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The paradox of value, also known as the diamond–water paradox, is the paradox that, although
water Water is an inorganic compound with the chemical formula . It is a transparent, tasteless, odorless, and Color of water, nearly colorless chemical substance. It is the main constituent of Earth's hydrosphere and the fluids of all known liv ...
is on the whole more useful in terms of survival than diamonds, diamonds command a higher price in the market. The philosopher
Adam Smith Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
is often considered to be the classic presenter of this paradox, although it had already appeared as early as
Plato Plato ( ; Greek language, Greek: , ; born  BC, died 348/347 BC) was an ancient Greek philosopher of the Classical Greece, Classical period who is considered a foundational thinker in Western philosophy and an innovator of the writte ...
's '' Euthydemus''.
Nicolaus Copernicus Nicolaus Copernicus (19 February 1473 – 24 May 1543) was a Renaissance polymath who formulated a mathematical model, model of Celestial spheres#Renaissance, the universe that placed heliocentrism, the Sun rather than Earth at its cen ...
,
John Locke John Locke (; 29 August 1632 (Old Style and New Style dates, O.S.) – 28 October 1704 (Old Style and New Style dates, O.S.)) was an English philosopher and physician, widely regarded as one of the most influential of the Enlightenment thi ...
, John Law, and others had previously tried to explain the disparity.


Labor theory of value

In a passage of '' An Inquiry into the Nature and Causes of the Wealth of Nations'', Smith discusses the concepts of value in use and value in exchange, and observes how they tend to differ. He writes: Furthermore, Smith explains the value in exchange as being determined by labor, stating: "The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it." Hence, Smith denied a necessary relationship between price and utility. Price on this view was related to a factor of production (namely labor) and not to the point of view of the consumer. Proponents of the labor theory of value see that as the resolution of the paradox.


Marginalism

The theory of marginal utility, which is based on the
subjective theory of value The subjective theory of value (STV) is an theory of value (economics), economic theory for explaining how the value of goods and services are not only set but also how they can fluctuate over time. The contrasting system is typically known as the ...
, says that the price at which an object trades in the market is determined neither by how much labor was exerted in its production nor on how useful it is on the whole. Rather, its price is determined by its
marginal utility Marginal utility, in mainstream economics, describes the change in ''utility'' (pleasure or satisfaction resulting from the consumption) of one unit of a good or service. Marginal utility can be positive, negative, or zero. Negative marginal utilit ...
. The marginal utility of a good is derived from its most important use to a person. Thus, if someone possesses a good, they will use it to satisfy some need or want, starting with the one that takes highest priority. Eugen von Böhm-Bawerk illustrated this with the example of a farmer having five sacks of grain. With the first, he will make bread to survive. With the second, he will make more bread, in order to be strong enough to work. With the next, he will feed his farm animals. The next is used to make whisky, and the last one he feeds to the pigeons. If one of those bags is stolen, he will not reduce each of those activities by one-fifth; instead, he will stop feeding the pigeons. Thus, the value of the fifth bag of grain is equal to the satisfaction he gets from feeding the pigeons. If he sells that bag and neglects the pigeons, his least productive use of the remaining grain is to make whisky, so the value of a fourth bag of grain is the value of his whisky. Only if he loses four bags of grain will he start eating less; that is the most productive use of his grain. The last bag of grain is worth his life. In explaining the diamond-water paradox, marginalists explain 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, people feel less urgency or enjoyment from consuming water since they know that water would continue to exist. Thus, consuming an extra unit of water would not generate an extra unit of usefulness and thus, an extra willingness to pay for it. Any particular unit of water is 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 greater than the usefulness of one additional glass of water, which is in abundant supply. Thus, diamonds are worth more to people. Therefore, 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. Conversely, a man dying of thirst in a desert 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.


See also

*
Paradox of hedonism The paradox of hedonism, also called the pleasure paradox, refers to the practical difficulties encountered in the pursuit of pleasure. For the hedonist, constant pleasure-seeking may not yield the most actual pleasure or happiness in the long ter ...


References

{{Economic paradoxes Paradoxes in utility theory Theory of value (economics) Paradoxes in economics