I believe one of the reasons why paradoxes exist and seem fascinating to me is because it reveals to us the blurry and indistinct line between subjective and objective reality. Paradoxes unite and reconcile both realities.
Imagine while on a shopping spree, you have to make a choice: a designer dress or a loaf of bread. It seems obvious – the dress is more desirable. But what if you were in a famine-stricken country, with no food available for days, would you still choose the same if you saw both? Why not? Isn’t the dress still more desirable?
This is the paradox of value in a nutshell. It is called the diamond-water paradox in economics. A classical dilemma that questions why some goods that are vital for life, such as water, are inexpensive, while some goods that are not vital, such as a diamond, are costly.
Economists and philosophers alike have grappled with it for centuries trying to make sense of this dilemma. This has resulted in various explanations from different viewpoints which also brought implications for how we value and trade goods in the market and society at large.
The History Of Paradox Of Value
Ancient Greece is always an interesting destination to travel back in time. This is where the paradox of value was reported to have first being alluded to by Plato, a philosopher who wrote about it in his Euthydemus(dialogue). He explained this phenomenon via the distinction between natural and conventional value, which depends on the needs and desires of people.
The paradox of value was later discussed by several influential thinkers in the history of economic thought. Each tried to explain the paradox of value by using different concepts and theories, such as labor and and utility theory of value.
The labor theory of value is quite objective and was endorsed by Adam Smith and other like minded economists.
According to this theory, the work required to produce a product is the basis of its value.
Using this theory, water is simply less valuable that diamond because there's more labor involved in mining and polishing diamonds than there is to collect water and purify it.
Objectively, this is true but it didn't account for the subjective aspect which is the differences in demand and scarcity of goods, as well as the preferences of consumers.
This is the angle the utility theory of value took. This theory which was developed by Alfred Marshall and other neoclassical economists, argued that the value of a good is determined by its usefulness or satisfaction to consumers.
So for this theory, water is more valuable than diamonds because it has more usefulness for human survival and well-being than diamonds.
However, a shortcoming was discovered with this theory which is it didn't account for the diminishing marginal utility of goods. This means that the more we consume a good, the less utility or satisfaction we get from it.
So another theory was formulated, the marginal theory of value. This was proposed by William Stanley Jevons, and other marginalist economists. They argued that the value of a good is determined by its marginal utility or satisfaction to consumers at the point of consumption.
With this theory, diamonds are seemingly more valuable than water because they have higher marginal utility or satisfaction than water. An additional unit of water has little or no marginal utility or satisfaction to consumers who already have enough water to meet their needs. On the other hand, an additional unit of diamond has high marginal utility or satisfaction to consumers who rarely have access to diamonds.
Of course, these are all theories but what I realise from them is that truth is relative depending on the context and situation. All theories are half true and half false.
Perceived Implications
I think any keen observer and ponderer of life would've come across this disparity. For me, I'd like to say water is 100x more valuable than diamond even if there's an abundance of the former and scarcity of the latter. Nobody needs diamond, there's little to any actual usefulness in them.
However, we live in a world of perception that is progressively changing. If a good number of people perceive something as valuable then it becomes valuable regardless of whether we actually need it or not.
On an individual level, the paradox of value reveals the hidden contradictions and complexities of our human nature.
Our values and desires are not always in sync. And they change based on the context and situation.
I feel that it also challenges us to re-evaluate our true needs and desires. While also rethink our assumptions and beliefs about what makes us truly happy and fulfilled.
For example, do we value our health more than our wealth? It seems obvious that it is health, but how often do we sacrifice our health for wealth?
It's a bit interesting on a market level. Here, it sheds more light on the hidden forces and complexities of the market system. The intrinsic qualities of goods and services do not determine their price and quantity, but their subjective qualities do.
This means that their supply and demand are influenced by 'the context and the situation' of the combined market participants.
Which also means that the market system is constantly changing and adapting to the dynamic and diverse subjective values of its participants.
Thanks for reading!! Share your thoughts below on the comments.
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