THE PARADOX OF VALUE

By Avantika Sen

 

 

Diamonds are, preferably regarded as a status symbol, to adorn ourselves with. However, they are valued more highly than water, which is a pre-requisite for sustaining life. Is  water’s fewer “valuable uses” in the household (washing cars, utensils and clothes), the cause of a dampening effect on its value?

Here comes  the concept of marginal utility!

The theory of marginal utility, based on the subjective theory of value, says that the price at which an object trades in the market is determined neither by how much labour was exerted in its production, nor by how useful  it is on the whole. Rather, its price is determined by its marginal utility. The marginal utility of a good is derived from its most important use to a person. So, if someone possesses a good, he will use it to satisfy some need or want but which one? Naturally, the one that takes the highest-priority.

What’s with this fancy term?

The paradox of value or the diamond-water paradox is considered to be a classic presentation of renowned economist and philosopher, Adam Smith. Using this paradox, he  presented the theory, where, even though water is more essential for our survival,  diamonds command a higher market price. [1.]

To understand it better…

In the diamond-water paradox, it was deduced that it is not the total usefulness of diamonds or water that determines price, but the usefulness of each unit of water or diamonds. It is true that the total utility of water to people is tremendous, because they need it to survive. However, since water is in such large supply in the world, the marginal utility of water is low. In other words, each additional unit of water that becomes available can be applied to less urgent uses as more urgent uses for water are satisfied. [2.]

Therefore, any particular unit of water becomes worth less to people as the supply of water increases. On the other hand, diamonds are in much lower supply. They are of such low supply that the usefulness of one additional diamond is exponentially greater than the usefulness of one additional glass of water, which, again, is in abundant supply. Thus, diamonds are worth more to people. Those who want diamonds are willing to pay a higher price for one diamond than for one glass of water, and sellers of diamonds ask a price for one diamond that is higher than for one glass of water.

 

Wait, there can be exceptions!

Supposedly, a man dying of thirst would have greater marginal use for water than for diamonds so would pay more for water, perhaps up to the point at which he was no longer dying. [2.]

At low levels of consumption, water has a much higher marginal utility than diamonds and thus is more valuable. People usually consume water at much higher levels than they do diamonds and thus the marginal utility and price of water are lower than that of diamonds.

 

 

 

 

Food for thought

The things which have the greatest value in use have frequently little or no value in exchange, but on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water but scarcely anything can be had in exchange for it.

A diamond, on the contrary, has scarcely any use-value, but a very great quantity of other goods may frequently be had in exchange for it. [3.]

This contradiction leads to the conclusion that if the demand is great, or if a man is willing to go to great toil and trouble to acquire it, the price of that commodity will rise. [3.]

 

 

 

 

 

 

 

References:

  1. Encyclopaedia Britannica. (2018). Austrian School of Economics. [Online]. Available at: https://www.britannica.com/topic/Austrian-school-of-economics#ref725579 [Accessed 24th August. 2018]
  2. The Millennial Economist. (2018). Diamonds or Water? Which do you value more? [Online]. Available at: https://www.thingsthatmatterblog.com/articles/2018/2/22/diamonds-or-water-which-do-you-value-more

[Accessed 24th August. 2018]

  1. (2018). Paradox of Value. [Online]. Available at: https://gohighbrow.com/paradox-of-value/ [Accessed 24th August. 2018]
  2. Wikimedia Commons. (2018). Diamond-Water Paradox. [Online]. Available at: https://commons.wikimedia.org/wiki/File:Diamond-Water_paradox.png

[Accessed 24th August. 2018]