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Why is an ounce of diamond much more expensive than an ounce of water?

This relates to the question of Unit 1 of ECON 103:

Why is an ounce of diamond much more expensive than an ounce of water? Water is essential for survival, but diamonds are non-essential.

The expected answer from Austrian economics, I suppose, is that marginal analysis tells us that if we have the usual abundance of water, the value of the next ounce of water is near zero. Whereas if there is the usual scarcity of diamonds, the value of the next diamond is very high.

However, based on my understanding of the history of the diamond trade (which admittedly is based on a single documentary that I saw years ago), diamonds’ value is highly artificial, because both their need and their scarcity were engineered.

On the one hand, the diamond cartel executed an incredibly successful marketing campaign to ingrain in people’s minds the image of diamonds as the standard token of love and commitment a man must give to his woman to ask for her hand in marriage. So, a previously useless trinket was masterfully inserted into the deepest “biology” of the human species: it became a keystone element in the mating ritual.

On the other hand, the diamond cartel succeeded in acquiring nearly the entire global production of diamonds, thereby largely controlling the market supply. They were able to make the good scarce (and hence “economic”) by releasing only a small fraction of the diamonds onto the market. There is also a strong fashion component within the market, by which certain types of diamonds are made more desirable some years, and then less again, carefully engineering the supply to jewelers.

I would be very interested in fellow students’ take @fischup @zaills (or Saifedean’s!) on this.


Tagging some more of my fellow students! :slight_smile: @librebell @billy_taylor

The Austrian School doesn’t tell you anything about how humans give something value. This is a topic for psychology or biology. It doesn’t matter if the thing you are trying to sell only has value because of a marketing campaign or because it is necessary for your survival.

The Austrian School also doesn’t tell you why certain natural resources are scarcer than others. That is a topic for physics or geology.

All economists can say about this problem is that there is a certain demand for a certain good, and the supply is limited in some way. With this information you can begin to predict what the price for such a commodity might be. It doesn’t matter how demand and supply came to be as they are.

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Thanks for your input.

I understand your point, but let’s take a slightly broader view than any particular discipline.

Saifedean is attempting to teach economics as the study of human choices under scarcity. Surely it makes sense to also think about how humans create scarcity in order to influence the choices of their fellow humans. After all this is human action as well. It seems like a complete theory of economics should address it.

I think that you have grasped the overall concepts nicely.

I just want to note that the Austrian perspective isn’t so different from the overall marginalist analysis as Mises was actually the person who was able to push marginalist views through Maclup and others to the “mainstream” economics.

The Austrian perspective is very “thin” in the way that it doesn’t force one to have particular commodities, mentalities, etc. It just analyses the situation from the very particular embedded (but still) abstract view as the starting point is the methodological dualism standpoint.