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. In contrast to the prevailing objective theories—such as Ricardo's and Marx's labor theory of value—Menger introduced a radically different approach: the value of goods is not determined by their intrinsic characteristics or by the labor embodied in them, but by the utility that individuals subjectively assign to them according to their purposes.
This paradigm shift had deep 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, now taken up by President Javier Milei, is key to understanding market phenomena in inflationary contexts such as Argentina.
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, value is not in the good, but in the mind of the person who values it.
This view is in direct opposition to theories that assigned value based on embodied labor. Menger showed that even goods produced with the same amount of labor can have radically different market values, simply because the ends they satisfy differ in importance for 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 make it possible to produce 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 he believes he can sell the bread. If the consumer doesn't value that bread at the final price, the entrepreneur will incur losses, regardless of his costs.
