Smith and Others Knew Their Water from their Diamonds

It’s always pleasurable to read Adam Smith’s contributions to the history of economics that are presented correctly. Last year I had occasion to correct statements to the effect that Smith ‘discovered’ or asserted ‘first’ the diamond water paradox between the use and exchange values of an economic good. He stated the paradox, of course, in Wealth of Nations but so had several earlier authors before him.

So ‘Hedgefund guy’ in the Mahalonobis Blog is spot on in his comment on a statement in the Wall Street Journal (WSJ), 16 January:

“Diamond-water paradox applied to synthetic diamonds. Doh!”

“From last weekend's WSJ:

These lab-made diamonds have begun trickling into retailers at prices below those for natural diamonds of similar size and sparkle.
...
De Beers extols the permanence of natural diamonds and attempts to make them seem special. They're "billions of years in the making," it says on its diamond information Web site, adiamondisforever.com. "Adding to the mystery and aura of what make diamonds so sought-after" is the fact that "approximately 250 tons of ore must be mined and processed in order to produce a single, one-carat, polished, gem-quality diamond."

I think these diamond producers don't realize that higher cost doesn't imply higher value. In fact, the paradox of value is also known as the diamond-water paradox, because it notes that although water is on the whole more useful than diamonds, diamonds command a higher price in the market. Adam Smith famously propounded on the paradox in The Wealth of Nations, though heavyweights such as Copernicus, John Locke, John Law and others had previously tried to explain the disparity in value between water and diamonds. Marginalism brought about the birth of neoclassical economics and argues that it is not the cost or use-value of a good that determines its price but its marginal utility. Thus the marginal value of a synthetic diamond, like that of a cultured pearl, is unaffected by its provenance. I doubt anyone feels sorry for diamond makers grasping at straws.”

Comment
I shall be happier when I see more of this sort of thoughtful comment. Smith’s contribution to economics is strong enough not to require false ascriptions of views that were also presented by others.

Now, I know that scholars know this, but graduate economists, and others who attended Economics 101 (or what I see is called Ec10 at Harvard), often shorten the list of other contributors simply to Smith, stating or implying that the paradox was original to him. Clearly, it wasn’t.

To the list of others offered by Hedge fund guy we could add: Plato, Samuel von Pufendorf, Grotius, Harris, Cantillon, and Mandeville, and his own tutor, Francis Hutcheson. Clearly, not a lot of commentators on Smith know that. But as clearly, Hedgefund guy does, and so do you now, if you didn’t before.