The Diamond-Water paradox is a contradiction in value where it is clear that although water is more useful for human life than diamonds, diamonds have a higher selling price. This theory was introduced by Adam Smith, a Scottish philosopher who became a pioneer of modern economics. His most famous work is the book An Inquiry into the Nature and Causes of the Wealth of Nations, the first book to describe the history of the development of industry and trade in Europe as well as the foundations of the development of free trade and capitalism.
As far as I know, he is also known as the father of modern economics thanks to his various influences on the industrial revolution in Europe in the 18th century.
In An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith also explains the concepts of use value and exchange value, and explains the difference:
"I will explain what rules humans naturally obey when exchanging [goods] for money or other [goods]. These rules determine what is called the relative value or exchange value of goods.
The word value has two different meanings, and sometimes describes the use of an object, and sometimes describes the purchasing power of another thing that belongs to the possession of that thing. The things that have the greatest use value have little or no exchange value; on the other hand, the things that have the greatest exchange value have little or no use value. Nothing is more useful than water: but water cannot buy everything; nothing can be exchanged for water. Diamonds, on the other hand, have no use value; but there are many other things that can be exchanged for it."
This theory was later supported by marginalism. Marginalism is an economic theory that focuses on differences in the value of goods and services in terms of their secondary or marginal needs.
In his explanation, the marginal utility of a good derives from its most important benefit to an individual. So, if the person owns an item, he will use it to satisfy his need or desire, which has the highest priority.
In explaining the diamond-water paradox, marginalists explain that what matters is not the total utility of the diamond or its water, but the utility of each unit of water or diamond.
It is true that the use of water for humans is very large, because it serves to help humans survive. However, because there is so much water on Earth, the marginal utility of water is low. In other words, every unit of water that is increasing can be used for needs that are of diminishing importance, because very vital needs have been met. Therefore, any unit of water becomes of no value to humans as the water supply increases. On the other hand, diamonds have a much lower supply.