; Innsbruck, 1909), Part. II, p. 228.

The fact that modern economics starts from acting man’s subjective valuations and the action that is governed by these valuations, and not from any kind of objectively “correct” scale of values, is so familiar to everyone who is even slightly conversant with modern catallactics or who has thought only very little about the meaning of the terms “supply” and “demand” that it would be out of place to waste any more words on it. That it is frequently attacked by authors whose stand is opposed to that of subjective economics—for example, recently by Diehl2  —is the result of such crass misunderstanding of the entire theory that it can be passed over without further discussion. Modern economics cannot be more clearly characterized than by the phrase “subjective use value.” The explanation that the new theory gives of the phenomena of the market does not have as its basis any “scale of wants which is constructed on rational principles,”3 as Diehlm maintains. The scale of wants or of values, of which the theory speaks, is not “constructed.” We infer it from the action of the individual or even—whether or not this is permissible can remain undecided here—from his statements about how he would act under certain assumed conditions.

Diehl considers it obviously absurd to draw on “fanciful wishes, desires, etc.” for an explanation and thinks that in that case value would be determined by “the subjective whims of each individual” and thereby “the theory of marginal utility would lose all meaning.”4  Here he has indeed been misled by the oft-lamented ambiguity of the term “value” whose meaning for catallactics must not be confused with the “absolute” values of ethics. For no one will want to doubt that market prices, the formation of which we have to explain, really are influenced by “fanciful wishes” and caprices in exactly the same way as by motives that appear rational in Diehl’s eyes. Let Diehl try some time to explain, without referring to “fanciful wishes and desires,” the formation of the prices of goods that fluctuate in response to changes in fashion! Catallactics has the task of explaining the formation of the exchange ratios of economic goods that are actually observed in the market, and not those which would come about if all men were to act in a way that some critic regards as rational.

All this is so clear, as has been said, that no one will doubt it. It cannot be the task of this essay to belabor the obvious by attempting to prove it in detail. On the contrary, what we intend is something altogether different. We have already pointed out that Menger and Böhm-Bawerk made statements in various passages of their writings that are utterly incompatible with the basic principles they advanced. It should not be forgotten that the two masters, like all pioneers and trail blazers, had first assimilated the old concepts and ideas that had come down from earlier days and only later substituted more satisfactory concepts and ideas for them. It is humanly excusable, even if it is not objectively justifiable, that occasionally they were not consistent in the elaboration of their great fundamental ideas and that in details they clung to assertions stemming from the conceptual structure of the old, objective theory of value. A critical consideration of this insufficiency of the work of the founders of the Austrian School is an absolute necessity, since they seem to present great difficulties to many readers who attempt to understand the theory. For this reason I wish to select a passage from the chief work of each.5

In the preface to the first edition of his Principles of Economics, Menger describes the “proper subject matter of our science” i.e., theoretical economics, as the investigation of the “conditions under which men display provisionary activity that aims at the satisfaction of their wants.” He illustrates this in the following words:

Whether and under what conditions a thing is useful to me; whether and under what conditions it is a good; whether and under what conditions it is an economic good; whether and under what conditions it has value to me, and how great the measure of this value is to me; whether and under what conditions an economic exchange of goods between two parties can take place; and the margins within which prices can be formed in such an exchange; and so on.6

This, according to Menger, is the subject matter of economics. It should be noted how the subjectivity of the phenomena of value is repeatedly emphasized by means of the personal pronoun “me”: “useful to me,” “value to me,” “measure of this value to me,” etc.

Unfortunately, Menger did not adhere to this principle of subjectivity in his description of the qualities that make things goods in the economic sense. Although he cites Storch’s beautiful definition (l’arrêt que notre jugement porte sur l’utilité des choses . . . en fait des biens), he declares that the presence of all four of the following prerequisites is necessary for a thing to become a good:

1. A human want.
2. Such properties of the thing as enable it to be placed in a causal relation with the satisfaction of this want.
3. Knowledge of this causal relation on the part of a human being.
4. The ability to direct the employment of the thing in such a way that it actually can be used for the satisfaction of this want.7

The fourth prerequisite does not concern us here. There is nothing to criticize in the first requirement. As far as it is understood in this connection, it corresponds completely to the fundamental idea of subjectivism, viz., that in the case of the individual lie alone decides what is or is not a need. Of course, we can only conjecture that this was Menger’s opinion when he wrote the first edition. It is to be noted that Menger cited Roscher’s definition (everything that is acknowledged as useful for the satisfaction of a real human want) along with many definitions8  of other predecessors, without going further into the matter.

However, in the posthumous second edition of his book, which appeared more than half a century later and which (apart from the section on money, published long before in the Handw?rterbuch der Staatswissenschaften) can in no way be called an improvement over the epoch-making first edition, Menger distinguishes between real and imaginary wants. The latter are those

which do not in fact originate from the nature of the person or from his position as a member of a social body, but are only the result of defective knowledge of the exigencies of his nature and of his position in human society.9

Menger adds the observation:

The practical economic life of men is determined not by their wants, but by their momentary opinions about the exigencies of the preservation of their lives and well-being; indeed, often by their lusts and instincts. Rational theory and practical economics will have to enter into the investigation of real wants, i.e., wants which correspond to the objective state of affairs.10

To refute this notorious slip it suffices to quote some of Menger’s own words a few lines below those just cited. There we read:

The opinion that physical wants alone are the subject matter of our science is erroneous. The conception of it as merely a theory of the physical well-being of man is untenable. If we wished to limit ourselves exclusively to the consideration of the physical wants of men, we should be able, as we shall see, to explain the phenomena of human economic action only very imperfectly and in part not at all.11

Here Menger has said all that needs to be said on this subject. The case is exactly the same with regard to the distinction between real and imaginary wants as it is in regard to the distinction between physical and nonphysical wants.

It follows from the preceding quotations that the second and the third prerequisites for a thing to become a good would have to read: the opinion of the economizing individuals that the thing is capable of satisfying their wants. This makes it possible to speak of a category of “imaginary” goods. The case of imaginary goods, Menger maintains, is to be observed

where things which in no way can be placed in a causal relation with the satisfaction of human wants arc nonetheless treated as goods. This happens when properties, and thus effects, are attributed to things to which in reality they do not belong or when human wants that in reality are not present are falsely presumed to exist.12

To realize how pointless this dichotomy between real and imaginary goods is, one need only consider the examples cited by Menger. Among others, he designates as imaginary goods utensils used in idolatry, most cosmetics, etc. Yet prices are demanded and offered for these things too, and we have to explain these prices.

The basis of subjective use value is described very differently, but completely in the spirit of the theories that Menger elaborated in the latter sections of his basic work, in the words of C. A. Verrijn Stuart: A man’s valuation of goods is based on “his insight into their usefulness,” in which sense anything can be conceived as useful “that is the goal of any human desire, whether justified or not. It is for this reason that such goods can satisfy a human want.”13

• 22Cf. Diehl, Theoretische Nationalökonomie (Jena, 1916), I, 287; (Jena, 1927), III, 82–87. Against this, cf. my essays in Archiv für Geschichte des Sozialismus, X, 93 ff.
• 3Diehl, Theoretische Nationalökonomie, III, 85.
• 4Ibid.
• 5With regard to the problem of the measurement of value and of total value, which will not be treated further here, I have attempted a critical examination of the works of a few of the older representatives of the modern theory of value in my book, The Theory of Money and Credit (Yale University Press), pp. 38-47.
• 6Menger, Grundsätze der Volkswirtschaftslehre (Vienna, 1871), p. ix; (2nd ed.; Vienna, 1923), p. xxi.
• 7Cf. Menger, op. cit. (1st ed.), p. 3.
• 8Ibid., p. 2.
• 9Ibid., 2nd ed., p, 4.
• 10Ibid., p. 4 et seq.
• 11Ibid., p. 5.
• 12Ibid., p. 4; 2nd ed., pp. 161 f.
• 13C. A. Verrijn Stuart, Die Grundlagen der Volkswirtschaft (Jena, 1923), p. 94.

Böhm-Bawerk expresses the opinion that the treatment of the theory of price determination should be divided into two parts.

The first part has the task of formulating the law of the fundamental phenomenon in all its purity; that is, to deduce all propositions following from the law that lead to the phenomena of prices on the hypothesis that for all persons interested in exchange the only impelling motive is the desire to attain a direct gain in the transaction. To the second part falls the task of combining the law of the fundamental phenomenon with modifications that result from factual conditions and the emergence of other motives. This will be the place to . . . demonstrate the influence that such commonly felt and typical “motives” as habit, custom, fairness, humanity, generosity, comfort or convenience, pride, race and nationality, hatred, etc. have in the determination of prices.14

In order to arrive at a correct judgment of this argument, one must note the difference that exists between classical and modern economics in the starting points of their investigations. Classical economics starts from the action of the businessman in that it places exchange value, and not use value, at the center of its treatment of the problem of price determination. Since it could not succeed in resolving the paradox of value, it had to forgo tracing the phenomenon of price determination further back and disclosing what lies behind the conduct of the businessman and governs it in every instance, viz., the conduct of the marginal consumers. Only a theory of utility, i.e., of subjective use value, can explain the action of the consumers. If such a theory cannot be formulated, any attempt at an explanation must be renounced. One certainly was not justified in leveling against the classical theory the reproach that it starts from the assumption that all men are businessmen and act like members of a stock exchange. However, it is true that the classical doctrine was not capable of comprehending the most fundamental element of economics—consumption and the direct satisfaction of a want.

Because the classical economists were able to explain only the action of businessmen and were helpless in the face of everything that went beyond it, their thinking was oriented toward bookkeeping, the supreme expression of the rationality of the businessman (but not that of the consumer). Whatever cannot be entered into the businessman’s accounts they were unable to accommodate in their theory. This explains several of their ideas?for example, their position in regard to personal services. The performance of a service which caused no increase in value that could be expressed in the ledger of the businessman had to appear to them as unproductive. Only thus can it be explained why they regarded the attainment of the greatest monetary profit possible as the goal of economic action. Because of the difficulties occasioned by the paradox of value, they were unable to find a bridge from the realization, which they owed to utilitarianism, that the goal of action is an increase of pleasure and a decrease of pain, to the theory of value and price. Therefore, they were unable to comprehend any change in well-being that cannot be valued in money in the account books of the businessman.

This fact necessarily led to a distinction between economic and noneconomic action. Whoever sees and grasps the opportunity to make the cheapest purchase (in money) has acted economically. But whoever has purchased at a higher price than he could have, either out of error, ignorance, incapacity, laziness, neglectfulness, or for political, nationalistic, or religious reasons, has acted noneconomically. It is evident that this grading of action already contains an ethical coloration. A norm soon develops from the distinction between the two groups of motives: You should act economically. You should buy in the cheapest market and sell in the dearest market. In buying and selling you should know no other goal than the greatest monetary profit.

It has already been shown that the situation is altogether different for the subjective theory of value. There is little sense in distinguishing between economic and other motives in explaining, the determination of prices if one starts with the action of the marginal consumer and not with that of the businessman.

This can be clearly illustrated by an example drawn from the conditions of a politically disputed territory, let us say Czechoslovakia. A German intends to join a chauvinistic, athletic-military organization and wants to acquire the necessary outfit and paraphernalia for it. If he could make this purchase more cheaply in a store run by a Czech, then we should have to say, if we make such a distinction among motives, that in buying at a slightly higher price in a store run by a German in order to give his business to a fellow national, he would be acting uneconomically. Yet it is clear that the whole purchase as such would have to be called uneconomic, since the procuring of the outfit itself is to serve a chauvinistic purpose just as much as helping a fellow national by not considering the possibility of making a cheaper purchase from a foreigner. But then many other expenditures would have to be called uneconomic, each according to the taste of whoever judges them: contributions for all kinds of cultural or political purposes, expenditures for churches, most educational expenses, etc. One can see how ridiculous such scholastic distinctions are. The maxims of the businessman cannot be applied to the action of the consumers, which, in the last analysis, governs all business.

On the other hand, it is possible for the subjective theory of value to comprehend from its standpoint also the action of the businessman (whether he is a manufacturer or only a merchant) precisely because it starts from the action of the consumers. Under the pressure of the market the businessman must always act in accordance with the wishes of the marginal consumers. For the same reason that he cannot, without suffering a loss, produce fabrics that do not suit the taste of the consumers, he cannot, without taking a loss, act on the basis of political considerations that are not acknowledged and accepted by his customers. Therefore, the businessman must purchase from the cheapest source, without any such considerations, if those whose patronage he seeks are not prepared, for political reasons, to compensate him for his increased expenses in paying higher prices to a fellow national. But if the consumers themselves—let us say in purchasing trademarked articles—are prepared to compensate him, he will conduct his business affairs accordingly.

If we take the other examples cited by Böhm-Bawerk and go through the whole series, we shall find the same thing in each case. Custom requires that in the evening a man of “good” society appear in evening clothes. If somewhere the prejudices of the circle in which he lives demand that the suit not come from the shop of a radical tailor, where it can be bought more cheaply, but that it be procured from the more expensive shop of a tailor with conservative leanings, and if our man acts in accordance with these views, he follows no other motive in doing so than that of getting a suit in general. In both instances, in agreeing to purchase evening clothes in the first place, and in procuring them from the tailor with conservative leanings, he acts in accordance with the views of his circle, which he acknowledges as authoritative for himself.

What is that “direct gain in the exchange” which Böhm-Bawerk speaks of? When, for humanitarian reasons, I do not buy pencils in the stationery store, but make my purchase from a warwounded peddler who asks a higher price, I aim at two goals at the same time: that of obtaining pencils and that of assisting an invalid. If I did not think this second purpose worthy of the expense involved, I should buy in the store. With the more expensive purchase I satisfy two wants: that for pencils and that of helping a war veteran. When, for reasons of “comfort and convenience,” I pay more in a nearby store rather than buy more cheaply in one further away, I satisfy my desire for “comfort and convenience,” in the same way as by buying an easy chair or by using a taxi or by hiring a maid to keep my room in order. It cannot be denied that in all these instances I make a “direct gain in the exchange” in the sense intended by Böhm-Bawerk. Why, then, should the case be any different when I buy in a nearby store?

Böhm-Bawerk’s distinction can be understood only when it is recognized as a tenet taken over from the older, objective system of classical economics. It is not at all compatible with the system of subjective economics. But in saying this, we must emphasize that such a dichotomy had not the slightest influence on Böhm-Bawerk’s theory of value and price determination and that the pages in which it is propounded could be removed from his book without changing anything significant in it. In the context of this work it represents nothing more than?as we believe we have shown?an unsuccessful defense against the objections that had been raised against the possibility of a theory of value and price determination.

Strigl expresses the matter more nearly in accordance with the subjective system than does Böhm-Bawerk. He points out that the scale of values “is fundamentally composed also of elements that popular usage treats as noneconomic in contrast to the economic principle.” Therefore, the “maximum quantity of available goods cannot be opposed, as ‘economic,’ to the ‘uneconomic’ goals of action.”15

For the comprehension of economic phenomena it is quite permissible to distinguish “purely economic” action from other action which, if one wishes, may be called “noneconomic,” or “uneconomic” in popular usage, provided it is understood that “purely economic” action is necessarily susceptible of calculation in terms of money. Indeed, both for the scientific study of phenomena and for the practical conduct of men, there may even be good reason to make this distinction and perhaps to say that under given conditions it is not advisable, from the “purely economic” point of view, to manifest a certain conviction or that some course of action is “bad business,” that is to say, it cannot involve a monetary gain, but only losses. If, nevertheless, one persists in acting in that way, he has done so not for the sake of monetary gain, but for reasons of honor or loyalty or for the sake of other ethical values. But for the theory of value and price determination, catallactics, and theoretical economics, this dichotomy has no significance. For it is a matter of complete indifference for the exchange ratios of the market, the explanation of which is the task of these disciplines, whether the demand for domestic products arises because they cost less money than foreign goods (of the same quality, of course) or because nationalist ideology makes the purchase of domestic products even at a higher price seem right; just as, from the point of view of economic theory, the situation remains the same whether the demand for weapons comes from honorable men who want to enforce the law or from criminals who are planning monstrous crimes.

• 14Cf. Böhm-Bawerk, Kapital und Kapitalzins, II, 354.
• 15Strigl, Die ökonomischen Kategorien und die Organisation der Wirtschaft (Jena, 1923), p. 75 et seq. Cf. further ibid., pp. 146 ff.

The much talked about homo economicus of the classical theory is the personification of the principles of the businessman. The businessman wants to conduct every business with the highest possible profit: he wants to buy as cheaply as possible and sell as dearly as possible. By means of diligence and attention to business he strives to eliminate all sources of error so that the results of his action are not prejudiced by ignorance, neglectfulness, mistakes, and the like.

Therefore, the homo economicus is not a fiction in Vaihinger’s sense. Classical economics did not assert that the economizing individual, whether engaged in trade or as a consumer, acts as if the greatest monetary profit were the sole guiding principle of his conduct. The classical scheme is not at all applicable to consumption or the consumer. It could in no way comprehend the act of consumption or the consumer’s expenditure of money. The principle of buying on the cheapest market comes into question here only in so far as the choice is between several possibilities, otherwise equal, of purchasing goods; but it cannot be understood, from this point of view, why someone buys the better suit even though the cheaper one has the same “objective” usefulness, or why more is generally spent than is necessary for the minimum—taken in the strictest sense of the term—necessary for bare physical subsistence. It did not escape even the classical economists that the economizing individual as a party engaged in trade does not always and cannot always remain true to the principles governing the businessman, that he is not omniscient, that he can err, and that, under certain conditions, he even prefers his comfort to a profit-making business.

On the contrary, it could be said that with the scheme of the homo economicus classical economics comprehended only one side of man?the economic, materialistic side. It observed him only as a man engaged in business, not as a consumer of economic goods. This would be a pertinent observation in so far as the classical theory is inapplicable to the conduct of the consumers. On the other hand, it is not a pertinent observation in so far as it is understood as meaning that, according to classical economic theory, a person engaged in business always acts in the manner described. What classical economics asserts is only that in general he tends to act in this way, but that he does not always conduct himself, with or without such an intention, in conformity with this principle.

Yet neither is the homo economicus an ideal type in Max Weber’s sense. Classical economics did not want to exalt a certain human type—for example, the English businessman of the nineteenth century, or the businessman in general. As genuine praxeology—and economics is a branch of praxeology—it aspired to a universal, timeless understanding that would embrace all economic action. (That it could not succeed in this endeavor is another matter.) But this is something that can only be indicated here. To make it evident, it would have to be shown that an ideal type cannot be constructed on the basis of a formal, theoretical science like praxeology, but only on the basis of concrete historical data.16  However, such a task goes beyond the scope of this discussion.

By means of its subjectivism the modern theory becomes objective science. It does not pass judgment on action, but takes it exactly as it is; and it explains market phenomena not on the basis of “right” action, but on the basis of given action. It does not seek to explain the exchange ratios that would exist on the supposition that men are governed exclusively by certain motives and that other motives, which do in fact govern them, have no effect. It wants to comprehend the formation of the exchange ratios that actually appear in the market.

The determination of the prices of what Menger calls “imaginary goods” follows the same laws as that of “real goods.” Bbhm-Bawerk’s “other motives” cause no fundamental alteration in the market process; they change only the data.

It was necessary to expressly point out these mistakes of Menger and Böhm-Bawerk (which, as we have noted above, are also encountered in other authors) in order to avoid misinterpretations of the theory. But all the more emphatically must it be stated that neither Menger nor Böhm-Bawerk allowed themselves to be misled in any way in the development of their theory of price determination and imputation by consideration for the differences in the motives that lie behind the action of the parties on the market. The assertions that were designated as erroneous in the preceding remarks did not in the least detract from the great merit of their work: to explain the determination of prices in terms of the subjective theory of value.

• 16Ibid., pp. 75 ff.