Subjective theory of value

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    Professor Herbener,

    This is a terrific course, thank you.

    It seems that neoclassical economics who are in favor of interventionism don’t truly believe in the subjective theory of value, or perhaps their notion of value as quantifiable psychological utility gives them justification to support government intervention where a strict subjectivist notion of value as understood by Austrians would not.

    Am I correct? If so, do neoclassical economists openly say that they don’t fully believe in the STV or do they simply undermine it in a round about way? I’m interested in medical licensing and healthcare economics. The rationale behind licensing advanced by neoclassical economists (like K. Arrow) seems to imply a repudiation of the subjective theory of value. Would you agree?

    Thank you,

    Michel Accad


    Neoclassical economists claim to respect the ordinal ranking of subjective valuation. Their claim relies on representation theorems in mathematics that demonstrate a correspondence between an ordinal rank of bundles of units of goods and the numeric utility generated by a utility function under certain assumptions. Of course, some of the assumptions are entirely unrealistic. For example, that a person can rank every possible bundle of units of different goods even if the amount of a good in a different bundle differs by only an infinitesimal amount. Gerard Debreu is credited with the proof:

    It seems to me that the Neoclassical technique of model building is what results in market failures which in turn can be corrected by government intervention. A particular market failure is simply a logic consequence of the assumptions of the model.

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