Have you ever noticed how often both sides to an economic transaction say, Thank you to each other? For example, when the cashier at the grocery store says to the customer, Thank you, more often than not the customer responds, Thank you, rather than You’re welcome.
Why is this so?
The reason has to do with what is called the subjective theory of value. The theory is based on the following principle: In every economic exchange, each side gains because each side gives up something he values less for something he values more.
Therefore, each side to an exchange is grateful for being given something that, in his mind, is more valuable than what he surrenders in order to receive it.
Consider a simple example of the subjective theory of value. Suppose one person has 10 apples and another person has 10 oranges. What would be a fair exchange between the two people?
It’s impossible to say, because there is no objective value of the apples and oranges. Their value, like beauty, lies in the eyes of each beholder. Their value is entirely subjective.
Suppose the two fruit owners enter into an exchange in which 3 apples are traded for 5 oranges? Has the apple owner taken advantage of the orange owner? Can we consider the apple owner to be the winner in this transaction and the orange owner to be the loser?
The answer is no to both questions. Actually both the apple owner and the orange owner are winners. Both sides have gained from the transaction, each from his own individual perspective. The apple owner has gained because he has given up something he valued less — 3 apples — for something he valued more — 5 oranges.
The orange owner is a winner too, despite the fact that he has given up 5 things and received only 3 things in return. Why? Because in his mind — and according to his personal ranking of values — he too has given up something he values less — 5 oranges — for something he values more — 3 apples.
In the grocery store, the principle of subjective value is the same, even though people are using money. Let’s say the groceries cost $50. At the moment of the exchange, the customer is receiving items that are worth more to him than the $50 he’s giving the grocery store in return. By the same token, the grocery-store owner has given up something he values less — the groceries — for something he values more — the $50.
The theory of subjective value applies not only to the purchase of goods but to all economic transactions, including employment contracts. When an employer and an employee enter into an employment agreement, there is no winner and loser, but instead two winners. The employer is giving up something he values less (the money he’s paying the employee) for something he values more (the employee’s labor). By the same token, the employee is giving up something he values less (his time and energy) for something he values more (the money).
How do we know that both sides benefit from every exchange? Because if they didn’t, at least one of them — and possibly both — would not enter into the exchange. After all, why would anyone enter into an exchange if he was receiving something he valued less for something he valued more?
An important corollary to the subjective theory of value is that people’s standard of living rises through the simple act of exchange. Both the owner of the apples and the owner of the oranges, for example, have raised their standard of living as a result of their exchange because they have both improved their own personal well-being, from their own individual perspective.
Thus, it stands to reason that the wider the ambit of opportunities to enter into economic exchanges with others, the easier it is for people to raise their standard of living.