Price formation is one of the most fundamental questions in economics. For mainstream economists, prices are determined by marginal costs and marginal utility, an objective and modelable approach. Austrian economists, however, propose a radically different conception: prices emerge from voluntary exchanges between individuals with different subjective valuations, making them neither objective, predictable nor modelable.

The price is always set between the maximum a consumer is willing to pay and the minimum a seller will accept. Let's take the example of the baker who prefers money to her baguette, and the buyer who prefers the baguette to his money. When the transaction succeeds, both individuals mutually benefit. As Henry Hazlitt writes, the most important fact about a free market is that no exchange takes place without both parties benefiting. Exchange is only possible because individuals value goods differently, and the free market functions precisely because of this diversity of individual preferences.

It's essential to understand that price and value are two radically different concepts. Price is not an indicator of a good's value; it's simply an accounting figure, an exchange ratio expressed in money. Value, on the other hand, emanates from the individual and his or her relationship with the good. It is unique, subjective and individual, depending on the individual's relationship with his or her environment and time preference.

As Eamon Butler explains, what prices sum up is how much of one thing an actor is willing to sacrifice for another. A good can have a high price without having a high value for a particular individual, and vice versa. It is precisely the subjectivity of value, combined with the multiplicity of individual valuations, that enables prices to emerge through exchange.

A fundamental idea of the Austrian school, already present in Spanish scholastics such as Luis Saravia de la Calle, is that costs tend to follow prices, rather than the other way round. Just because a good is expensive to produce doesn't mean it will be worth much on the market. On the contrary, it's the final price the consumer is willing to pay that influences the organization of the productive structure. If consumers are willing to pay a high price, entrepreneurs can incur high production costs, but if consumers don't value a good enough, no matter what resources are invested, its price will remain low.

This vision is radically opposed to the theory of labor value defended by classical economists and Karl Marx. For Austrian economists, value does not derive from embodied labor, but solely from subjective utility for the end consumer. To illustrate this principle, if you want to build an entry-level family SUV, you won't use the same resources as for a Ferrari.

Prices are formed through a continuous process of voluntary exchange, where each transaction contributes to the discovery of the market price, without any central planner determining it. The rate of exchange is not the product of an equality of value, but of a discordance between two value judgments. It is precisely this difference in valuation that makes the exchange possible and mutually beneficial. If both parties valued their goods identically, no exchange would take place.

There can be no price discovery without private property and voluntary exchange. These three elements form an inseparable system that enables economic coordination in a complex society. Without private property, no one can truly exchange. Without voluntary exchange, prices do not reflect real valuations. Without free prices, economic coordination becomes impossible. As Ludwig von Mises summed it up, each individual, when he or she buys or refrains from buying, makes a contribution to the formation of market prices.