Since I answered a question earlier about fair trade products such as those sold at 10,000 Villages stores (as distinguished from the use of the term “fair trade” in “fair trade agreements” made by governments, which are usually not fair or conducive to trade), it has become clear to me that a significant subset of my followers do not appear to be familiar with the subjective theory of value, which is a foundational principle of Austrian economics.
Therefore, I’m reposting a good portion of that post (where I replied to a lot of replies to the post in the form of updates) in a more intelligible format less specifically concerned with the fair trade issue.
We could consider purchasing fair trade products a form of charity, but I tend to think of it more as an example of the subjective theory of value. In this light, the buyer is not paying more for the same product which has artificially been pushed above the market equilibrium price out of charitible inclination; rather, the buyer is paying for what is, in his view, a different product which deserves a different price because it has a different value to him.
Think of it this way: Say your beloved grandmother knits a sweater, and then she dies. Then say Gap produces the exact same sweater in a factory. You’re offered the chance to buy either sweater. They’re completely identical in every way, except your Grandma made one and Gap made the other. But to you, they’re different products entirely because one of them holds meaning for you which the other doesn’t. You’d pay way more for the one your grandmother made because you value the way it was produced even though it’s otherwise identical to the Gap sweater. Your valuation of the way it was produced is part of your value scale, and for you it makes the sweaters two unique products, each with a different value.
Fair trade products work the same way, only it’s not your grandmother. This is the “subjective theory of value,” and it’s a very basic feature of Austrian economics. Here’s an explanation from the Mises Institute:
The explanation of all economic activity that takes place in the market economy ultimately rests on the subjective theory of value. The value of various consumer goods and services does not reside objectively and intrinsically in the things themselves, apart from the individual who is making an evaluation. His valuation is a subjective matter that even he cannot reduce to objective terms or measurement. Valuation consists in preferring a particular increment of a thing over increments of alternative things available; the outcome of valuation is the ranking of definite quantities of various goods and services with which the individual is concerned for purposes of decision and action. Theory resorts to the hypothetical concept of the scale of values in seeking to explain and understand the nature of human valuations. The ranking of alternative ends is determined by the person’s expectations of satisfaction from each specific choice faced by him at any moment of decision. He will invariably select the alternative that he believes will yield him the greatest satisfaction.
From the same source comes this paragraph, which applies here:
To relate the matter of valuation to the individual person is not to suggest that each individual is concerned only with the satisfaction of his own appetites and needs. A person may find satisfaction or relief in helping another person. Satisfaction can be and often is derived from the attainment of altruistic as well as “selfish” motives. But the point remains that regardless of the form the satisfaction is to take, each choice arises from subjective valuation on the part of the particular person who is doing the choosing. The uneasiness that he seeks to remove is in his own mind, whether such uneasiness pertains to an immediate problem of his own or to a problem faced by someone else.
For some people, the ability to help other people through paying them a higher wage for their handicraft is valuable. This makes fair trade goods more valuable to them than other goods. It has nothing to do with whether the product is in some sense objectively better. No product has intrinsic value; value is in the eye of the buyer.
If fair trade products are more valuable to me than regular products, then they just are. End of story. They rank higher on my value scale and on the value scales of enough other people for them to have their own market equilibrium, unique and higher than the equilibrium reached for comparable regular products.
To learn more about the subjective theory of value, click here, here, and here. This is also covered at length in Rothbard’s classic Man, Economy, and State.
