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 its 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 hell have shelter for the night isnt 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 societyA 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 Smiths 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 its 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 lifes 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 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 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 its 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 marketplaceBibliography:
