Diamonds are Forever - Cost and Price
Last week, I posted the first in a series of articles on diamonds (but really about the economic point of view). Here's part 2.
Diamond mines are expensive.
The heavy machinery used to excavate diamonds likewise comes with a hefty price tag.
Unsurprisingly, diamonds themselves can be jaw-droppingly pricey. The Pink Star diamond, mined in 1999, and about half the size of a strawberry, sold at a 2017 auction for $71 million. And that was 2017—so $71 million meant something.
This all raises the question of whether there is a causal relationship between the price of diamond inputs (mines, equipment, labor, etc…) and diamonds themselves. And if so, which direction does the causation run?
Classical, pre-Marginal Revolution economists suggested that high input prices were somehow transmitted to the price of consumer goods—at least in the long run.
Yet, this view mires us in insuperable circularities. For instance, how to explain the price of bread? The Classical economists appealed to the price of labor inputs (wages) necessary to produce bread. But what explains those labor input prices? Well…the prices of all the stuff that sustains workers, including…bread.
Suffice it to say that the Marginal Revolution corrected this mistaken perspective on causality. A brief thought experiment may be clarifying. Suppose that international demand for diamonds collapses—perhaps because of mass conversions to a religion that condemns diamonds as excessively showy.
If diamond mines were exclusively capable of producing diamonds, if mines had no other use, such widespread conversions would cause mines to lose all their value. Simple once you see it, the Marginal Revolution showed that value—and prices—flow from final consumer goods like diamonds back to input prices like mines, not the other way around.
Botuobinskaya, a Russian mine opened in 2015, is expected to yield about 1.5 million carats of diamonds annually for forty years. While I can’t find the mine on Zillow, one would expect a hefty price tag to accompany this plot of barren, desolate earth. People love their diamonds, which is why they’re willing to pay a lot to own them. Accordingly, mines capable of yielding large quantities of high-quality diamonds are outrageously expensive.
Yet, not every input in the diamond production process commands jaw-dropping compensation. Lapidary—gem cutter—wages are not particularly high. And like all prices, wages are set by the interaction of supply and demand. While the demand for diamonds is substantial, the supply of lapidaries is also large relative to that demand. The job simply doesn’t require the skills of a professional athlete or a CEO. If only a handful of people could become lapidaries, we’d expect higher wages for them, all else equal. Here we see the insights of the Marginal Revolution again, this time applied to labor markets.
Such basic, supply and demand reasoning should inform our thinking about wages in every market. For instance, teachers aren’t paid much. That’s because many people can become teachers. They’re the water of the Diamond-Water Paradox; NFL quarterbacks are the diamonds.
Imagine a world where teachers are billionaires. The implication would be that the skills required for teaching are extremely rare, only a few people each generation possessing the requisite capabilities.
In such a world, teachers would be well-paid, but children would be illiterate.