What's more valuable — diamonds, water or J Lo's jewelry box?
National Post, 25 August 2024
CANADIAN MINER’S DISCOVERY OF THE SECOND LARGEST DIAMOND EVER RAISES QUESTIONS ABOUT THE ‘PARADOX OF VALUE’ AND WHETHER BEN AFFLECK SHOULD CONSIDER BUYING IT
After a summer of gold, silver and bronze, and political leaders the world over who, as master reverse alchemists, offer their people the lead of inadequacy rather than the precious metal of leadership, let us now speak of diamonds — a topic favoured by us economists for centuries.
On Thursday, the president of Botswana, adorned with the alliteratively magnificent moniker of Mokgweetsi Masisi, unveiled the second largest diamondever found. It filled his hand and weighs more than a pound — an astonishing 2,492 carats.
Lucara Diamond Corp., a Canadian mining company based in Vancouver, found the diamond in its Karowe Mine in central Botswana. Lucara uses X-ray technology to detect large diamonds in the ground, and then extracts them in a kinder, gentler process that avoids smashing them as does the usual, rougher, method. While diamonds are well-known to be so hard that they are nearly impossible to scratch, apparently they are relatively easier to break during mining. Hence the X-ray approach, figuring out what is lying underground before the heavy equipment does its worst.
The process has yielded other impressive results at the Karowe mine. In 2016, Lucara sold a massive rock, “The Constellation,” plucked from the same patch of earth, for US$63 million. Karowe also yielded the three-billion-year-old “Lesedi La Rona” stone, which sold in 2017 for US$53 million.
Ben Affleck might consider purchasing this latest gem, as it would provide sufficient raw material to be used in rings for a future third, or fourth, engagement to Jennifer Lopez. In point of fact, the Constellation was bought by Dubai-based Nemesis International, which sounds like what an evil corporate conglomerate would be called in a Bond film.
The largest diamond ever was found the old-fashioned way in South Africa in 1905, weighing 3,106 carats. That was convenient for the British, who then controlled South Africa, and the Cullinan Diamond was incorporated in 1910 into the Crown Jewels, specifically the Sovereign’s Sceptre and Imperial State Crown. King Charles III used them in his coronation last year.
Cutting the massive Cullinan was an overwhelming task in the early-20th century; the initial cleaving knife was broken upon first contact. It took three men, working 14-hour days over eight months, to cut and polish the nine principal stones the Cullinan yielded.
Decades before the Cullinan was discovered, economists solved a mystery that had perplexed the best of them, including Adam Smith. It was called the “diamond-water paradox” or, more generally, the “paradox of value.”
Water is essential for life, but is very inexpensive — even freely given away in some circumstances. Diamonds are very expensive, though being practically useless. Why do the baubles cost so much? It’s one of the foundational philosophical questions in economics: What is the value of something? What is it worth?
Various solutions were proposed. Diamonds are harder to find, there are fewer of them, it takes more labour to extract them and rare expertise to cut and polish them. In the 1870s, a solution was found, associated with Carl Menger and others.
The value depends on the “marginal” decision, the decision about the next available unit I want to buy or sell. The marginal value of water is cheap because there is so much of it, readily available, that I am not in desperate need. If I was stranded in the desert and dying, I may well, at the margin, trade the Cullinan for water to drink. Conversely, if diamonds were necessary daily for survival, a market would have to emerge to provide them inexpensively.
Marginal value explains a great deal about curious consumer behaviour. Baubles can command high prices if necessities like water and food are abundantly at hand — so that their marginal value is low — and there are sufficient rich people who have decreasing returns from their wealth, so that splurging on a diamond is rational.
But ask the soon-to-be former Mrs. Affleck about the value of her engagement rings, and she would not reply in terms of marginal value, any more than a teenage girl would speak in that manner about her beloved grandmother’s costume jewellery.
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