_The diamond-water paradox _
By: Paul
Marginal Utility: The Missing Link in the Diamond-Water Paradox American
Heritage Dictionary describes a paradox as “a seemingly contradictory
statement that may nonetheless be true”. I feel this definition applies to
“The Diamond-Water Paradox”. Water is of immeasurable value to human survival,
however it has virtually little or no monetary or trade value. While this
seems to be a contradiction, it is in fact the absolute truth. On the other
hand a diamond has no real value of use to mankind, however it is one of the
most sought after and expensive items in the world. How is this? How can
statements which seem so ludicrous be true? We must take certain factors into
account when answering these and other questions. Economic status, supply and
demand of a particular good, and tastes and preferences all must be considered
when determining the value of a good to any particular individual. The fact is
that what is of value to person A may be of little or no value to person B.
Smith feels that the true value of water(1) based on it’s usefulness must be
the most valuable substance in the world, for without it life as we know it
would cease to exist. However, as we all know our opinions of the usefulness
of any given good is in constant flux. What is of a high value and one point
in time may be useless to us at another point in time. Because of this fact
the usefulness of what we consider to be everyday goods (such as water) are
often taken for granted It is definitely possible for a good to command
other commodities in exchange even if it has little or no value in use. A
persons level of satisfaction received from a good is based on certain
factors, two of which are economic status, and tasted and preferences.
Referring back to “The Diamond-Water Paradox”, a person who is of higher
economic status is more often than not going to be less concerned with the
simpler things in life. Where his next meal might come from or whether he’ll
have shelter for the night isn’t really even a thought. These people are free
to pursue the “finer things in life”. While these items often have to value in
use, they are often sought after by upper society because they are used as a
status symbol to show the wealth such a person might possess. Knowing this
fact one could argue that such items do in fact have a distinct value in use
to the purchaser, for it helps to distinguish them from common society A
persons tastes and preferences also help determine the value of a good to a
particular individual. An art lover for instance may see a piece of work that
to the average person may seem to be worthless. The art lover however may be
completely enthralled by the piece and be willing to pay top dollar to possess
it. The Mona Lisa would likely seem, to be a worthless painting to someone
completely ignorant to the art world, but as we know the piece is virtually
priceless, and is known the world wide. So, in essence, a good with seemingly
no value in use may command other commodities depending on the amount of
satisfaction it gives to the buyer, and the amount of purchasing power that
buyer maintains There does seem to be a definite implied value judgment as
it pertains to Smith’s view of a diamonds value in use. As mentioned
previously, everyone values things differently and in different ways. To some
people money is the most important thing in the world, while others seek a
more spiritual source of value, such as family or religion. It seems that
Smith views an items value in terms of it’s necessity to human survival. While
it is hard to argue such a belief, we know that some people place a higher
value on things beyond the realm of human existence. Smith views a diamond as
a sort of fringe benefit, it is of no real value to us and is merely one of
life’s seemingly meaningless “extras”. He also wonders how such an item of no
use can command such a high return of exchange and be so revered since, in
actuality, it has no use in determining human survival People have searched
for a resolution to the “The Diamond-Water Paradox” for years. One could
attempt to resolve the paradox by attempting to use the concept of marginal
utility (MU) as it relates to total utility (TU). To a person suffering of
dehydration in the middle of the desert a glass of water would most likely
have a higher MU than any other substance know to man. He would seemingly
maintain a very high level of MU for the next few glasses of water, with each
glass his TU would continue to grow, but his MU for each glass would gradually
begin to fall. He will desire each next glass increasingly less and less.
Eventually his MU for the water would reach the point that he would receive a
greater satisfaction from another good (perhaps a plane ride out of the
desert). This is how most of us feel as it pertains to water. While we are in
constant need of the substance, we seem to have a never ending supply that is
available at our simple command. Because of this we receive greater
satisfaction from goods which may, in actuality, have a lower real value to
us. This helps us to maximize our consumer optimization. Consumer optimization
says if our MU for one item falls below the MU of another item, we should
choose the second item, whatever it may be. Therefor the demand of the first
good would begin to level off while the demand for another good will begin to
rise When looking at or measuring MU we must take into account the scarcity
of the given good. Take “The Diamond-Water Paradox” for example. As noted, MU
is the satisfaction we get from each next unit of the good consumed. As we
consume more and more water our MU for each next unit will fall. We can
eventually reach a point where water will give us negative satisfaction. As we
begin to receive each unit of diamonds our MU will be very high. Now, as we
receive each next unit of diamonds our MU will begin to fall, but the drop-off
will be much less per unit than that of the water. The reason for this is
scarcity. Scarcity as a whole makes an object much more desirable to society
because of it’s relatively high demand and worth. Obviously diamonds are much
more scarce in our world than water. As a result of this fact diamonds retain
a high monetary value in society. Here, the diamond/water tradeoff is an
obvious one. If we were to be given the choice between water and diamonds,
assuming our everyday needs for survival are being met, we would surely select
the diamonds because such a high monetary value would bring a much higher rate
of exchange in the marketplace
Word Count: 1193
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