Have you ever wondered why some things cost more than others? Why do people pay a lot of money for things like diamonds, but not for water? Let’s explore the fascinating topic of economic value through the lens of Austrian economic theory.
What is Austrian economics?
Austrian economics is a way of understanding how people make choices about what to buy and sell. One of the key ideas in Austrian economics is that economic value is subjective. In other words, it’s different for everyone.
When we understand economic value, we can make better decisions about what to buy and sell, and at what price.
On a hot summer day, if you’re thirsty, which would you rather have a glass of water or a big fat diamond? Water, right? Even though diamonds are worth a lot more money, water is more important for your survival than a diamond. This is economic value which is all about how much something is worth to you.
Have you ever wondered why you might want to buy one toy, but not ten? Or why you might want to eat one cookie, but not a hundred? That’s marginal utility!
This is just a fancy way of saying that each additional unit of something giving you less and less benefit or satisfaction. Let’s go back to the glass of water. The first glass of water will give you a lot of satisfaction because you’re so thirsty. But a second glass won’t be as satisfying as the first one. And a third will be even less satisfying than that. That’s because your marginal utility for each additional glass of water is decreasing!
We call this the law of diminishing marginal utility. It means that as you consume more and more of something, you get less satisfaction from it. This helps explain why different things have different values to different people at different times. And understanding economic value helps us make better decisions about how to use our resources.
Here are some more examples of marginal utility:
- Purchase of Goods: The marginal utility of each additional unit of a product decreases as a consumer purchases more of the same product. For example, a person may value their first pair of shoes more than the second, and the second more than the third, etc.
- Time Allocation: A person may value their free time more than time spent working, and the marginal utility of additional free time decreases as they have more of it.
- Advertising: The first exposure to a product advertisement may be highly effective in creating awareness and generating interest, but the marginal utility of additional exposures decreases as the person becomes more familiar with the product.
- Investment: The marginal utility of each additional dollar invested in a particular asset may decrease as the investor approaches their target level of investment in that asset. For example, the first few shares of a stock may provide a higher level of expected return than additional shares purchased at a higher price.
How does Austrian economics help us understand value?
Now that we know what economic value is and how it is determined, let’s talk about the idea of individual preferences. Everyone has their own unique preferences and values and that varies from person to person.
This brings up the importance of free markets and voluntary exchange. When people are free to buy and sell goods and services without interference, they are better able to express their preferences. When this happens, the market can more efficiently allocate resources to meet those preferences making everyone better off.
And who allocates resources? Entrepreneurs, that’s who. Entrepreneurs are people who identify what people want and provide it to them. And by doing so, they create value for themselves and for others.
Austrian economics helps us understand that economic value is not simply the usefulness of a good or the amount of labor put into producing it. It’s determined by the subjective preferences of individuals in a free market. By understanding these concepts, you can make better decisions about how to spend your money. And that makes you more informed and able to make better decisions for yourself and your community.