diamond/water paradox…

Father of modern Economics Adam Smith wrote about an old Platonian paradox in 1776:

The things which have the greatest value in use have frequently little or no value in exchange; and 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 scarce anything; scarce anything can be handed in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange of it.

This enlightening abstraction needs a little more addition. Value of water depends on the thirst of the person and the availability of the water, same with the diamond. Suppose the man is dying with thirst and there is little water available but beyond his reach, he will give everything for that little water.

Same might not be true for the diamond. Now since the water is unlimited in almost every country except a few, and diamond is very scarce, the equations have shifted a little. This unfolds another human trait that mind craves for something which is beyond its reach, and ignores what it has with it. As needs keep getting satisfied more and more new needs come out. This chain reaction leads mind to misery. Look at Africa. It has the most number of diamond mines in world but still it is under developed because…? In a land where basic needs of its population are not satisfied with plenty, having things which other countries value more, lead to corruption at the basic level.

There is another trait – more we consume/use some thing, less useful it becomes to us. It is called law of diminishing marginal utility. Chocolate is the best example. If you are eating it after a month, first chocolate is like heavenly ambrosia. Second tastes good, third is ok and fourth could have been avoided… if you eat fifth, sixth, seventh – it makes you sick!! The numbers may differ depending on the individual tastes, but the ultimate effect is the same.

Well – excess of everything is bad. That’s the reason we don’t allocate all our income to only one good! Our aim consciously or subconsciously is to maximize the utility of our income! And that depends largely on what we value and what we prefer when we go out in the market hunting to satisfy our needs!