Paradox of value

Episode #8 of the course “Brain-twisting paradoxes”

The paradox of value, proposed by legendary economist Adam Smith, states that human beings do not value what they use the most, such as water, but choose to pay highly for things that have no real use, such as diamonds. Thus, the paradox of value is also known as the diamond–water paradox.

As Smith explains in An Inquiry into the Nature and Causes of the Wealth of Nations, “The word VALUE…has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ‘value in use;’ the other, ‘value in exchange.’ The things which have the greatest value in use have frequently little or no value in exchange; on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.”

This contradiction leads to the conclusion that “the real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it,” as Smith says. The effects of this conclusion can be found in the law of supply and demand. In other words, if the demand is great, or if a man is willing to go to great toil and trouble to acquire it, the price will rise.

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