Empirical Observation: Jim exchanges his good “A” for John’s good “B”. There is no physical coercion.
The phenomena of exchange leads us to three important deductions.
- John also exchanges his good “B” for Jim’s good “A”.
- Jim values B more than A. John values A more than B.
- Jim and John both hold preference scales. If Jim did not hold a preference scale, then why would he have undertaken the exchange? The same can be said for John.
- The value of A does not equal the value of B. Because who is the one doing the valuation? Us, as a third party observer? Of course not! The individuals being observed are doing the valuing. Observing that A and B are being exchanged for each other does not mean that A and B are being valued equally. After all, if A and B were valued equally by Jim and John, then why would the exchange occur?
This important result is called The Subjective Theory of Value.