Values in a Market Context

The subjectivist trap of personal-contextual values.

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Objectivism rejects the idea of intrinsic values. Values are not inherent in things. To say that something is of value is to presuppose the question: of value to whom?

Objectivism also rejects the idea of subjective values. Values do not exist only in the mind; they are (also) based on external facts.

Objectivism maintains that values are objective; they arise from the relationship between a valuer and his object of value. The object must be factually beneficial to the valuer’s life and the valuer must recognize this fact for it to be of real value.

This is Ayn Rand’s distinctive conception of value that rejects both intrinsic and subjective “boxes” offered in conventional philosophy.

In the field of economics, however, the objectivity of market values is not fully grasped, even among Objectivists. The latter contend that modern economics—especially the Austrian branch—can be compatible with an objective conception of value despite its common terminology of “subjective value.” This compatibility is said to derive from the nature of contextual-personal values. That is, a car highly valuable for Bob, who needs it to commute for work, can have zero value to Joe, who lives in New York City and gets around using public transportation.

Values are individually context-dependent. Personal circumstances dictate what is valued and to what degree, without necessarily falling into subjectivism. To use the car example again, a car would not be valuable to someone who doesn’t know how to drive as it would be for someone who does. After all, value “presupposes an answer to the question: of value to whom and for what?[1]”

And yet, the idea of “personal-contextual value” drops the wider market context. As Leonard Peikoff stressed: “Whenever you tear an idea from its context and treat it as though it were a self-sufficient, independent item, you invalidate the thought process involved.”

Thanks to the market economy, individual contexts do not exist in a void. Goods that do not match one person’s context may match another’s.

Suppose I want to sell my coat. I take it to the local market and ask around for potential buyers. The first person says the coat is too small for him. The second says he already owns too many coats. The third says he can’t afford it. The fourth says he doesn’t like the design. The fifth tries it on and says: “I’ll buy it!”

For an exchange to occur, all it takes is for one good to match one personal context out of many. Which means: the full context for any good on the market relates to all personal contexts of the market participants. While other contexts do not guarantee an exchange, as they are only potential matches for any particular good, the market makes such matching possible.

The distinctive benefit of the market is that we don’t need to know the personal contexts of others. Market exchanges are impersonal as a feature, not a bug. The market abstracts away from personal contexts and uses goods as the tie that binds sellers and buyers together, despite their personal differences.

Consider the difference between personal and impersonal exchange.

A parent might gift a car to a son or sell it at a steep discount to help him out. Two friends might barter items that command disparate market prices because supporting each other’s personal wants matters more to them than preserving “purchasing power.”

By contrast, impersonal exchange is “personal-blind.” It does not matter to the supermarket owners how much money customers have in the bank, whether they are buying milk for themselves or the neighbors, or if their refrigerator is already full of dairy. An impersonal exchange is indifferent to personal contexts; its chief focus is on material value.

The primacy of material gain—which omits personal contexts—is the essence of commercial exchange. Commerce highlights the qualitative element of goods (what some economists call “objective use value”), which serves as a common denominator for strangers. The factual quality of goods is their distinguishing characteristic that can be recognized by all market participants, whether it matches their personal contexts or not; for a good’s usability is the same for one person as the next, or at least to a certain range of individuals for whom the good is usable.

For instance, while the contextual-value of a car changes from person to person, what doesn’t change is the car’s objective performance. If a vehicle has a powerful and durable engine, if it offers high standards of safety, if its parts are made of high-quality materials—the overall high performance of the vehicle will be the same for any person driving it.

It is true that one person may enjoy the driving experience more than the next, but the general performance of the vehicle remains the same no matter who drives it—just like a particular coat provides warmth to anyone who can wear it. The argument that economic value depends on personal context ignores the fact that for a matching personal context, a good’s objective utility is necessarily relevant. The luxury of a Rolls-Royce might be impractical for the average household; but for a high-profile executive who frequently transports important clients to meetings, the vehicle’s luxury is practical.

Modern economics reverses cause and condition. It treats usefulness as a condition of value (e.g., a spoiled egg can’t be eaten, thus can’t have value) and personal context as the primary determinant of value (e.g., if I am very hungry, I will value an edible egg more). In truth, personal context is the condition; objective utility is the cause.

Let us illustrate this principle. Suppose that one detests modern architecture so much that if he had to choose between a futuristic, five-bedroom residence, versus a quaint, two-bedroom house, he would opt for the latter in a heartbeat. In fact, he would rather pay more for the old home. Now suppose he owns both. Despite his own disdain for the modern home, he can nevertheless identify its factual qualities that could service those who do want to live in it. This economic appraisal of the modern house is essentially his judgment of its exchange value. While he prefers the smaller home, he knows the larger can fetch a higher market value because its objective qualities are necessarily relevant for any buyer who will want to live in it.

At this point, the reader may object that while this might be true for the seller, for the buyer personal context still dictates his degree of value. But is it? Suppose someone needs a closet for a temporary apartment. She has no interest in a high-quality item. She expects less usage from a new closet, preferring a flimsy model over a durable one; namely, a cheaper closet over an expensive one. As you can see, objective utility still serves as her measuring rod. Her personal context requires it for her economic decisions: valuing higher the flimsy closet translates economically to a low exchange value with more money saved.

The objective utility of goods is a fact of their identity. Personal disparities do not change this fact but rather require it as a standard for trade. We first appraise the factual utility of goods, which is an economic evaluation, then measure their utility against our personal context, which is a personal-contextual valuation. Put differently, we grade a good’s utility according to how objectively useful it is in satisfying common human needs. The graded utility that best serves our individual context will be valued personally the highest, regardless of how high or low we grade the good’s objective utility. A higher graded utility that does not match our context is valued low personally, albeit valued high economically. Thus objective utility is the exchange value of goods in the market.

(By “exchange value” we mean the matching potential of a good to a buyer based on its factual utility—not price. Price is a different concept that follows different rules. Do observe though that most prices cluster around the objective differences in the graded quality of goods.)

Now we must end on an important note. While exchange based on personal-contextual values might be objectively reciprocal in spiritual terms, the same cannot be said materially. Personal relationships do not trade value for value from a strictly material perspective. Any material value traded within an intimate relationship cannot be separated from its spiritual aspect. This renders such exchanges subjective by default, as they depend on non-material standards. For example, a husband who is the main provider for his family gains spiritual values in return as the value equivalent; but the relationship has no standard to measure material equivalence; namely, the husband will not increase his material provision because his wife organized a romantic dinner. On the flip side, an impersonal exchange is absent spiritual values that can compensate for any unequal material exchanges[2].

Recall that the classical economists considered trade an exchange of equivalents. But since they found it difficult to explain why individuals would exchange equal values in the first place, modern economics discarded this idea. It argued that exchange involves no common measure of value: individuals trade that which they want less for that which they want more. Yet this is where the subjectivism is most glaring. If commercial trade is driven only by personal valuations, then there is no objective reason for a wealthy man to refuse exchanging his fifth house, which he deems surplus to his needs, for a pack of gum that he momentarily desires. The standard pushback is that he could gain more in exchange than mere gum. But why is this so? The answer drowns in an infinite regression of unequal exchanges of coinciding personal valuations. The house-for-gum reductio ad absurdum is hypothetically plausible. To suggest that, in aggregate, humans share common preferences that remain largely stable across time—which manifests in price convergence among similar goods—is to concede that humans indeed share common needs, and that goods satisfy these needs thanks to their factual attributes.

Our solution to the problem of equivalence is to bridge these factual attributes to their matching personal contexts: namely, that we exchange economic equivalents to satisfy personal disparities. This way we do not abandon the equivalent exchange format, while acknowledging personal variations.

To summarize, value in the market begins with the fact of a good’s objective utility. This, in turn, is recognized by potential customers. The trader who finds this utility suitable for his personal context might end up buying it. Personal contexts are the precondition for a sale; they do not determine economic values. A seller can’t know the personal values of others—only that his goods can be valued by virtue of their objective utility. The gap between potential demand and actual usefulness is his entrepreneurial risk.

The wider context of goods must include the market and its participants. This is what gives rise to economic values—which are not intrinsic, inherent in the goods themselves, and neither are they subjective or personal, relating only to the mind or one’s personal context. Goods are valued economically for their quality that makes them factually useful for any market participant—provided it can satisfy his or her needs. The unique benefit of the market is that it enables us to appraise goods independently of our private circumstances and thus specialize in particular lines of production.

There are surely other questions to address, such as the relationship between utility and prices, how utility is measured across different goods, the water-diamond paradox, the consequences of this framework to marginal utility, etc. We shall answer these questions in subsequent essays.

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[1] Ayn Rand, The Virtue of Selfishness, “The Objectivist Ethics,” p. 16.

[2] This is why socialists vociferously attack capitalism. They hate commercial trade because it is grounded on objective production results, not on traders’ personal contexts (which they would use as the standard for redistribution, i.e., sacrifice).