Origins and Smith's distinction
The idea that rare things are precious appears as early as Plato's Euthydemus, and before Smith writers such as Law (1705) and Galiani (1751) had already used the comparison of water and diamonds to argue that utility and scarcity together create value. Kauder (1953) traced this lineage of utility-based value theory from Aristotle through the eighteenth century. In Book I, Chapter 4 of The Wealth of Nations, Smith (1776) wrote that value has two meanings, value in use, the usefulness of a particular object, and value in exchange, the power to purchase other goods, and that water has great value in use but scarcely any in exchange, while a diamond is the reverse. He went on to explain exchange value by the labor needed to produce goods, and Ricardo (1817) systematized the labor theory of value.
The marginalist resolution
In the early 1870s, Jevons (1871), Menger (1871) and Walras (1874) independently argued that value depends not on a good's total utility but on the utility of one additional unit, its marginal utility. Water is so plentiful that the last glass yields little utility, while diamonds are scarce, so one more yields a great deal. Given diminishing marginal utility, water's total utility can be far larger while its price, which follows marginal utility, stays low, and the paradox disappears. Böhm-Bawerk (1886) illustrated the point with examples such as water in the desert and developed the Austrian school's subjective theory of value.
Marshall's synthesis and debates in the history of thought
Marshall (1890) argued that asking whether price is governed by marginal utility on the demand side or by cost of production on the supply side is like asking whether the upper or the lower blade of a pair of scissors cuts the paper, and he united the two views in the framework of supply and demand. Schumpeter (1954) and Blaug (1997) judged that Smith's neglect of utility theory already available to him sent classical value theory down a detour. White (2002), by contrast, argued that the received view that Smith failed to solve the paradox is a reconstruction by later economists, so the paradox has also become a debate about how the history of economic thought is written.
FAQ
- What is the diamond–water paradox in simple terms?
- Why is water, which we need to live, so cheap, while diamonds, which we can easily do without, are so expensive?
- How does marginal utility explain it?
- Price depends not on how useful a good is in total but on how useful one more unit is. Water is abundant, so one more glass is worth little; diamonds are scarce, so one more is worth a lot.
Sources reviewed: 2026-10-26
References
- Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan and T. Cadell.
- Plato. (c. 380 BCE/1997). Euthydemus. In J. M. Cooper (Ed.), Plato: Complete Works. Indianapolis: Hackett.
- Law, J. (1705). Money and Trade Considered. Edinburgh: Andrew Anderson.
- Galiani, F. (1751). Della moneta. Naples: Giuseppe Raimondi.
- Ricardo, D. (1817). On the Principles of Political Economy and Taxation. London: John Murray.
- Jevons, W. S. (1871). The Theory of Political Economy. London: Macmillan.
- Menger, C. (1871). Grundsätze der Volkswirthschaftslehre. Vienna: Wilhelm Braumüller.
- Walras, L. (1874). Éléments d'économie politique pure. Lausanne: L. Corbaz.
- Böhm-Bawerk, E. von (1886). Grundzüge der Theorie des wirtschaftlichen Güterwerts. Jahrbücher für Nationalökonomie und Statistik, 47, 1–82, 477–541.
- Marshall, A. (1890). Principles of Economics. London: Macmillan.
- Schumpeter, J. A. (1954). History of Economic Analysis. New York: Oxford University Press.
- Kauder, E. (1953). Genesis of the marginal utility theory: From Aristotle to the end of the eighteenth century. Economic Journal, 63(251), 638–650.
- Blaug, M. (1997). Economic Theory in Retrospect (5th ed.). Cambridge: Cambridge University Press.
- White, M. V. (2002). Doctoring Adam Smith: The fable of the diamonds and water paradox. History of Political Economy, 34(4), 659–683.