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https://libertarianinstitute.org/articles/capitalism-is-a-machine-of-subjective-value/

by Zack Sorenson

What is economics and why do we care about it? The economy is what we do and why we do it. Reality introduces scarcity to that equation, and competition results. Our desires and values translate into actions, and competition translates those actions into strategies and compromises. Economics is a question of how we do what we choose to do, and how our way of doing things evolves. We all want what we want, but what’s our praxeology? More importantly, how do we improve it? That’s what economics seeks to answer.

I have previously asked whether capitalism, thought of as an engine, might yet receive an upgrade for the twenty-first century. If capitalism is an economic operating system, what is it managing? What is the freedom we hope to obtain through capitalism? Economics provides an answer.

Conventional academic economics relies on the neoclassical model, which uses an abstract concept of utility. Utility is a continuous quantity, like a tank of gas, abstracting the sum of everything that’s considered valuable to people. Since utility is a uniform, universal value, the mathematics of equilibrium can be applied to it.

The main drawback of neoclassical economics is that its framework constrains analysis. It primarily works for situations where all value derived from goods and services can be quantified in the abstract, as interchangeable utility. This mode of analysis works for businesses, which measure their success in terms of money, where any dollar is interchangeable for any other. It’s not as useful for human economics, where a person’s or group’s hierarchy of preferences includes trade-offs that fundamentally alter their priorities depending on whether they have access to one set of choices or another.

Trade-offs create different sets of priorities. For example, if a person meets the love of their life, they may start a family. If, as fortune would have it, they do not find love, then they will face a completely different set of possible career priorities. There’s no room for abstracted, universalized utility here.

A more salient mode of economic analysis comes from the Austrian School. Early economists such as Carl Menger, Jean-Baptiste Say, and Ludwig von Mises promoted the concept of subjective preference hierarchies. Humans do not experience general utility. We have a hierarchy of needs and wants. It is a discrete function, counted one at a time. It’s a matter of rigid trade-offs and high complexity.

The subjective basis of economic value better suits newer theories of business strategy which depend on game theory to generate meaningful conclusions out of the interlocking trade-offs faced by market participants. Consider the basic logic of game theory; it’s about who can afford to walk away, and who can’t. This defines who has power, and through power one derives a greater claim over scarce resources. A player with the smallest advantage can end up owning the whole game if that advantage becomes essential.

The concept of subjective, ranked value speaks to another truth of human economics. A product, tool or asset has no intrinsic value. Everything into which economic value is added, through labor, merely represents a value proposition. The value which an actively used tool or asset can provide represents the value of that item in the moment of use. This is because a human being’s needs change throughout the day and with the passage of time. Economics shouldn’t be structured as an equilibrium problem, but rather as a game with trade-offs and variable opportunities to cooperate or compete. Consider this dynamic within the economy if it were to be described as a technological system.

The human economic actor possesses limbs, mobility, and a mind. Economic activity is the employment of mind and mobility, the manipulation of matter with limbs and digits, to gather and organize resources. In essence, humans are knowledge machines, who configure systems of materials and energy while learning ever more sophisticated ways of doing so.

What an individual man can’t build, organize, or invent himself must be produced through a division of labor. This entails social organization. There must be a division of tasks and a distribution of gains. The tools which lay down these divisions and govern human economic cooperation are social technologies. With labor specialization leading to technological development, the division of labor can be interpreted as a meta-technology which enables discovery.

Any organized group of economic actors will need some cooperative basis for their division of labor. There needs to be a process for assigning tasks. There will have to be some system for paying individuals out of the common pool of realized value. Usually, a way to enforce rules. These dynamics can be described using cooperative game theory.

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