Paradox of value

This phrase was first used by Scots economist Adam Smith (1723-1790). In his theory he wonders how a diamond can be so tremendously valuable, but have no inherent worth i.e. it is not necessary to life, whilst water which is central to living is practically worthless.

He recognised that it was possible that this was the case because water is plentiful but diamonds are not, but this would not account for the price of the commodity not the value. Yet we would all value a diamond more than a jug of water.

He concluded that the difference in value was caused by the fact that diamonds are labour intensive in the sense that they have to be extracted cut, shaped and polished, whereas water can be esaily obtained by anyone. This means that water may have a greater use value than diamonds, but it has a much lower exchange value and this was his paradox of value!

The paradox of value addresses why absolute necessities such as water are valued (priced) so cheaply, while frivolities like diamonds are highly valued and command outrageous prices.

The paradox of value refers to the fact that very useful goods (e.g., water) can have very low prices, whereas goods that are not necessary for survival (e.g., diamonds) can command high prices.