When we teach an intro economics course one of the early lectures includes a discussion (and resolution) of the “water-diamond” paradox. How is it that something so valuable in use, such as water, has such a low exchange value, while something with little value in use, such as diamonds, has such a high exchange value.
The resolution of course came from the “marginalist” school, which developed independently across Europe in 1871, via Carl Menger, Leon Walras and William Stanley Jevons. They rightly understood that value is subjective, and depends on the particular circumstances of time and place upon which our choices are made.
I typically mention the common modern illustration of misunderstanding of this paradox by paraphrasing a common objection to our modern economy: “Our society has its priorities all messed up. Teachers make, like, $40,000 per year while athletes make like $4 million per year. How sick is it to live in a world where a baseball player is deemed more valuable than a teacher!”
Please let’s not start a foodfight about the value of teachers. One way to get students to understand that there is a difference between marginal values (how much we value that particular person given the way the world looks at that point) and total value (how much “we” value all individuals) is to ask the thought question: which industry would suffer more from the loss of 200 random individuals – the teaching profession or the NBA? Of course it’s the latter – I think there are only 400 or so NBA players, even if the 200 missing players were the 200 worst players in the league, we’d decimate the league.
Another way to frame the thought question is to ask instead, “OK, imagine the world has zero NBA players and zero teachers, would the salary of the first teacher or first NBA player be higher?” Now I am sure you can conjure up scenarios where the NBA player would be paid more, but they’d be extreme. What would you bet if your own money were on the line?
But here is the pithy proof, or empirical resolution, of the foregoing question. We can actually look back at a time when there were few teachers and no professional basketball players. Who was paid more, the first NBA player or the first teacher? And if that is not satisfactory, is there any information to be gleaned from the fact that the teaching profession grew and took hold long before anyone ever imagined an NBA, NFL, MLB or NHL could exist? Did we all value teachers more back in 1913 (maybe we did, after all we did elect a professor as President) and not so today? Could be. There’s no way to prove it, but the evidence suggests otherwise.
Surely if teaching was run like most private businesses, and there was competition between teachers, and no collective wage bargaining, and ferocious competition between schools for the best teachers, then the best teachers in the U.S. WOULD be earning $4 million dollars a year. And education would be improved as a result.
Funny you would post this today, the diamond-water paradox.
Last night at the Amerks game I was standing in line for concessions with my son and noticed the prices. A bottle of plain water was $3.75, while a cup of Tim Horton’s coffee was only $2.00.
It wasn’t all that long ago that a major league baseball player made in the neighborhood of $30k a season and usually had some kind of a job during the winter. The income of the teams themselves, through ticket and concessions sales and, most of all, television rights, in addition to the need for success on the field to maximize that income, has led to the huge increase in salaries. However, it’s not obvious that teams that are successful on the field, at the turnstile or on television are, in fact, financially successful as well. Much of the profit in owning a sports franchise has been in selling it for dramatically more than was paid for it. This might be a bubble situation, too. We’ve seen evidence of this in NHL hockey. Nevertheless, it seems unlikely that a linguistics prof will ever make as much money per year as a left-handed relief pitcher, although he’ll probably have a longer career.
As a long-time Eagles fan and businessman, one can appreciate that big errors can occur when one adds nine zeroes to the price of anything, as in a quarterback’s salary.
As far as water goes, I admit to have missed the boat on that one, foolishly trying to put it through a cow before selling it.
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