The mystery of intrinsic value
Money is widely associated with value (the economics textbooks literally say it is a store of value), but that does not mean that all value can be expressed as a sum of cash.
Despite recent turmoil under new management, Twitter is still a valuable source of knowledge, insight and, occasionally, provocative statements that make you question your intuitions. The other week, economics blogger Noah Smith cited an old tweet saying, “The saddest part of free market ideology is that, if you know your job is beneficial to society, the capitalists will use this against you and pay you less, because they know people want to do jobs that help society.” If money corresponds to value, and if we genuinely value those jobs that serve the needs of our society more than others, isn’t it odd that they are generally low paid?
An economic conundrum
None other than Adam Smith, the father of modern economics, was confronted with a similarly puzzling observation. How was it that diamonds, by no means essential to human life and society, were so much more expensive than water, without which humanity would perish very quickly? His intuition was as obvious as it was incorrect: water is easily accessible and requires (well, at least in Smith’s time) little or no processing, while diamonds needed laborious mining and processing, so the reason one was so much more expensive is that it required more costly labour. But if someone simply found a finished, cut diamond, and they took it to market, it would not fetch a lower price than one that had just been processed, despite the fact that it had not cost the seller anything. (As a brief aside, this classic comparison may be about to lose its illustrative power, as lab-grown synthetic diamonds are causing a major drop in the price of this commodity.)
It is not the labour content (or more generally, the overall cost of production) that determines the price of a good, but supply and demand, and marginal utility. If there is enough water to provide everyone with all they need, its price will be low; if diamonds are scarce, and more people want them than there are available, their price will be high. When people have no water and no diamonds, they will…