The Paradox of Value
by Gabriel Cross
Water is essential for life, and yet its market value is almost nothing. Diamonds serve no functional purpose for most people, and yet command an incredible price in all markets. This paradox has provided an interesting puzzle which every school of economic thought has solved in its own way. The most widely accepted solution today is the subjective theory of value, which holds that we value things not according to their utility or necessity, but by several factors that affect how much we want them.
The phenomenon of subjective value is often expressed as “marginal utility,” an insight of the Austrian School that has been absorbed by the mainstream of economics. The basic theory is that a thing’s value is set by its relative abundance and accessibility, and the value to an individual changes according to how much the individual already has. The traditional explanation (first formulated by Eugen von Böhm-Bawerk) involves how a subsistence farmer might value his grain. With one sack of grain he can produce enough food to survive, but with two he can gain enough nutrition to work harder and become stronger. A third sack of grain would allow him to feed his live stock. A fourth could be made into whiskey. A fifth sack has no utility to him other than to feed the pigeons to entertain himself. In this example, each sack of grain is worth less than the last, and more sacks beyond those five would be worth next to nothing. As his supply approaches zero, however, 1 sack of grain is worth his entire existence. This change in value to the individual based on the incremental decrease in usefulness when adding one more unit at a time is called the “marginal utility curve.”
In most societies that can support purely abstract professionals such as economists, water is abundant and accessible, and therefore has little value as a means of exchange. It is generally provided for by a municipal agency or private company contracted by a municipal agency. The cost of providing the water per unit is quite low, and so the price of water to the individual is almost negligible. However, as water supply is threatened even slightly, total chaos is not far behind.
In drought situations, when different uses begin to compete for limited supplies, the marginal utility is often expressed in skyrocketing prices and/or government control of water uses. Both of the above are extremely unpopular and lead to contentious public discourse. In extreme drought situations, when the potable needs of the population cannot be fully met, conflict is often not far behind. History is full of stories of groups fighting over access to water in arid climates around the world.
The marginal utility curve for water can therefore be said to have a very sharp tipping point. When supply is well above potable needs, the curve is quite elastic, i.e. removing some water does not affect its value significantly. As supply approaches potable needs, the value suddenly begins to increase exponentially. Infinite value, the point at which something is so valuable that people will fight and kill for it, is reached as supply drops below the potable needs of the population. Indeed, this curve is so tight, the tipping point so severe, that often the increase in value is expressed only in conflict and legal battles, and market rate is hardly affected at all.
There are a number of other goods that have similar extreme tipping points in their marginal utility curves, such as edible food, breathable air, workable land, and anything else that can be considered necessary for life. Land value is affected by many factors, but its value approaches infinite as the population grows beyond the ability of the land to produce food. In his book Plan B, Lester R. Brown suggests that this was a major underlying cause for the Rowandan Genocide of 1994, as their population doubled from 1950 to 1994. Food shortages often lead to violence or authoritarian measures to avoid it.
Breathable air is not competed over in the same manner, but its loss inevitably results in death. The London Fogs of the late 19th and early 20th century, a by-product of burning coal in the city, at their worst resulted in the death of 1000s of people per day. Mostly those affected were the elderly, children, and those already in poor health.
Diamonds, on the other hand, are not affected by the same kind of tipping point marginal utility curve, because they always have exactly the same utility. Namely, they provide a means of concentrating a large sum of money in a small, easily transported and liquidated form. Buying one more diamond does not increase or diminish this utility. Furthermore, this utility is not necessary for any aspect of life; it is merely a convenience. Diamond supply in and of itself, therefore, does not have the capacity to turn otherwise law abiding citizens against one another. People will kill for diamonds, true, but generally only when their ability to access food, water, land etc. is really what is at stake. Conflict diamonds come from countries which cannot support their entire population with access to the necessities of life.
The paradox of value is not, in fact, a paradox at all. When there is enough water to go around, it has no value in a market. When there is not enough, it never makes it to market, but its transportation, use, and exchange affects whether or not there is a market for anything else at all. The real puzzle is that people do not want to expend any effort to protect, secure, or manage their water until there is a crisis. Many people today seem to forget that the EPA was created to reduce pollution in our rivers, which between 1950 and 1970 were literally catching on fire because they were so burdened with waste. Now that our rivers are once again fire-proof, suddenly no one wants to pay the bill, and the EPA is considered a useless or redundant institution.
Having the foresight to manage these resources with extreme tipping points in their marginal utility curve is extremely important for a stable economy and the maintenance of a market in which people want to participate. Keeping our air, water and food supply clean and safe, and making sure that everyone has access to the basic necessities of life, in other words the primary goals of the sustainability movement, can therefore be thought of as a prerequisite to a functioning free market economy.