Value And Scarcity. Diamond Water Paradox. Would You Rather Prefer A Diamond Or Water When You Are Thirsty?

riceflakes

I have to thank my cousin who shared the sayings of a comedian of yesteryears which was very profound

The statement goes like this “When I was young and  had the ability to digest stones I did not even have the money to buy ordinary rice flakes. But now at this age when I have the ability to own diamonds I have lost the ability to even digest the ordinary rice flakes”

I replied back to my cousin saying “I feel Diamonds don’t really have any intrinsic value in an isolated world. I might be cast away in an island full of Diamonds but it’s those ordinary rice flakes which might be of some nutritional value but not those useless diamonds”.

My Cousin replied back Saying “So True“

desert-diamonds-300x183

Just taking this a bit further Imagine yourself stranded on a Desert with no water all by yourself . You are in the lookout for the elusive oasis which will be your life saver. But all of a sudden you find a bag of diamonds in front of you. Would you really care? You might thank your extreme good luck but as they say diamonds don’t quench thirst they only make shine bright to mesmerize with no intrinsic value what’s so ever. Until you find the elusive oasis’s the bag of Diamonds don’t really mean much. Only after you find an oasis and quench your thirst the Diamonds start appearing as Diamonds after all.
diamondandwater

So why is that we give so much of value to diamonds which cannot even quench our thirst. Well this question was posed long back by the famous Economist Adam Smith and he came up with a notion called the Diamond Water Paradox – is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market.

It is because Humanity as a whole has subjectively evaluated Diamonds are worth the price because and the scarcity of Diamonds make them valuable because there are a lot more people chasing diamonds then they are in supply. Well in Economic terms the marginal utility of Diamonds is much more than water. The marginal utilitarian value of water decreases dramatically once a person’s thirst is quenched. But a person who already owns a Diamond still sees value in buying another Diamond. The subjective valuation, scarcity and the marginal utility answer the question why Diamonds are worth more than water though water is more needed in Survival. If one fine day the Entire Humanity decides Diamonds are not worth a dime than the oft repeated Why Diamonds are worth much more than water becomes a moot point. In support to my argument I stumbled on an article in Internet Diamonds are Bullshit.

American males enter adulthood through a peculiar rite of passage – they spend most of their savings on a shiny piece of rock. They could invest the money in assets that will compound over time and someday provide a nest egg. Instead, they trade that money for a diamond ring, which isn’t much of an asset at all. As soon as you leave the jeweler with a diamond, it loses over 50% of its value.

Americans exchange diamond rings as part of the engagement process, because in 1938 De Beers decided that they would like us to. Prior to a stunningly successful marketing campaign 1938, Americans occasionally exchanged engagement rings, but wasn’t a pervasive occurrence. Not only is the demand for diamonds a marketing invention, but diamonds aren’t actually that rare. Only by carefully restricting the supply has De Beers kept the price of a diamond high.
Diamond

Countless American dudes will attest that the societal obligation to furnish a diamond engagement ring is both stressful and expensive. But here’s the thing – this obligation only exists because the company that stands to profit from it willed it into existence. So here is a modest proposal: Let’s agree that diamonds are bullshit and reject their role in the marriage process. Let’s admit that as a society we got tricked for about century into coveting sparkling pieces of carbon, but it’s time to end the nonsense.

The author of the above article only wanted to reject the role of diamonds in the marriage process. However if the Humanity as a whole rejects Diamonds as a valuable commodity as I said earlier the question why Diamonds are more expensive than water will become a part of history.

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RS

RS is a deep thinker. His hobby is to analyze and reanalyze. Out of a passion to analyze he started this blog

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