Thursday, January 22, 2015

THE DIAMOND-WATER PARADOX OF VALUE 8 YEARS LATER


‘Magpie” posts (22 Jan 2015) a comment on my Lost Legacy Blog entry for 16 January 2007, 8 years earlier! Here is the original post and my comment:
Smith and Others Knew Their Water from their Diamonds”
“It’s always pleasurable to read Adam Smith’s contributions to the history of economics that are presented correctly. Last year I had occasion to correct statements to the effect that Smith ‘discovered’ or asserted ‘first’ the diamond water paradox between the use and exchange values of an economic good. He stated the paradox, of course, in Wealth of Nations but so had several earlier authors before him”. So ‘Hedgefund guy’ in the Mahalonobis Blog is spot on in his comment on a statement in the Wall Street Journal (WSJ), 16 January, 2007:
Diamond-water paradox applied to synthetic diamonds. Doh!”
“From last weekend's WSJ: 
These lab-made diamonds have begun trickling into retailers at prices below those for natural diamonds of similar size and sparkle.
De Beers extols the permanence of natural diamonds and attempts to make them seem special. They're "billions of years in the making," it says on its diamond information Web site, adiamondisforever.com. "Adding to the mystery and aura of what make diamonds so sought-after" is the fact that "approximately 250 tons of ore must be mined and processed in order to produce a single, one-carat, polished, gem-quality diamond."

I think these diamond producers don't realize that higher cost doesn't imply higher value. In fact, the paradox of value is also known as the diamond-water paradox, because it notes that although water is on the whole more useful than diamonds, diamonds command a higher price in the market. Adam Smith famously propounded on the paradox in The Wealth of Nations, though heavyweights such as Copernicus, John Locke, John Law and others had previously tried to explain the disparity in value between water and diamonds. 
Marginalism brought about the birth of neoclassical economics and argues that it is not the cost or use-value of a good that determines its price but its marginal utility. Thus the marginal value of a synthetic diamond, like that of a cultured pearl, is unaffected by its provenance. I doubt anyone feels sorry for diamond makers grasping at straws.”
[My Original] Comment
I shall be happier when I see more of this sort of thoughtful comment. Smith’s contribution to economics is strong enough not to require false ascriptions of views that were also presented by others.
Now, I know that scholars know this, but graduate economists, and others who attended Economics 101 (or what I see is called Ec10 at Harvard), often shorten the list of other contributors simply to Smith, stating or implying that the paradox was original to him. Clearly, it wasn’t. In some cases this matters and in others it does not.
To the list of others offered by Hedge fund guy we could add: Plato, Samuel von Pufendorf, Grotius, Harris, Cantillon, and Mandeville, and his own tutor, Francis Hutcheson. Clearly, not a lot of modern commentators on Smith know that. But as clearly, Hedgefund guy does, and so do you now, if you didn’t before.
To which today’s correspondent (Magpie writes):
Frankly, I am not convinced there ever was a "diamond-water paradox", at least in Smith's mind (I'd appreciate it if you could provide references to the other authors who expounded on it). This is the passage where people claim to see a paradox: "The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use;' the other, 'value in exchange.' The things which have the greatest value in use have frequently little or no value in exchange; and, 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 it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in on Smith and Others Knew Their Water from their Diamonds”.
My Comment today(2015):
I am not sure what ‘Magpie’ is complaining about because his complaint is clearly answered in the original 2007 post and in my original comment.
I could add that their relative value is also related to the timing and circumstances in which a comparison of their values is made. When dying of thirst in a desert, a person desperate for water would hand over a sack-full of diamonds for a drink of water, reversing the ‘paradox of value’.
In my previous day-job lecturing at Edinburgh Business School, I often posed the question to my classes on negotiation: 
“A man with six camels and desperate for water. approached an oasis  and found a man standing by a sign that read: “All the water you can drink, price one camel”. Who had the power?
This usually provoked a lively discussion, into which I tipped further complications, such as the man by the sign wanted a camel to be able to leave the oasis, and then I asked: which one of the men had a rifle? And so on ...

Moral: values are relative to situations.

NB:
'Magpie' responds to my 2007 comments which I also post HERE to save time searching back to 2007:
"Frankly, I am not convinced there ever was a "diamond-water paradox", at least in Smith's mind (I'd appreciate it if you could provide references to the other authors who expounded on it). This is the passage where people claim to see a paradox: "The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use;' the other, 'value in exchange.' The things which have the greatest value in use have frequently little or no value in exchange; and, 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 it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in on Smith and Others Knew Their Water from their Diamonds"

My Comments:
I think you are making an over-literal approach to Smith's use of a 'paradox of value'. I remember when I was taught on the 'paradox' in my first year economics A-level course at evening school, in 1961, it was treated as a 'paradox' to draw our attention.
In short, the use of the word 'paradox' is purely descriptive in presenting two apparent views that seem to contradict themselves in a purely literary sense, but which on examination are explainable by looking at them differently, such as value in use and exchange. Once explained the paradox removed.
The other authors I mentioned in 2007 I no longer have citations to hand and pressure of work precludes me taking time to identify them (use google).
Gavin

1 Comments:

Blogger Magpie said...

Prof.

Thanks for the reply. I see that I did not make myself clear, for which I must apologise.

My point is that for Adam Smith the paradox of diamond and water probably was no paradox at all. He considered his explanation sufficient and the "paradox" only existed in the mind of the marginalist economists.

I supported that claim with White's paper and with the fact that, nowhere in the WN, Smith seems puzzled by a "paradox".

And my question was about people like Plato, Copernicus and others who supposedly puzzled over the "paradox". On which of his books did Plato study the paradox? What about Copernicus or any of the other authors?

7:45 am  

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