The Paradox of the Diamond/Water Paradox

“Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.” Adam Smith 1776

Since Smith wrote, new discoveries made diamonds abundant, but DeBeers managed to create scarcity and to pump up demand. A new article in the Journal of Economic Perspectives details the history of the diamond business. Here are some notes from the article concerning the management of demand for diamonds:

Spar, Debora L. 2006. “Continuity and Change in the International Diamond Market.” Journal of Economic Perspectives, 20: 3 (Summer): pp. 187-94.

200: “DeBeers matched its supply-side strategies with attempts to manage demand. In 1948, the company debuted its famous slogan “A diamond is forever,” later hailed by Advertising Age as the slogan of the century. Implicit in the slogan were all the notions that the cartel held dear. It told diamond customers that their purchases were heirlooms, too valuable ever to be sold (which effectively killed the resale market). It reminded them that diamonds equaled love, something not to be measured in terms of price. And in the fine print and at the jewelers, DeBeers told its (mostly male) customers how to buy these talismans of love: several months’ salary was the recommended price, with attention duly paid to the cartel’s own criteria of color, cut, clarity and carat. Rarely has any business been more specific in telling its customers what to buy and how.”

201: “Since Rhodes’s time, the diamond cartel has managed to convince consumers that diamonds are both valuable and scarce, that they should be purchased on quality rather than price.”

201: “… the underlying demand for their product is … rooted in sentiment …. The challenge for the diamond industry, therefore, is to convince consumers to separate the value they place on diamonds from the price they pay.”

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