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  • ECO11, Principles of Economics, Introduction

    Posted by Lynne on February 23, 2022 at 23:27

    I’m trying to think through the homework (which reminds me of a riddle – why is a raven like a writing desk?).

    When I homeschooled my large family and taught a homeschool coöp, we discussed Austrian economics and read some high-school-level books and watched some of the videos on the Mises Institute website, but this question is challenging.

    I’m going through each sub-unit of the intro and jotting down ideas about water and diamonds, however, I live in the desert and could easily imagine an ounce of water being more valued than an ounce of diamond (especially in June, when it can get to 120˚ or hotter), which is either complicating my thought process or helping it; I’m not sure which.

    Does anyone have any hints or advice as I work through this question (please, no spoilers)?

    Thank you!
    Lynne

    Eli replied 1 month ago 3 Members · 3 Replies
  • 3 Replies
  • Stefano

    Member
    May 19, 2022 at 04:23

    I’ve come here expecting to discuss the matter too!

    I tried to explain myself using the marginal nature of value:

    – we need to drink a few liters of water a day, so it’s likely that an ounce of water comes at a time and place where we already had some – and if we are thirsty, we make sure to have some readily available. In the desert (beautiful in Dune from Herbert) water is a matter of life and death because of its scarcity, so we are close to the “zero”, or maximum marginal value, and people might be ready to kill for some of it

    – diamonds on the other hand are very scarce and hard to make, so it’s very likely that an ounce of it is “zero” in almost every free trade it’s subject to, which means maximum marginal value almost all the time. Therefore it’s very likely that an ounce of diamonds is not held readily available by most humans. To disprove my point, no human would prefer to hold diamonds while dying of dehydration at an oasis, so there are exceptions as well.

    – the conclusion is around price(or cost) and value, but I’ll stop here to keep the thread without spoilers

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  • Lynne

    Member
    May 22, 2022 at 22:25

    Awesome, Stefano! Thanks for jumping into the discussion!

    I think that maybe the answer is included in the question which asks about the difference in how expensive one substance is when compared to the other. Expense refers to price which is a function of value, right? But values are subjective, hence there isn’t just one price for something, but various prices depending on the parties who are trading. So why would someone value an ounce of diamonds more than an ounce of water?

    I think that part of the equation has to do with the relative scarcity of each item (one being scarce and the other not for most people).

    Might it also have to do with the amount of work that goes into each (does that relate back to scarcity?): water requires some treatment (unless one finds an artesian well or other clean source straight from nature, but how rare is that, anymore?) and the diamond requires a lot of work to dig from the ground and to make it either pretty for jewelry or useful for industry. Water treatment benefits from economies of scale, thus making the next ounce less expensive than the first treated, but diamonds don’t benefit from those economies. (But the amount of work that’s gone into something isn’t always going to make that something valuable to someone else. Two chefs, one really good, one not so much; two meals, both with a lot of work, one worth buying, one not. (I think I think too much 😊).)

    However, as we’ve both mentioned, values are subjective and can change. I know someone who was stranded in the desert when his car died on a day that reached 122˚F (pre-cell phone); he was grateful that he hadn’t grabbed a 5-gallon jug of water, but three 1-gallon jugs, because a 5-gallon jug would have been too heavy to carry as he and his companion walked to where they could get help. In that case, more water wouldn’t have been better (but diamonds would have been useless). So values change.

    Am I close?

  • Eli

    Member
    May 26, 2022 at 15:49

    Hello everyone,

    I am glad I found this thread, as I am attempting to think through the same question! Stefano, your assessment makes a lot of sense to me, and I would imagine that is the correct train of thought. With scarcity giving the conditions for someone to make a valuation, the valuation has to occur at the margin. Since a large majority of people live with access to water or have stored water available, the valuation of an ounce of water is much less than the valuation for a diamond, which is most likely much more scarce in their area.

    Other factors to consider: running water would decrease the valuation immensely, especially if that water is affordable. This would also cause second order, third order, and higher order uses of water to have less value, because the water is so readily available.