Diamonds aren’t forever

The price of the precious stone has little connection to its use value or marginal utility.

Written by Bibek Debroy | Updated: March 8, 2018 1:14:07 am
diamonds, diamond-water paradox, Adam Smith, Nava ratna, jewels, precious stones, Indian express As with all precious and semi-precious stones, unlike gold, there is no clear market-determined price. (Photo: Reuters)

Every student of economics has confronted diamonds fairly early in her career, through what is called the diamond-water paradox, or paradox of value. The paradox predates Adam Smith. In 1776, this is what Adam Smith wrote. “The things which have the greatest value in use have frequently little or no value in exchange; on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: But it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.”

In resolving this, stated simply, initially, there was a labour theory of value. Diamonds cost more to extract than water. Therefore, they are priced higher than water. Subsequently, bringing in the consumer, there was marginal utility. The marginal utility of diamonds is more than that of water. Therefore, they are priced higher than water. Where were diamonds found? Until roughly 50 years before Adam Smith wrote those words, there was no Brazil. (South Africa was discovered 100 years after Adam Smith.) Diamonds meant India.

Nava ratna means nine jewels. What are the traditional nine gems? The concept exists elsewhere in Asia too, not just India, and not only in Hinduism. The standard list, in India and in Hinduism, is — ruby (manikya), pearl (muktaphala), red coral (vidruma), emerald (marakata), topaz/yellow sapphire (pushparaja), diamond (vajra), blue sapphire (nila), hessonite/dolomite (gomeda) and cat’s eye/lapis lazuli (vaidurya). A jewel can, of course, have more than one name in Sanskrit. For instance, diamond is also hiraka. What do I mean by a “standard” list? Who framed this list and why these nine gems and not some other? As is to be expected, the answer is linked to astrology and each of these gems is associated with a planet. The standardisation in the list originates from astrological texts. But in India, the land of jewels, not everything is linked to astrology. There are several descriptions of expensive palaces in Valmiki Ramayana, Mahabharata and the Puranas. As a manifestation of their opulence, they are inlaid with jewels and you will find rubies, pearls, corals, emeralds, sapphires and lapis lazuli, not to forget gold. The mention of a diamond is rare, almost non-existent. To be accurate, a diamond finds mention because of its hardness and because of its ability to cut/perforate other diamonds or jewels, not because of its opulence.

If you read William Dalrymple and Anita Anand’s biography of the Koh-i-Noor, you distinctly get the feeling that before Nader Shah came along, the Mughals didn’t set great store by diamonds either. It was Nader Shah, followed by Ranjit Singh and the British. You might argue this is about only one specific diamond. Hence, I looked up a book written by Rao Bahadur L A N Iyer, A Handbook of Precious Stones (1948). This clearly said, “Till the middle ages, ruby, peridote and pearl were considered more precious.” But let’s add another quote from this book. “The oriental cutter followed the outlines of the rough stone and tried to reduce the loss of material to a minimum, whereas with the European cutter, the development of its properties is of prime consideration and economy of material is only secondary.” This automatically means the sparkle is less. Let’s not be unfair on the British or Europe. Consider royal jewels from various European countries or precious stones shown in portraits of kings and queens. Rubies, sapphires and emeralds — diamonds are rare. I realise determining prices of precious stones is tough. Nevertheless, I searched the internet to see if I could compare the prices of a one-carat diamond to a one-carat emerald, blue sapphire or better class of ruby. Try it out, it is by no means obvious that diamonds are relatively more expensive.

Why did explorations of the paradox of value pick on diamonds and not emeralds, sapphires or rubies? Diamonds are colourless, like water, but that’s a flippant explanation. Paradoxically, South America made diamonds relatively more abundant and common, outside royalty, and that was probably the reason behind using this example. Exchange value, or price, is determined in a market and barring industrial use, the use value of a diamond is limited. Therefore, we eventually come to DeBeers, which controlled the market, though increasingly less since the early 2000s. “Diamonds are a Girl’s Best Friend” has nothing to do with the labour theory of value or marginal utility. (If you remember the film, rather than the Broadway production of Gentlemen Prefer Blondes, I hope you also recall the letter of credit getting cancelled). Diamonds are not forever. That’s a song for Shirley Bassey to croon and a film for Sean Connery to act in. I began with a quote from Adam Smith, an author identified with functioning of markets. I think a quote from Thorstein Veblen would have been more appropriate since this is about “conspicuous consumption” triggered by marketing, and not about markets.

As with all precious and semi-precious stones, unlike gold, there is no clear market-determined price. This is even truer of diamonds. Beauty and value lie in the eye of the beholder. That’s the reason hardly anyone will give you a loan with a diamond as a collateral. Perhaps some pawnbroker might, but that’s not what I meant. You might as well take a loan without collateral.

The writer is chairman, Economic Advisory Council to the PM. Views are personal

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