In Austrian economics, the theory of imputation refers to the idea that prices of the factors of production are determined, to a large extent, by the value that consumers perceive the final good or service to have, where this value then "filters backwards" to determine the price of the factors of production.

For example, the price that consumers are willing to pay for bread determines, in turn, the prices of the factors of bread production, such as the raw ingredients and the labor of the baker.

My question then is: Where does the limiting factor lie? What I mean is, what gives the consumers the ability to pay for the bread in the first place, and what determines (in a macro way) the maximum amount that they are able to pay?

For example, is the produce of the agricultural sector the ultimate limiting factor? If the price of staple foods skyrockets, then consumers would be constrained to pay less for bread (assuming that bread is not one of those staples) and everything else? I guess what I'm trying to get at is where in the economy does value ultimately originate? I could be wrong, but it seems like everything else in economics is a rearrangement of that initial, original value.

Another, better example:

Consider a two-product economy in an island, consisting of fish and coconuts. Assume that fish is essential for survival while coconuts are a non-essential, and therefore a luxury. Let's suppose Jack is good at fishing and gathers more fish than he needs while Jill gathers coconuts and has a surplus as well. For Jill, fish is essential. Let's say she exchanges 10 coconuts for one fish. Despite the fact that she has some bargaining power, ultimately, every economic activity on that island is fundamentally dependent on fish. Therefore, it looks as if the number of fish caught is the limiting factor in that economy. It is only when there is a surplus of fish caught by Jack that this surplus can get re-arranged in other areas.

NOTE: Sorry if this question is not well-formed. I've been grappling with the best way to frame it. I would welcome any clarifying comments.


2 Answers 2


Where does value originate?

Value originated in subjective preferences of an individual. This is both the modern mainstream economic theory and the theory that is also part of Austrian school, since this theory has its origins in marginalist revolution lead by economists that are associated with Austrian school like Menger, together with other economists like Jevons and Walras (see Grant & Brue. History of Economic Thought 8ed).

To be more specific value originated from utility function individual has (which is mathematical representation of your ordinal (or in some subfields cardinal) preferences. Subjective value depends on marginal utility because it depends on how much of good $x$ you are already consuming. If you are in a desert with no water, a liter of water can have value of billion Euros, if you are drowning in lake of drinkable water and some water merchant offers you extra liter of water you won’t be willing to pay for it even a cent.

Hence value originates purely in the eye of individual, from the marginal value that individual has from consumption or use of some good and services.

My question then is: Where does the limiting factor lie? What I mean is, what gives the consumers the ability to pay for the bread in the first place, and what determines (in a macro way) the maximum amount that they are able to pay?

You are mixing multiple concepts here ability to pay has nothing to do with actual value. You can value something but not being able to purchase it with your income.

Let’s break your question down:

Where does the limiting factor lie?

Answer here will depend on exact utility function. For well-behaved utility which is increasing but has declining marginal value (i.e $U’>0, U’’<0$) the maximum value of good will occur when you move from having zero units of the good to having one unit of a good. Value of the good would just decline moving from that point on. However, this is not necessarily universal truth because people can have various non-well behaved utility function where maximum value occurs at some specific quantity.

If you want to discuss price, which should not be confused with value, then maximum price can be derived from the marginal utility. From marginal utility, combined with individual’s budget constraint which depends on income and prices you can derive individual’s demand, and from individual demand person’s willingness to pay (i.e. maximum price they are willing to pay for certain quantity).

This should not be confused with value. Although it’s true that someone would not pay price higher than value for some good, some can pay price lower than their value for some good, and in addition demand and willingness to pay depends also on person’s income whereas value person places on some good does not depend directly on income, but on marginal utility.

what gives the consumers the ability to pay for the bread in the first place and what determines (in a macro way) the maximum amount that they are able to pay?

What gives people ability to buy things is production. Society’s income is society’s production. Macroeconomically, in a closed economy:

$$f(.) =Y= C+ I +G$$

Production of society $f(.)$ which depends on factors of production such as labor or capital or land is by definition income of the society $Y$, and this income can be used to finance consumption spending ($C$), investment spending ($I$) or government spending, net of transfers that just shuffle output around ($G$). In open economy you could also add spending on net exports.

Hence what gives consumers (in aggregate) the ability to pay for things is how much society produces. If society produces only 100 loafs of bread then consumers will be able to only purchase 100 loafs of bread, at maximum, irrespective of how much they value bread. Prices in equilibrium will adjust so the bread market clears so prices will be just set to whatever number allows this consumption. If people do not value bread enough to buy so many loafs of bread output and prices will eventually adjust to reflect that in equilibrium.

A simple illustration of this is closed Robinson Crusoe economy. Value, income and even relative prices can exist even in one person’s economy. For example, if Robinson Crusoe can either fish or collect coconuts and he is faster at collecting so that he has choice to either catch one fish per hour or collect two coconuts, price of fish is 2 coconuts and price of coconut is 1/2 of fish.

If he decides to focus only on fish and works 10 hours of day his income is 10 fish and this 10 fish income enables him to have maximum 10 fish consumer spending or he could have consumer spending of 5fish and save another 5 fish as inventory investment so next day he can craft capital (net, fishing rod).

The value of a fish will depend on Robinsons marginal utility. If Robinson’s utility is given by: $U=x^{0.5}$ where $x$ is amount of fish he consumes, then when he eats 10 fish he values a fish at approximately 3.14 utils. We can convert this to terms of money using money metric indirect utility function, but it would be bit time consuming and this answer is already very long so i will skip it, important result is that this value could be much higher than the value he actually paid in terms of fish just not lower.

  • $\begingroup$ I shouldn't have used the word value as it is a loaded term. I guess what I was getting at is that not all production is equal and it's only when the basic needs (like fish in my example) are met that luxuries like coconuts become a possible option. Sort of like Maslow's hierarchy of needs, but on a grand, societal scale. $\endgroup$
    – Joebevo
    Commented Jan 18 at 14:18
  • $\begingroup$ @Joebevo 1. I don't think value is loaded term, rather value is already term which has precise definition in economics, and maybe you wanted to ask about something else. 2. I do not think that is really good example. For a Buddhist fish is not a basic need, for someone living in jungle coconut can be basic staple and fish luxury. What good is basic need is also to some degree subjective, this was already recognized by Smith in Wealth of Nations. 200 years ago rowing was considered bad work, today its a luxury pass time for wealthy. $\endgroup$
    – 1muflon1
    Commented Jan 18 at 15:52
  • $\begingroup$ This is also why Maslow pyramid of needs does not really talk about specific goods but talks about broad categories like physiological needs. Moreover, luxuries (e.g. good wine, expensive food) can satisfy basic physiological needs. 3. On societal scale luxuries are always an option because people are heterogeneous. In many feudal societies basic physiological needs of peasants were not met yet many feudal societies devoted resources into production of luxury so its kind of a moot point to talk about basic goods somehow enabling luxury goods. $\endgroup$
    – 1muflon1
    Commented Jan 18 at 15:54

Value originates from usefulness for humans. What humans find useful, acquires value, as understood by humans (this does not mean that everything of value acquires also a price - that would be economic value, and to get there one needs also scarcity).

Things that are useful in order to survive biologically are the first to have value. Then you have other things, like those that are useful in order to "feel good", or those that are useful in reducing uncertainty either materialistically or psychologically. And more.

Your thought that the total value is the value of those things that are needed in order to survive biologically, while a bona-fide logical thought, is not correct.

Once we can produce more than what we need biologically, namely, once we produce all we need to survive, and realize that we still have "free time" in our hands, then we have available resources to produce other things. Things that we find them also useful, in relation to a different aspect of the human existence. And we do.

There is no "why" we do that. It is what human history (and prehistory) teaches us. It so happened that a human that was ok on the biological front and had free time left, did not just sit to marvel at the sunset or whatever. They engaged further with the environment, transforming it (i.e. producing) more.

One could say that the ultimate value frontier is what humans can produce at full employment of productive resources (in the general sense).

So, those "things" I started my post with, are in most cases made things, which moves the discussion about the measure of value, to the resources available.


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