Question

At the end of Book I, chapter 4 Smith introduces the theory of value through the "diamond-water paradox." Why does Smith see the contrast between the exchange value of diamonds and water as a paradox? How does he resolve it? How about Marx? Jevons or Menger?

Answer 1

Smith sees the exchange value of diamonds and water as a paradox because even though water is more useful for existence it commands less value than diamonds in the market . In other words diamond is more valuable than water.

Adam Smith resolves this paradox by stating that a word value has two meanings , value in use and value in exchange.Goods which have more value in use have less value in exchange as for eg water.Again goods which have more value in exchange have less value in use.As for eg diamond.He observed that even though life cannot exist without water and people can survive without diamonds , diamonds are more valuable than water. Smith says that the marginal utility theory resolves this problem As because water is plentiful and diamonds are scarce, the marginal value of diamond is more than marginal value of water.

Jevons , Menger explained diverse economic phenomena and resolved the paradox.No one chooses between all of water and all of diamonds is what they explained.People choose between discrete units of water and discrete units of diamond.The difference lies in that Adam Smith and Karl Marx insisted on subjective nature of economic value.