Milei and Menger's principle of imputation

In 1871, Carl Menger published Principles of Political Economy, a work that gave rise to the Austrian School and revolutionized classical economic thought by laying the foundations of the subjective theory of value. Against the prevailing objective theories—such as Ricardo and Marx's labor theory of value—Menger introduced a radically different approach: the value of goods is not given by their intrinsic characteristics or the labor incorporated, but by the utility that individuals subjectively assign to them based on their purposes.

This paradigm shift had profound theoretical and practical implications, especially regarding price formation and the role of consumers in the economic process. In contrast to the classical approach where costs determined prices, Menger argued that it is the value consumers attribute to consumer goods that determines, by imputation, the value of capital goods and, therefore, costs. This causal inversion, today taken up by President Javier Milei, is key to understanding market phenomena in inflationary contexts like Argentina's.

Value is subjective, not objective

Menger starts from an individualistic and marginalist conception of value. For him, a good only has value if it contributes to satisfying a human need. This value doesn't derive from an objective essence but from marginal utility, that is, the importance of the least urgent use that can be satisfied with an additional unit of the good. Thus, the value is not in the good, but in the mind of the subject who values it.

This view clashes head-on with theories that assigned value based on the labor incorporated. Menger showed that even goods produced with the same amount of labor can have radically different market values, simply because the ends they satisfy are of different importance to consumers. Value, then, is born in consumption, not in production.

The principle of imputation: prices are not explained by costs

One of Menger's most revolutionary contributions was the principle of imputation, according to which the value of higher-order goods (capital goods or factors of production) is derived from the value of consumer goods (lower-order goods). In other words, capital goods have value insofar as they allow the production of goods that consumers value.

This principle implies that it is not costs that determine prices, but rather the expected prices of final goods that determine how much can be paid for inputs and productive factors. For example, a producer is willing to pay for flour, labor, and electricity based on the price at which they believe they can sell the bread. If the consumer doesn't value that bread at the final price, the entrepreneur will suffer losses, regardless of their costs.

The consumer is sovereign in the market

The market economy described by Menger and his successors (Mises, Hayek, Böhm-Bawerk) is based on the principle of consumer sovereignty. In this system, consumers, through their purchasing decisions, determine what goods are produced, in what quantity, with what quality, and by what methods. Entrepreneurs are not all-powerful planners but intermediaries who risk capital to meet consumer needs.

In this framework, prices function as signals that convey dispersed information about subjective valuations. When the price of a good increases, it is not because the entrepreneur "decided" to charge more, but because the consumer values it more than before, or because the available quantity of the good has decreased and consumers are willing to pay more to obtain it.  If no consumer is willing to pay the new price, the good doesn't sell. It's that simple.

Milei and the Mengerian vindication

Javier Milei has strongly revived these ideas in his crusade against statism and structural inflation.  His criticism of the notion that "entrepreneurs raise prices" is precisely based on the theory of subjective value and the principle of imputation. When he states that "the market determines prices" or that "consumers validate prices," he is merely applying Mengerian logic to the Argentine context.

In an economy with high inflation, the temptation to blame the merchant or the supermarket for price increases is high. However, from an Austrian perspective, the structural cause of inflation is always monetary, while relative prices adjust based on subjective valuations and scarcity signals. Attempting to control prices or regulate margins without addressing monetary causes only generates shortages and distortions.

Milei has been clear in pointing out that if an entrepreneur tries to increase the price of a good, they will only succeed if the consumer is willing to pay more for it. If not, that product will remain on the shelf. And in that case, the entrepreneur will lose. It is the consumer who has the final say.