Paradox of value

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The paradox of value, also known as the paradox of diamond and water, tries to explain why, despite being enormously more useful and necessary than diamonds, water has a lower price in the market.

The paradox of value is related to the law of diminishing marginal utility. Generally, a diamond, despite being very valuable, loses value as its existence increases. In addition, at certain times or for certain people it can be less valuable, as pointed out by the subjective value theory.

Imagine that you are in the desert and after two days without drinking water you are totally lost, but you have a bag of diamonds. At that moment you find a person with two bottles of water who is looking for diamonds. It is likely that despite the fact that the diamond is much more valuable, you gave him a diamond or those that were needed in exchange for a bottle of water.

Origin of the paradox of value

The origin of the paradox of value dates back several centuries. Thus, although Adam Smith popularized it with his explanation in the Wealth of Nations, the reality is that it had already been dealt with by other intellectuals. Among them, John Locke and Nicolás Copernicus stand out.

After Adam Smith, the paradox of value has remained a matter of wide debate. So much so, that there are explanations that refute Smith's approach. One such approach was established by Carl Menger as early as the 19th century. At the same time, other Austrian school economists such as William Stanley Jevons or Leon Walras developed their own approaches.

The different explanations for the paradox of value

As we mentioned, the paradox of value has been debated for centuries. So throughout history different explanations have been given. Here are the most outstanding ones.

The paradox of value according to Adam Smith

Adam Smith, in his famous book, The Wealth of Nations, wrote the following:

The word value, it should be noted, has two different meanings, and sometimes it expresses the usefulness of some particular object, and sometimes the power to buy other goods that the possession of that object conveys. One can be called "use value"; the other, "exchange value." The things that have the highest use value often have little or no exchange value; conversely, those with the highest exchange value often have little or no use value. Nothing is more useful than water: but you hardly buy anything, you can hardly have anything in return. A diamond, by contrast, has little use value, but you can often get a great deal of other goods in exchange for it.

Adam smith

The paradox of value according to Karl Marx

Although Karl Marx did not resolve this paradox in a concrete way, scholars of his theory respond as follows.

According to Marx's theory of value, a product has more value the longer it takes to produce it. Of course, one might think that if someone slows down, their product will necessarily have more value. This conception of Marxist theory is erroneous, since Marx refers not to the time of creation of the product, but to the socially necessary time that the average of society needs to create it under homogeneous conditions.

Under this precept, Marxists argue that if someone is able to exchange diamonds for water in the desert, this is because at that time, the time required to get water is very long. Later, water becomes more valuable in the desert than diamonds.

Although the above is not consistent, since diamonds are probably at least more difficult to obtain in the same situation, the Marxist theory responds to the paradox of value with other questions that try to contradict the theory of marginal utility that we will see below. .

The paradox of value according to Menger, Walras and Jevons

Broadly speaking, for Menger, Walras, and Jevons, people do not have to make an all-or-nothing decision under normal conditions. That is, either all the water in the world or all the diamonds in the world.

According to the three economists cited above, water has more value since it is essential for our lives. However, since, as they maintain, the value is subjective, it will depend on the circumstances that we give it more or less value.

To support this explanation, they used the theory of marginal utility.

The paradox of value in the 21st century

Although the most widely accepted theory is based on the different preferences of any given consumer, as well as the law of scarcity, different explanations for the diamond and water dilemma still coexist.

Thus, depending on which school of economic thought the economist or the person we consult belongs to, we will receive one or another explanation.

At the same time, it should be noted, economics is an ever-evolving science and is therefore always open to new ways of tackling a problem of this caliber.

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