Ludwig von Mises
On the Development of the Subjective Theory of Value
By costs classical economics understood a quantity of goods and labor. From the standpoint of the modern theory, cost is the importance of the next most urgent want that can now no longer be satisfied. This conception of cost is clearly expressed outside the orbit of the economic in the narrower sense in a statement like the following, for example: The work involved in preparing for the examination cost me (i.e., prevented) the trip to Italy. Had I not had to study for the examination, I should have taken a trip to Italy.
Only if one employs this concept of cost does one realize the importance that attaches to profitability. The fact that production is discontinued beyond the point at which it ceases to be profitable means that production takes place only as far as the goods of higher order and the labor required to produce one commodity are not more urgently needed to produce other commodities. This observation shows how unwarranted is the popular practice of objecting to the limitation of production to profitable undertakings without also mentioning those enterprises that would have to be discontinued if others were maintained beyond the point of profitability.
The same observation also disposes of the assertion, made repeatedly, that the subjective theory of value does justice only to the private aspect of price formation and not to its economic implications for society as well. On the contrary, one could turn this objection around and argue that whoever traces the determination of prices to the costs of production alone does not go beyond the outlook of the individual businessman or producer. Only the reduction of the concept of cost to its ultimate basis, as carried out by the theory of marginal utility, brings the social aspect of economic action entirely into view.
Within the field of modern economics the Austrian School has shown its superiority to the School of Lausanne and the schools related to the latter, which favor mathematical formulations, by clarifying the causal relationship between value and cost, while at the same time eschewing the concept of function, which in our science is misleading. The Austrian School must also be credited with not having stopped at the concept of cost, but, on the contrary, with carrying on its investigations to the point where it is able to trace back even this concept to subjective value iudgments.
Once one has correctly grasped the position of the concept of cost within the framework of modern science, one will have no difficulty in seeing that economics exhibits a continuity of development no less definite than that presented by the history of other sciences. The popular assertion that there are various schools of economics whose theories have nothing in common and that every economist begins by destroying the work of his predecessors in order to construct his own theory on its ruins is no more true than the other legends that the proponents of historicism, socialism, and interventionism have spread about economics. In fact, a straight line leads from the system of the classical economists to the subjectivist economics of the present. The latter is erected not on the ruins, but on the foundations, of the classical system. Modern economics has taken from its predecessor the best that it was able to offer. Without the work that the classical economists accomplished, it would not have been possible to advance to the discoveries of the modern school. Indeed, it was the uncertainties of the objectivistic school itself that necessarily led to the solutions offered by subjectivism. No work that had been devoted to the problem was done in vain. Everything that appears to those who have come afterward as a blind alley or at least as a wrong turning on the way toward a solution was necessary in order to exhaust all possibilities and to explore and think through to its logical conclusion every consideration to which the problems might lead.