The Paradox of Value

30.08.2018 |

Episode #8 of the course Brain-twisting paradoxes by John Robin


Welcome to another stop on our tour of the strange.

Today, as promised, we’re turning back to more practical matters, except as this next paradox shows us, we have a contradictory way of blurring the lines between different kinds of practicality.


Enter: The Paradox of Value

Adam Smith was a foundational economist and philosopher of the 1700s, whose work established much of the theory behind our current free market economy. It’s within this work that we find today’s paradox.

Let’s enter by way of an everyday example.

It’s the start of your day. You get up and go about your routine. At some point, no doubt you’re going to need water. Can you imagine going through your day and having no water? What would that mean?

• no coffee

• no shower

• no washing dishes

• no flushing toilet

That’s just the beginning of it.

Now, let’s imagine instead that you had diamonds. In fact, imagine you have lots of them, enough to make a king or queen jealous. You have no water, but you have oodles of diamonds.

You’re still going to be just as miserable without water. Diamonds won’t make your coffee, and they won’t help you get cleaned up nor allow your sinks to drain and toilets to flush.

But strangely, diamonds are worth a lot more than water. Way, way more! In fact, the price of a diamond is about $1,400/carat (1 carat is based on the standard of 1/100th of 1 paragon, which is a flawless “perfect” diamond stone of 20g designated 100 carats). Water, on the other hand, is so cheap that it’s practically free.

Isn’t that contradictory?

That’s the paradox of value in motion, and it’s what defines our economy.


What Adam Smith Proposed

Now, in the above example, you might have been shaking your head. “That’s ridiculous! If I had a bunch of diamonds, I’d sell them and be able to afford water.”

And that’s exactly the point behind the paradox of value.

Although water is extremely cheap, it is far more valuable than diamonds, with regard to how fundamental it is to us. While diamonds, being extremely expensive, are far less valuable in terms of practicality, they are extremely rare and coveted and command a high trade leverage, thus making them effectively more practical by way of the larger economic system.

What Smith’s paradox says is that the value assigned in a free market economy isn’t necessarily reflective of the practical value. Saffron, for instance, is one of the most expensive spices because it has low yields and a great deal of labor goes into extracting it. Its value is determined by the demand for it, and since it’s rare, the wealthy will be more likely to buy it. This can be seen as one way to resolve the paradox: While saffron might have little practical value to the everyday person, this is made up for in the practical value of shared wealth given to the laborers and traders, who in turn help fund the economy, which ultimately encompasses greater systems, such as water management that lets you shower, manage sanitation, and have your morning cup of coffee.

In our imagined scenario of having only diamonds instead of water, while the actual value on water is low, this is only because water is much easier to come by and distribute. Our scenario of having no water seems ludicrous to us only because we are so used to having it available.

And this is how value is assigned in all avenues of our world economics: supply (how available something is) and demand (how much it is needed). Thanks to Smith’s paradox, practicality is not the final judge of value, but rather the collective value of all who work together in our complex world.

Tomorrow, we’ll explore another paradox relating to the good of the whole. Until then, enjoy your coffee and water supply!


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Recommended reading

A good article on the price of diamonds (and how not to get ripped off).


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