Question

6. Describe the theory of value that Adam Smith believed was applicable to 18th century commercial society. With reference to the so-called Diamond-Water Paradox, did Smith believe that use-value (utility) could be seen as the regulator of exchange- value?

Answer 1

The labor theory of value states that the relative prices between the products are explained by and likely to tend toward a "natural price," thus indicating that the relative amount of labor that goes in their production. In economics, the theory of value during the 18th to 19th centuries became applicable and dominant over the subjective theory of value. Adam Smith believed that the commercial society distinguishes sharply the self-interested from sympathetic relations and thus is needed for the spread of personal relations based on sentiment and sympathy. Adam Smith propose that labor was the original exchange money for all the goods and thus when more labor is employed in production, the higher will be the value of that good in exchange with other goods on a relative basis.

The paradox of value (also known as diamond-water paradox) demonstrates the labor theory of value i.e. ultimate worth of a commodity’s is the total of all labor invested in the production of commodity, and not necessarily by its utility. Diamonds command a higher price in the market than water. Though water has high utility, but at the same time very low marginal utility in comparison to diamonds as they are scarce. According to Smith the practical things that people use in routine activities usually have no or little value in exchange.