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Keynesian philosophy vs. Austrian philosophy

August 25, 2012

Keynesians view ‘value’ and ‘price’ as identical and ‘objective’Austrians view ‘value’ and ‘price’ as ‘subjective’!

After spending most of my professional career within the Valuation Profession (some 44 years), I think that I understand the concept of ‘value’ better than most economists and pundits. I also have been teaching the concept of ‘value’ to thousands since 1980 and most tend to agree with my philosophy on ‘value’. Why is this issue important within economic theory? Let’s review this core concept of economics called ‘value’!

The foundational concept of Capitalism is this concept that we call ‘value’. The first principle of trading and exchange involves this concept. What is the ‘value’ is a common expression when we trade, exchange, or execute a buy/sell transaction. All money transactions involve thinking about this concept. Is this concept ‘objective’ or can it be made ‘objective’…or is it ‘subjective’ and personal to each trader/buyer/seller? Is ‘value’ inherent or intrinsic within an item or good? Let’s think about this concept we call ‘value’ to discern what is reality and what is illusion.

The subjective theory of value, also known as the theory of subjective value, is an economic theory of value that identifies worth as being based on the wants and needs of the members of a society, as opposed to value being inherent (or intrinsic) to an object. It holds that to possess value an object must be useful, with the extent of that value dependent upon the ability of an object (good) to satisfy the wants of any given individual.[ci
The Austrian school of economics has the correct view of ‘value’ in my opinion (it is subjective and personal). The Keynesian school assumes that ‘value’ can be objectified with the denomination of an object with money units (numbers or dollars). I played the game of objectifying ‘value’ for some 12 years of my career before I realized that ‘value’ was not objective. So for Keynesians, ‘value’ and ‘price’ are identical. The purpose of a valuation or an appraisal is to derive an ‘objective’ price for a good or thing (according to Keynesians). The definition of ‘value’ then tries to force this concept of ‘objectivity’ upon the appraiser/consultant.
For Austrians, however, ‘value’ and ‘price’ varies from person to person (its subjective). After some 44 years as a valuation consultant, I have concluded that the Austrian school is much more realistic than the Keynesian school. I have witnessed that each person internalizes this concept that we call ‘value’ and then derives a unique/subjective result. Value and Price are not necessarily identical from person to person or from appraiser to appraiser. Also, ‘value’ is NOT inherent in the ‘bricks and mortar’ or intrinsic with a good or item.
When Capitalism started exchanges and transactions were done via barter. Barter is the best experience one can have to understand ‘value’. Two human beings desire to make an exchange of goods…how is ‘value’ derived? What happens is that one party suggests a monetary number and the other party then evaluates this logic and appropriateness internally. After some back and forth banter, a negotiated number is determined. All this is subjective for these two parties and may have NO relevance for a different set of circumstances or different parties. All is relative when it comes to ‘value’ derivations! Yet Keynesians try to force the concept of ‘objectivity’ upon market participants and appraisers. This philosophy distorts all transactions and exchanges within a market!
In today’s economy we experience extreme relativity. Our money units are ‘no thing’ units;  interest rates vary from day-to-day; people’s confidence varies from day-to-day; situations change from day-to-day;  our monetary authorities change the game from day-to-day (monetary manipulations occur continually). All this means that ‘value’ of any asset or good is subjective and changing (daily). Real estate values are a good example of this change. My personal property increased in ‘value’ until late 2007. Then a decline developed and my property now commands some 50% less than in 2007. Values are now bouncing around with great uncertainty from month to month. Does this situation appear ‘objective’ or ‘subjective’.

I think that the Keynesian philosophy of ‘value’ is really an illusion and a distortion of reality. In reality, ‘value’ is subjective and changes from transaction to transaction and from person to person. Denominating an asset or good with $ or a ‘number’ does not make this transaction ‘objective’ as taught within the Keynesian school of economics. Mises and Hayak (Austrian economists) are much more realistic when it  comes to understanding this concept that we call ‘value’. Value changes because people (each party to a transaction) tend to change their thinking from one time period to another. This makes the concept of ‘value’ quite subjective and psychological. What do you think?

Will house ‘prices’ and ‘values’ increase or decrease in the next year? Who can discern with certainty? Does location and financing affect ‘values’ and ‘prices’? What about supply and foreclosures? What about the general overall condition of our economy? What about each person’s subjective (internal) psychology?
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