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.


  1. John also exchanges his good “B” for Jim’s good “A”.
  2. Jim values B more than A. John values A more than B.
  3. 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.
  4. 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.