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Water-diamond Paradox

 

            John Law (1705) elaborated upon Davanzati's distinction between "value in exchange" and "value in use", which led him to introduce his famous "water-diamond" paradox: namely, that water, which has great use-value, has no exchange-value while diamonds, which have great exchange-value have no use-value. However, contrary to Adam Smith (who used the same example but explained it on the basis of water and diamonds having different labor costs of production), Law regarded the relative scarcity of goods as the creator of exchange value. .
             Scarcity = Paradox of Value (Water/Diamond Paradox) = things that are essential to life do not always have the highest value in a monetary sense. This is because many essential needs in life can be satisfied with resources that are so plentiful that almost everyone can get them as much and as often as they like. (Ex. water, air, etc.). So, things tend to have higher value when they come from resources that are scarcer or more difficult to obtain. (Ex. Water in a desert (think of the movie Dune) would be very valuable because it wouldn't be so plentiful and more people would be competing for what little there is.).
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             Menger used his marginal utility table to explain the old water diamond paradox. The value of diamonds was greater than the value of water because it was marginal utility and not total utility that determines consumer choice and hence value. From this they also argued that value comes from the future and not past production. Hence, the factors of production are not price determining but price-determined.
             Menger uses a numerical table as an illustration of declining (marginal) satisfaction and how an economizing individual would make decisions. This table should not be taken to mean that he believed in cardinal (measurable) utilities. He designated the importance of satisfactions on which life depends with 10, and the smaller importance of the other satisfactions successively with 9, 8, 7, 6, etc.


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