23rd  of a series

"That's nothing at all. My father has a diamond bigger than the Ritz-Carlton Hotel."

- F. Scott Fitzgerald

“It sometimes puzzles me that humankind made it to the top of the food chain.”

- Julie Dietrich

In The Wealth of Nations Adam Smith posed the “diamond-water paradox,” in which the price of water, which is essential to human life, is a fraction of the price of diamonds, which  are not. In Smith’s words, “Nothing is more useful than water: but it will scarcely purchase anything; barely anything can be had in exchange for it. A diamond, on the contrary, has scarce value in use;* but a very great quantity of other goods may frequently be had in exchange for it.”

And so, modern economic theory began with a conundrum that stumped its own founder. Several theories have since sought to resolve this paradox.

• The “Labor theory of value,” which Smith conceived and Karl Marx enshrined, holds that the value of something is based on the cost of the labor to produce it. Obviously, diamonds are harder to get than water. Or at least they used to be. Or are they? Consider some of the vast projects humans have built to store water or to move it from one place to another.

Moreover, a diamond is only hard to get when it is dug up and refined. As one economist asked and answered, if a hiker happens upon a perfectly cut diamond by the side of the trail, is it less valuable because the only labor he added was bending down to pick it up? “Clearly not.”

• “Marginal utility,” which argues that because water is so plentiful, the additional satisfaction of consuming a bit more is low, while the opposite is true of diamonds. Tell that to Meliyio Tompoi, a 35-year-old Kenyan mother of six who walks six hours every day to fetch water for her family. They need 40 liters a day, but Meliyio can only carry half that (which weighs about 40 pounds), which means that the family never has enough water for its basic needs. Does her marginal utility for water not exceed that for diamonds?

• “Conspicuous Consumption.” Thorstein Veblen would undoubtedly have considered diamonds the epitome of conspicuous consumption, which, in The Theory of the Leisure Class, he defined as buying things you don’t need as a public display of your wealth and status. “Such “useless activities,” he wrote, “[provide] a means of reputability to the gentleman of leisure.”

Adam Smith did add a few wrinkles, such as the fable of the thirsty merchant in the Arabian desert, whose predicament makes him realize the true value of water and who is probably quite willing to exchange all his diamonds for a cup of the stuff.

But the real paradox is not one of economic theory; it is an evolutionary enigma: we are surely the only species on the planet dumb enough to consider diamonds more valuable than water. And the consequence is that, while we are not running out of diamonds, we are running perilously short of potable water.

*Particularly before the industrial and information revolutions discovered new uses for diamonds.