Imagine a recruiter asking you to determine the value of a certain good. What valuation factor jumps out for you? Usefulness, or perhaps exchangeability? Personal preference? 

This question is posed in the paradox of value, specifically the diamond-water paradox. The diamond-water paradox arises from the observation that although water is more useful for survival, diamonds, a non-essential luxury good, get a higher market price. This raises questions on how economic value is truly determined.  

A popular argument is that diamonds are rare and, therefore, demand is higher than supply –  upward pricing pressures then create a high valuation of diamonds. However, it is essential to note that less than 1% of the earth’s water is drinkable and the currently perceived “abundance” of water does not reflect reality. Although Marxist economists may refute this statistic by referencing the labor theory of value, stating the low amount of labor expended in the production of water is what serves as the basis for its low exchange value, the argument that one is more “rare” than the other clearly doesn’t hold. 

Another argument revolves around subjective valuation in determining prices through marginal utility, focusing on the consumer’s perspective. Many high-income people would agree that the social recognition and appreciation of a diamond, especially shinier, larger ones, is extremely important within their social circles. On the other hand, water is often taken for granted. This shifts society away from valuations based on practicality and emphasizes individual preferences in determining demand. 

All in all, the diamond-water paradox speaks to larger issues of a resource allocation disparity that furthers economic inequalities. While clean water is often abundant, cheap, and more often than not considered a right in developed countries, in developing countries, access to clean water is a pressing issue. Perhaps revisiting how essential resources like water can be properly valued is the first step toward finding the true value of a diamond.  



References:

Bell, Chris. “The Diamond-Water Paradox: Why is it important to consider?” Water Research Centre, www.wrcgroup.com/headlines/bite-sized-views/the-diamond-water-paradox-why-is-it-important-to-consider/. Accessed 16 Nov. 2024. 
Bouzerda, Ramzi, and Dr. Christian Hugo Hoffmann. “The Diamond-Water Paradox revisited.” Droople SA, www.droople.com/article/the-diamond-water-paradox-revisited. Accessed 16 Nov. 2024.