Diamonds are Forever: A Primer on the Economic Point of View
A few years back, I wrote a little primer on economic reasoning for the Independent Institute. It contained 14 "lessons," each of which centered on what a diamond can teach us about economics. Over the next 14 weeks, I'll post one "lesson" a week.
Forged miles beneath the earth’s crust.
Eternal—or as close as we get in this vale of tears.
Objects of endless fascination and avarice, the diamond is at times witness to bloody conflict in its production and exchange (more on that below).
Diamonds have proven irresistible to the scholar’s pen (admittedly, a low bar) and the professor’s lecture (admittedly, a lower bar).
They’re also my answer to a friend’s question recently posed to me.
“Suppose you had to teach a semester-long class,” he began.
“So far, so good,” I’m thinking.
“Using examples from only one object.”
“That’s a lot harder,” I chew on the problem.
“What would it be?” he asks.
It wasn’t but a moment before I hit on my answer.
A typical semester includes about fourteen weeks of instruction.
How much economics could I teach, using only diamonds for illustration? Pretty far, I think, and far enough.
Here’s a quick whirlwind tour—fourteen topics, fourteen weeks.
I’d have to teach the class to flesh out the details, but this is a start.
Value
Where else to begin but the diamond-water paradox?
This famed intellectual puzzle is not just the premier diamond-using economics example. It also elucidates what’s at the core of contemporary economic theory: subjective marginalism.
The paradox ponders: Why are diamonds—a frippery—more expensive than water—necessary to sustain human life?
Some version of this question flummoxed Aristotle, Plato, Aquinas, Copernicus, Locke, Benjamin Franklin, Adam Smith, and a host of other luminaries.
The solution came by way of a watershed intellectual event called the Marginal Revolution.
Disarmingly simple, the puzzle’s key resides in the fact that humans don’t value entire classes of items. Instead, they always choose between “a little more of this” and “a little less of that.”
Since water, in most contexts, is so much more plentiful than diamonds, a little more water is much less valuable than a little more diamonds. We can access water for free—open your mouth when it’s raining. We have so much water that we “waste” it in frivolous activities like water-balloon fights or in stunts like the once-popular ALS ice-bucket challenge. Most people in most places would satisfy a relatively unimportant goal with an additional gallon of water.
Change the context, change the results. Someone dying of thirst in the desert will sign their life away for a glass of water. An entire cup—even a bucket—of diamonds? They’ll pay pennies, or nothing at all.
Were one confronted with the fantastical and unenviable choice of eliminating either all the water or all the diamonds from earth in a reverse genie situation, a non-sociopathic chooser would clearly banish diamonds.
Likewise, if tomorrow we discovered a diamond waterfall hidden in the Amazon rainforest—an endless stream of diamonds—their price would plummet. Diamonds would be like water is now. You’d go to your favorite restaurant and ask for a cup of diamonds, which your host would oblige without blinking an eye.
In fact, scientists estimate that there are over a quadrillion tons of diamonds buried deep beneath the earth’s surface. Perhaps one day diamonds will serve as children’s baubles—and little else.