The Diamond-Water Paradox: Why Are Diamonds Worth More Than Water?

The Diamond-Water Paradox has stumped economists for a while now, so what does this have to do with our work? I’d argue a lot.

The diamond – water paradox stumped Adam Smith. Why are diamonds worth so much more than water? It “shouldn’t” work given the “laws” of economics. Water is, on the whole, more useful in terms of survival (and so much more) than diamonds, yet diamonds command an order of magnitude of a higher price in the market.

Smith “resolved” the paradox in through the Labour Theory of Value, essentially saying the real price of everything – what “everything really costs to the man who wants to acquire it, is the trouble of acquiring it.” He denied that there’s a necessary relationship between price & utility and connected it more towards the cost to produce or acquire the item. Interesting idea but not necessarily complete.

The other (and perhaps more accepted) theory was the idea of Marginalism. Marginalism said that value isn’t determined by how much labour was exerted in its production nor how useful it is in the whole but rather it is determined by its marginal utility. The marginal utility is essentially the question of “how important is this item to this person relative to the next item on their list.”

The supply of water to people is huge because they need it to survive. However, for us living in the west – the marginal utility is low because the supply is abundant, and therefore so is the value. Certainly compared to a diamond. However, to a man dying of thirst in the desert the marginal use for water is extremely high and therefore the value will outrank a diamond up until the point where he thirsts no more and likely to the point where he can be assured his water supply is secure, stable and clean. Then the value will lessen relative to the next item of relative utility.

So why the boring economics lesson? Two practical examples come to mind, I’m sure you can think of more:

1. The theory of Marginalism, when we use it in this example shows how all humans – here in Canada and in Uganda might treat things that start precious and rare (ie clean water after a lifetime of going without) but quickly become normal. Can we design programs that continue to increase the authentic real marginal utility of water and therefore increase its value in the community for the long term?

2. Marginalism applies also to the revenue side of charities as well. When we look at our financial partners, our donors will give $100, $1000, $100 000 should we deliver the equivalent value to them for that gift. It sounds a bit crazy but think about it. Can we create utility and opportunity within our work to give people a sense of authentic, high marginal utility and therefore high value?

We’re in the business of helping humans thrive – here in Canada and in Uganda. We happen to do this through clean, safe water, but part of that thriving is understanding how we derive value, through marginal utility and a whole host of other means and delivering it in new, and creative ways to sustain value for the long haul.