Talk:Paradox of value/Archives/2013

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George Stigler on the paradox

George Stigler thought that the paradox was a "meaningless statement". I agree with his standpoint. Quoting his 1950 JPE article, Stigler said (p. 308):

"The paradox-that value in exchange may exceed or fall short of value in use -was, strictly speaking, a meaningless statement, for Smith had no basis (i.e., no concept of marginal utility of income or marginal price of utility) on which he could compare such heterogeneous quantities. On any reasonable interpretation, moreover, Smith's statement that value in use could be less than value in exchange was clearly a moral judgment, not shared by the possessors of diamonds. To avoid the incomparability of money and utility, one may interpret Smith to mean that the ratio of values of two commodities is not equal to the ratio of their total utilities. Or, alternatively, that the ratio of the prices of two commodities is not equal to the ratio of their total utilities; but this also requires an illegitimate selection of units: The price of what quantity of diamonds is to be compared with the price of one gallon of water?"

Stigler's argument is twofold: first, there is the SUBJECTIVITY issue (economists agree on value being a subjective concept, but the paradox states that the value of use of water is greater than its value of exchange, for every living person on earth and on any context). Second, there is a COMPARABILITY issue, as is well explained in the above quote: the paradox implies an illegitimate selection of units. --Forich (talk) 02:57, 15 October 2008 (UTC)

Well, you can certainly add this (with citation) to the article. I think myself that Stigler's argument is circular: Smith doesn't accept the "subjectivity" of value (which "economists agree on") and has no knowledge of "marginal" concepts (a shibboleth by which the orthodox know each other); therefore he is wrong; therefore "marginal" and "subjective" concepts are right. Smith does not state the use-value of water is always greater than diamonds, but argues that this is usually the case and that nevertheless the consumers pays more than diamonds. Smith is trying to explain the external market price that most of us experience, i.e. when we're not in an Amish village or dying of thirst in the desert. A theoretical mindset can always ignore practical reality. As to the comparability, that is set up by the price phenomenon itself: the "value" of each good is directly comparable (and to an extent fixed whatever our "subjective" circumstances).--Jack Upland (talk) 10:59, 17 October 2008 (UTC)

OK, I'll consider adding the quote, but first I'll read the wikipedia guidelines for proper citing and referencing (it would be my first edit in WP, :=). Now, as for the article, I support both Economizer and Dullfig standpoints and their argument on the subject seem sensible. The first step towards improving this article would be to try to put some of the sterile areas aside, for the sake of article-quality.

Now, about the "practical scenario" -the one where people pay a lot for diamonds and very little for water-, let us reach some agreements on the demand side: let's suppose a world with many identical consumers with identical preferences, (i.e. non-thirsty regular-joe's with no direct business with diamonds). ¿what price are these average guys willing to pay for a glass of water? simply put, if they are treated as the neoclassical homo-economicus, they would like to pay 0 (zero) dollars for it. So why do they end up paying, say 3 dollars? because there is a supply side to the equation and the water sellers need to charge something in order to not to incur in losses. Now lets look at diamonds: average joe would also like to pay 0 (zero) dollars for a gram of diamonds. The seller needs to price the gram of diamond for at least, say a 1000 dollars. The previous analysis doesn't explain the resulting trade that takes place everyday, because it needs to incorporate a key element: barganining.

Depending on the availability of close substitutes, our consumers have a "reservation price", such that a good seller will end up guessing what price can he make the costumer to pay for a glass of water, thus a bargaining process takes place, and a price is finally reached where the transaction happens. Obviously, this "reservation price" is at least 3 dollars (in our water example). Why is that so? Classical economics said: maybe the costumer want to USE the glass of water, thus paying the 3 dollars. Or maybe, the costumer wants to EXCHANGE the glass of water for something else, therefore paying the price. In the case of diamonds, the "reservation price" is at least 1000 dollars. Why is that so? again, maybe the costumer want to USE the diamond, thus paying the 1000 dollars. Or maybe, the costumer wants to EXCHANGE that gram of diamonds for something else, therefore paying the price. Cool, but the bigtime failure of classical economics is that they can't answer: why is the exchange-value of diamonds so high?

The LTV approach answer: "because an incredible large amount of hours was needed for that gram of diamond to reach the marketplace". Wrong. This takes good care of the minimum price the seller is willing to accept at the bargaining we talked about, but it doesn't explain the "reservation price" of the costumers.

Instead, the marginalist approach says: " i) let's forget about those use-and-exchange concepts of value, they are too vague; ii) let's bring again the concept of "close substitute": what exactly is the quantity of water readily available on earth? if water is defined as a liquid that satisifies thirst and gives energy to men, then there is a HUGE amount of it. iii) what is the size of a glass of water with respect to that huge amount of available stock? insignificant. iv) let's use the close substitute analogy with diamonds: what exactly is the quantity of diamonds readily available on earth? define diamonds as a byproduct of nature beautifully associated with strength, purity, and mathematical symmetry, then it's a very scarce product; v) what is the size of a gram of diamond with respect to the total available stock of this product of nature? its a great proportion, indeed, hence its ridiculously high "reservation price" even for a regular-joe. --200.6.187.136 (talk) 07:01, 18 October 2008 (UTC)

Well, I don't think "the minimum price the seller is willing to accept" is so irrelevant. And the argument about rarity of diamonds is fundamentally a restatement of the LTV argument, as rarity implies more work to produce.--Jack Upland (talk) 10:27, 14 May 2009 (UTC)

"the argument about rarity of diamonds is fundamentally a restatement of the LTV argument, as rarity implies more work to produce." No, no it isn't and no it doesn't. This is a very simplistic point. There are diamonds that sell for tens of millions. There is no LTV that can account for that. The cost to produce a flawed $100 diamond, and the cost to produce the multi-million dollar diamond are virtually the same relative to their price-differential. What makes the valuable diamond this valuable? Maybe it is significantly larger, or uniquely colored. Certainly, these qualities make it rare. But the identifiable production costs are virtually no different than the very common flawed diamond that sells for $100.

But let's exclude the different, rare diamonds, and just say there are only 'diamonds', and they are all the same, and currently are priced on the market at $100 a piece due to current supply vs demand. Then a cartel forms to control production. This cartel wants to quadruple the price of the diamond, and thus limits their production to reduce supply on the market. The price would go up simply because they are more 'rare', not because the production cost suddenly rose. So here is a second example of increasing rarity resulting in a higher price with zero increase of, or connection to, the production cost.

(BTW, do people expend effort to produce something, and base the price they charge on the effort they expended (LTV), or do they expend the least amount of effort necessary to produce something, and then charge the price that the market will bear, or its current marginal value (TMU), irrespective of whether that price is barely above their costs, or far above their costs, or even below their costs, as is sometimes the case. The latter condition cannot continue for very long, obviously, and most people avoid it by the expedient of not starting production in the first place, as opposed to simply setting their price at or just above their production cost, irrespective of true market demand.) — Preceding unsigned comment added by 108.178.82.226 (talk) 20:44, 31 July 2012 (UTC)

The effort to find something is a production cost.--Jack Upland (talk) 06:09, 13 October 2013 (UTC)

What does "more valuable" mean in the absence of measurement?

I can make an entirely correct argument that fertilizer is more valuable than gold. Simply compare the total value of all the world's fertilizer to that of an ounce of gold, QED.

The trick, obviously, is that I failed to specify a basis of measurement for the comparison. (It is vague to merely speak of the "same amount" of two different things). So what should the measurement be for this particular paradox to work? Is it mass, or volume, or something else? ± Lenoxus (" *** ") 15:51, 10 October 2013 (UTC)

This is determined on a case by case basis. We are talking about a glass of water (or something of that order) and a diamond.--Jack Upland (talk) 06:18, 13 October 2013 (UTC)