Subjective Valuation Versus Arbitrary Valuation

Commentary

Many assume an individual’s valuation scale, which is in his head, determines his choices. The decision to buy or not to buy a particular good is subjective valuation. Since the buying of goods is not linked to any particular goal, this buying is of a random nature. From this it may appear that subjective valuations are of an arbitrary nature. But is this the case?

“Thus if economizing men must choose between the satisfaction of a need on which the maintenance of their lives depends and another on which merely a greater or less degree of well-being is dependent, they will usually prefer the former.”

Hence, whenever an individual assesses a thing, he assesses it in accordance with its expected serviceability to his highest-valued goal at the moment. The perceived benefit of a good vary given changes in an individual’s circumstances.

The Mises Framework of Consumer Choices

According to Ludwig von Mises, given that individuals have a certain knowledge about themselves, this can assist in ascertaining a logically driven choice theory. For instance, one can observe that individuals are engaged in a variety of activities. They may be performing manual work, driving cars, walking on the street, or dining in restaurants. The distinguishing characteristic of these activities is that they are conscious and purposeful.

Using the knowledge that human action is conscious and purposeful, we can establish the meaning of an individual’s conduct. Thus, manual work may be a means for some people to earn money, which in turn enables them to achieve various goals, like buying food or clothing. Dining in a restaurant can be a means for establishing business relationships or satisfying hunger. Driving a car may be a means for reaching a particular destination.

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Individuals operate within a framework of means and ends; they use various means to secure ends. The knowledge that individuals pursue purposeful actions implies that causes—in the world of economics—emanate from human choices. (This is not to imply, however, that availability of natural factors and causes have no place in economics, just that economics focuses uniquely on the role of human action.)

“One example that Mises liked to use in his class to demonstrate the difference between two fundamental ways of approaching human behavior was in looking at Grand Central Station behavior during rush hour. The ‘objective’ or ‘truly scientific’ behaviorist, he pointed out, would observe the empirical events: e.g., people rushing back and forth, aimlessly at certain predictable times of day. And that is all he would know. But the true student of human action would start from the fact that all human behavior is purposive, and he would see the purpose is to get from home to the train to work in the morning, the opposite at night, etc. It is obvious which one would discover and know more about human behavior, and therefore which one would be the genuine ‘scientist.’”

Conscious and purposeful action implies that individuals assess or evaluate various means at their disposal relative to their desired ends. Individual ends set the standard for valuations and, thus, means and choices. Consequently, the same good—because of changes in an individual’s ends—is likely to be valued differently. At any point in time, individuals have an abundance of ends that they would like to achieve. What limits the attainment of various ends is the scarcity of means. Hence, once more means become available, a greater number of ends can be accommodated—i.e., an individual’s living standards will increase.

Again, some think that it is the value scale itself that determines what goods individuals are going to demand. The valuation scale is given without letting us know how it originated. Since the buying of goods here is not linked to any particular goal, this buying seems to be random in nature. The formation of valuations in the popular thinking framework is believed to be arbitrary. Thus, an individual may choose a particular good due to the valuation scale, hard-wired in his head. We, however, do not know the causes that have established the valuation scale, thus human choices and values are assumed to be arbitrary.

This should be contrasted with Ludwig von Mises’s framework, in which valuations are not formed arbitrarily by some hard-wired valuation scale, but are formed consciously and purposely by an individual. If an individual were to rank his ends arbitrarily, then he would have run the risk of endangering his life.