CONCEPT
Marginal Utility and the Diamond-Water Paradox
The 1870s insight that value is determined by the next unit rather than total usefulness—water is essential but cheap, diamonds useless but expensive—now explaining why execution skills lose value while judgment soars.
The marginal revolution of the 1870s, independently discovered by William Stanley Jevons, Carl Menger, and Léon Walras, resolved the classical paradox of value: why water, essential for life, trades for almost nothing while diamonds, serving no survival need, command fortunes. The answer is that value is determined not by aggregate utility but by marginal utility—the usefulness of the last unit consumed. Water is abundant, so its marginal unit is nearly worthless despite total indispensability. Diamonds are scarce, so their marginal unit is precious despite total frivolity. Applied to AI-era labor markets, this principle explains the Great Reallocation: execution is the new water (essential in aggregate, cheap at the margin), while judgment is the new diamond (the scarce input commanding exponential premiums).
In The You On AI Field Guide
The diamond-water paradox troubled classical economists for centuries. Adam Smith noted the contradiction but could not resolve it within his labor theory of value, which held that