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Julia Sanders discusses why diamonds
are more valuable than water with economist John Tabbot.
JULIA: Welcome to tonight's show. I'm
Julia Sanders. We have with us Mr. John Tabbot. It's great to have you here
with us tonight.
TABBOT: Thank you for inviting me here
today.
JULIA: OK. So, today we are going to
discuss why diamonds are more valuable than water.
TABBOT: Yes, it is a very strange
notion isn't it? After all, water not diamonds is essential for life.
Classical economists puzzled over this question and named it the "value
paradox".
JULIA: OK, so why are diamonds more
valuable?
TABBOT: Well, scarcity of goods is what
causes humans to attribute value. If, we were surrounded by an unending
abundance of both water and diamonds, we probably would not value either very
much.
JULIA: That makes sense.
TABBOT: Scarcity is an important factor
in how we value an economic good.
JULIA: What defines an economic good?
TABBOT: Economic goods have three
attributes - first of all, there must be a human need or want. Secondly,
there must be an opinion that the thing in question will satisfy that need or
want. The last point is that there must be command or control over the
ability to satisfy this want or need.
JULIA: So something, like good weather
would not be an economic good?
TABBOT: Exactly, I may know that a nice
sunny day would improve my mood. But, we do not have control over the
weather. Therefore, it is not an economic good.
JULIA: So now you have defined what
economic goods are and say that scarcity is how we value them?
TABBOT: Yes. We value an economic good
only if there is an insufficient quantity to satisfy all human desires for
that thing. Scarcity implies that we will rank our wants and this process
results in economic activity.
JULIA: So something like, the air we
breathe would not be economically valuable?
TABBOT: Under normal circumstances yes.
In the case of a SCUBA diver it is very much an economic good with value.
JULIA: Right!
TABBOT: Consumers will use whatever
resources they have at their disposal to satisfy their most important wants.
Our value system is determined by our ranking of wants.
JULIA: Can you provide an example?
TABBOT: Yes. Assume you are a farmer
with three horses and two cattle. Each of the horses is interchangeable with
one another.
JULIA: So all horses are identical?
TABBOT: Yes, we have in a sense turned
them into a commodity. And not only the horses, but each cow is
interchangeable as well. Now let us assume that you rank the importance of
the animals as follows - tilling the fields is the most important and you
need a horse for that. Secondly, you need a horse to pull your wagon to town.
JULIA: This must be a historical
example.
TABBOT: Seems to be, yes. So the two
top needs are fulfilled both by horses. Now we proceed down our ranking of
wants and see that we require one cow to produce milk. Then another cow is
required for cheese and butter.
JULIA: So it goes horse, horse, cow,
then cow?
TABBOT: Correct. The third horse, and
final animal, is required for recreational riding. This is regarded as being
the least important of the five wants. Okay. So now comes my question - which
is the most valuable animal in this example?
JULIA: The horse.
TABBOT: Wrong.
JULIA: But the horse fulfills the most
valuable want.
TABBOT: Yes, it does. But you see, you
have fallen into the same trap as the classical economists.
JULIA: Please explain?
TABBOT: I will prove to you that the
cow is the more valuable animal through the following scenario. Imagine that
these animals are all inside a barn that is on fire and you can save only one
of them. Which one would it be?
JULIA: It would be the horse of course.
TABBOT: Yes, if only one animal could
be saved it would be the horse. If you could save two animals?
JULIA: I would save the second horse.
TABBOT: Yes. And now, if you had
sufficient time what would be the third animal?
JULIA: The cow used for milk.
TABBOT: And the fourth animal?
JULIA: The second cow.
TABBOT: So, the remaining animal would
be a horse? That is my point. As this example shows, the cow is more valuable
than the horse. But, only if you have the third horse.
JULIA: So, if you only have two horses
and two cows, than the horse is more valuable?
TABBOT: Yes. But since you have three
horses, the value of a horse is less to you than a cow. This is what
economists refer to as "marginal utility". We can say that the
marginal utility of the cow is greater than that of the horse.
JULIA: But only because the farmer has
more horses than cows.
TABBOT: Yes. But we must keep in mind
our ranking of wants. If we had deemed the recreational riding as being more
important than making cheese and butter, then the horse would be the more
valuable animal, even though they outnumber the cows. So raw numbers alone do
not determine which is more valuable.
JULIA: Okay. I understand that.
TABBOT: Now we have a framework to
understand why diamonds are valued more than water even though water is
ultimately the more important of the two.
JULIA: Which explains why a person in
the desert dying of thirst would trade his diamonds for water?
TABBOT: Yes, and how under normal
circumstances diamonds are much more valuable.
JULIA: Thank-you for your explanation.
We will now take a short commercial break.
Mike Hewitt
Editor
DollarDaze.org
Mike
Hewitt is
the editor of www.DollarDaze.org, a website
pertaining to commentary on the instability of the global fiat monetary
system and investment strategies on mining companies. Disclaimer: The opinions expressed above are not
intended to be taken as investment advice. It is to be taken as opinion only
and I encourage you to complete your own due diligence when making an
investment decision.
©
2007 DollarDaze
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