Tuesday 27 January 2015

The Paradox of Value that Never Was.

With a diameter of 12,742 kilometres, Earth is a small planet. It's certainly much smaller than Jupiter (with a 139,822 km diameter).

Relative sizes: Earth and Jupiter. [A]

And, yet, humans evolved on tiny Earth, not on Jupiter (indeed, couldn't have evolved there).

Is this a paradox? Say, the Earth-Jupiter paradox? I mean, is it paradoxical that our planet, the home of all of humanity, the scenario of all of history, is small in relation to most planets in the solar system and revolves around a star, unremarkable among hundreds of billions of stars in a particular galaxy, unremarkable among hundreds of billions of galaxies?

It may be humbling, but I see no paradox there.

To see a paradox in the plebeian origins of our species, I'd first need to assume, maybe implicitly, something additional: that our species "deserves" a stately, special, or at least big, birthplace.

Since I don't assume anything additional, I don't find the Earth's small size or peripheral location conflicting with the fact our species evolved there. If you like, I've never spent a single sleepless night puzzling that out.

Historically, however, this was a serious matter for many.


As Michael White (White 2002) and others have explained, many, too, claim to have found a paradox in the following passage from Adam Smith's "The Wealth of Nations":
"Nothing is more useful than water; but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it."
The Library of Economics and Liberty (Econlib.org 2015) is a case in point:
"[Carl] Menger used this insight [i.e. marginal utility] to resolve the diamond-water paradox that had baffled Adam Smith (see marginalism)." 
Noted American economist Milton Friedman (Friedman 1999) provides another example:
"He [W. Stanley Jevons] resolved the classic diamond-water paradox—diamonds are a luxury, water a necessity, yet diamonds command a higher price than water—by showing that 'marginal utility'—the utility gained from having one more unit of something—not 'total utility' plays the key role in determining price."
Who should be credited with that, Jevons or Menger? Leaving that aside, if one believes that account, Smith and a host of other luminaries must have spent their nights tossing and turning, their thoughts devoted to solve that riddle: the diamond-water paradox!

But, is this really a paradox?

The parallel with the Earth-Jupiter "paradox" is evident. To be a paradox, it requires one to assume, perhaps implicitly, something additional. For instance, that what one gets in exchange for a good (say, water) should reflect its usefulness.

Since I don't assume anything additional, I see no paradox. Much more importantly, however, Smith himself appeared to see no paradox there. For one, he never wrote anything in WN to the effect that this was a devilish conundrum he had tried, unsuccessfully, to solve. (Check the link above!)

For all we know Smith was fully satisfied with his own solution: "what can be had in exchange" for water or diamonds (i.e. their values in exchange) does not depend on their usefulness (i.e. their values in use), but on their costs of production/labour time, as he explains later.

Friedman's quote above shows his own mistake: Smith never intended to explain value in exchange on the basis of use in value (i.e. "total utility").

For what it is worth, I think Smith wasn't too far off the mark.


When mainstream authors like Friedman claim "marginal utility" solves a centuries-old mystery keeping economic thought from advancing, they are solving a "paradox" existing in their minds, only. It is a claim both self-serving and false. If someone ever badly needed a good night's sleep, it seems, it was them, for they weren't thinking straight.

"Marginal utility" seems to be their imaginary answer to an irrelevant question nobody, but themselves, ever asked.

Econlib.org, (2015). Carl Menger: The Concise Encyclopedia of Economics | Library of Economics and Liberty.
[online] Available at: http://www.econlib.org/library/Enc/bios/Menger.html [Accessed 26 Jan. 2015].

Friedman, M. (1997). John Maynard Keynes. Economic Quarterly 83.2:1-20.
[online] Papers.ssrn.com. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2129832 [Accessed 26 Jan. 2015].

White, M. (2002). Doctoring Adam Smith: The Fable of the Diamonds and Water Paradox. History of Political Economy, 34(4), pp.659-683.

Image Credits:
[A] "Rough visual comparison of Jupiter, Earth, and the Great Red Spot. Approximate scale is 44 km/px." January 14th, 2007. Author: Brian0918 on NASA images. Image in the public domain. Wikipedia.

1 comment:

  1. If every economist was forced to humble himself and walk over to the philosophy department and say, "Could you give me a lesson on Smith and Hume?" the world would be a much better place. Indeed, if heterodox economists were to learn how badly they understand Smith and Hume, they might even make a criticism that actually got to the root of what's wrong with the orthodox.