Coffee and Wine: The Subjective Theory of Value at Work

This weekend, I had the privilege of attending a coffee tasting at No. Six Depot in West Stockbridge, Mass. It's a favorite local business here in the Berkshires, and they truly have a passion for coffee. While the other guests were comparing the subtle differences between coffees from all over the world, I was busy contemplating the subjective theory of value. It's true, you can't take economists anywhere.

What sent me on this wonderful economic excursion was the similarities between coffee and wine, from the production process to the way climate subtly influences the flavor. Roaster Flavio Lichtenthal is certainly as passionate and knowledgeable about his coffee as any vintner is about their wine. And I interrupted the group discussion enough times to confirm, at least anecdotally, that coffee harvesting is just as labor-intensive, if not more, than wine. Beans ripen at different times, meaning they have to be picked by hand, with the judgment of a human eye.

No. Six Depot manages to charge $10 per bag for its coffee. That's certainly more expensive than Maxwell House, but compare the price range to that of bottles of wine, which can cost $10 or $1,000. Why the stark difference?

The answer is the subjective theory of value, put forward by the Austrian economist Carl Menger and others in the late 19th century. It states that the value of a good has nothing to do with the labor that goes into its production, but instead depends on the individual consumer's subjective preferences and the importance he or she places on the good.

How does that work in our coffee-and-wine example? One mechanism is aging: while aging does not appear to add to the quality of coffee, it can raise the value to some wine connoisseurs by orders of magnitude. The aging process is not labor-intensive; the difference in value comes from individual preferences. According to the alternative labor theory of value, held by Marx among others, the aging process shouldn't add anything to price. (You may wonder if we ever get tired of proving Austrian economists right and Marxists wrong. The answer is no.)

There are likely other differences in people's relationships to coffee and wine that impact those goods' subjective value, such as the fact that coffee is so much a part of people's daily routines that they begin to see it as a commodity.

But my economist brain was present enough for the tasting and discussion to know that Flavio's coffees are anything but commodities. Do yourself a favor and order a bag to enjoy while you read Menger's Principles of Economics.

Max Gulker joined AIER in 2015. His primary research areas are applied microeconomics and industrial organization. Max previously worked as an economist for Keystone Strategy, supporting expert testimony for antitrust and intellectual property litigation in high tech industries. Prior to that, he worked on financial litigation matters with NERA Economic Consulting. Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan.