According to Marxists, the subjective theory of value is just bourgeois apologetics. By using the subjective theory, economists conceal the fact that the proletariat under capitalism is exploited. The labor theory of value shows that labor is the source of all surplus commodity value not accounted for by the cost of production of a commodity.
The refutation of the labor theory of value isn’t our task today. Also, while it’s true that even if the subjective theory of value is, as the Marxists say, capitalist apologetics, that wouldn’t show that it’s false. That also isn’t our topic today.
Rather, what I want to discuss is a point Mises makes in Human Action that I haven’t seen elsewhere in the literature. When the subjective theory was formulated in the 1870s by Carl Menger, William Stanley Jevons, and Léon Walras, it suffered from a defect. This defect gave socialists help in making their case. It wasn’t until Mises himself that this defect was remedied; this took place after World War I, when Mises developed his famous calculation argument against socialism. The fact that the subjective theory was around for fifty years while it retained the help it gave socialism is strong evidence that the theory wasn’t devised as a defense of capitalism. A possible counterargument is that even if the subjective theory aided socialism, this feature is outweighed by other aspects of the theory that disguised exploitation; but this doesn’t seem a plausible path to take.
The way that the subjective theory helped socialism is that one of the main antisocialist arguments is along these lines: Even if the capitalist system has all sorts of defects, this doesn’t make the case for socialism. We have little reason to think that a socialist system could be put into practice. But the subjectivist theory gives us grounds to think a socialist system might work.
Mises explains the issue in this way.
Socialists, Institutionalists and the Historical School have blamed economists for having employed the imaginary construction of an isolated individual’s thinking and acting. This Robinson Crusoe pattern, it is asserted, is of no use for the study of the conditions of a market economy. The rebuke is somewhat justified. Imaginary constructions of an isolated individual and of a planned economy without market exchange become utilizable only through the implication of the fictitious assumption, self-contradictory in thought and contrary to reality, that economic calculation is possible also within a system without a market for the means of production.
It was certainly a serious blunder that economists did not become aware of this difference between the conditions of a market economy and a nonmarket economy. Yet the socialists had little reason for criticizing this fault. For it consisted precisely in the fact that the economists tacitly implied the assumption that a socialist order of society could also resort to economic calculation and that they thus asserted the possibility of the realization of the socialist plans. (Human Action, p. 206)
The way that the early subjective theorists made this mistake is that they wrongly thought that economic calculation can take place without the use of money prices. A socialist system is by definition centrally planned, and a centrally planned system doesn’t allocate resources by using money prices. But if utility calculation is possible without money, then maybe the calculation problem can be overcome.
Mises explains the prosocialist argument in this way:
It was unpardonable for the modern economists to have failed to recognize the problems involved.
Wieser was right when he once declared that many economists have unwittingly dealt with the value theory of communism and have on that account neglected to elaborate that of the present state of society. It is tragic that he himself did not avoid this failure.
The illusion that a rational order of economic management is possible in a society based on public ownership of the means of production owed its origin to the value theory of the classical economists and its tenacity to the failure of many modern economists to think through consistently to its ultimate conclusions the fundamental theorem of the subjectivist theory. Thus the socialist utopias were generated and preserved by the shortcomings of those schools of thought which the Marxians reject as “an ideological disguise of the selfish class interest of the exploiting bourgeoisie.” In truth it was the errors of these schools that made the socialist ideas thrive. This fact clearly demonstrates the emptiness of the Marxian teachings concerning “ideologies” and its modern offshoot, the sociology of knowledge. (207)
Mises made a major advance in the subjective theory by bringing out the full implications of the fact that preferences are purely ordinal. You can prefer vanilla to chocolate ice cream, for example; but you can’t say how much you prefer one to the other. Intensive magnitudes can’t be measured. Calculation can only take place using money prices, and without calculation, there is no means of telling whether production goods with alternative uses are being allocated in a way that best satisfies the consumers. Further, without economic calculation, you could not
show how much one is free to consume without impairing the future capacity to produce. It is with regard to this problem that the fundamental notions of economic calculation—capital and income, profit and loss, spending and saving, cost and yield—are developed. The practical employment of these notions and of all notions derived from them is inseparably linked with the operation of a market in which goods and services of all orders are exchanged against a universally used medium of exchange, viz., money. They would be merely academic, without any relevance for acting within a world with a different structure of action. (212)
The Marxists might try to reply to Mises that his claim about the necessity of money prices for economic calculation is itself ideological. But this would carry more conviction if they could show that economic calculation without money prices is possible, and this they conspicuously failed to do.