Water Diamond Paradox Adam Smith Summary

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Adam Smith is an 18th-century philosopher and free-market economist. He is known as the father of economics and is famous for his ideas about the efficiency of the division of labor and the societal benefits of individuals ' pursuit of their own self-interest. Smith is best known for two classic works: The Theory of Moral Sentiments, and An Inquiry into the Nature and Causes of the Wealth of Nations. The latter, usually known as The Wealth of Nations, is the first modern work of economics and the book which is considered in this research. This research will discuss chapter four of The Wealth of Nations (WN), specifically Smith’s paragraph of water diamond paradox. It will also include an article of Michael V. White arguing that the paradox…show more content…
White introduces us with Smith’s water diamond paradox, also known as the classical paradox of value. The thesis of the article is that “there was never a paradox for Smith and his successors” (FWDP, 2) and shows why the water diamond paradox is a “fable” (2). The fable is a product of the twentieth century, which is used as an explanation of Smith’s paragraph in textbooks and lectures. The explanation is that the paradox puzzled Smith and his successors can be resolved with “the marginal utility theory (of Jevons) and a partial equilibrium supply and demand diagram” (2). However, there is no evidence that Smith and his successors were puzzled and one paragraph turned into a…show more content…
On one way the paragraph makes sense and the second way the paragraph does not. Mostly the debate depended on the definition of value (and its connection to long period market period prices) because there were different definitions of the term. According to Bentham and Dugald Stewart, utility was used as “a portmanteau term to cover all the wants and desires” (7). Ricardo states that “utility was an absolutely essential precondition, but could not be a measure of value in exchange” (8), which were determined either by the scarcity or by the quantity of labor required to obtain commodities. The second way the paragraph read made it sound incoherent because utility cannot be the measure of value. Smith’s paragraph made sense only in the Ricardian market and therefore explained in terms of supply and demand. But according to the portmanteau definition the paragraph was nonsense, as it says that people would purchase commodities if they had no desire for
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