Here's a riddle economists puzzled over for a long time. Water is vital: without it, you die within days. A diamond is almost useless. So why does a glass of water cost almost nothing and a diamond a fortune?
Carl Menger's answer
In 1871, the Austrian economist Carl Menger gave a simple and revolutionary answer. Value isn't in things. It's in the mind of the person looking at them, and it depends on how much of it they already have.
Imagine Buddy lost in the desert with five bottles of water.
- The 1st bottle saves his life. It's worth everything.
- The 2nd keeps him from being thirsty tomorrow.
- The 3rd lets him cook.
- The 4th is for washing.
- The 5th? He waters a plant.
If he's asked to swap one, he'll give up the last one, the least useful. It's that "last" bottle that sets the price. At home, water flows from the tap in plenty: the last drop is worth almost nothing. Diamonds, on the other hand, are rare: even the last one is still highly desired.
The same thing isn't worth the same to everyone
Menger's second lesson: value is personal. A football card is worth a fortune to a collector and nothing to his little sister. Neither of them is wrong: each judges it by their own needs.
It's that difference that makes swapping so powerful.
A playground example
Buddy has three identical cards. The third is no use to him: to him it's worth CHF 0.50. Lina doesn't have that card and has been looking for it for weeks: to her it's worth CHF 3. They agree on CHF 2.
- Buddy gets CHF 2 for a card worth 0.50 to him: he gains CHF 1.50.
- Lina pays CHF 2 for a card worth 3 to her: she gains CHF 1.
Nobody made anything, and yet CHF 2.50 of satisfaction has appeared. In a free exchange, where nobody is forced, both sides go home happier. That's what has kept markets turning for thousands of years.
What it changes for your child
Understanding value means understanding that a price is neither an injustice nor an accident: it's where what each person is willing to give meets. It also means understanding how to earn money: by offering others something that has value to them.
Try this tonight with your child
Hold a swap market at home. Everyone brings three things they no longer use. Before swapping, each person writes down how much each thing is "worth" to them (in points from 1 to 10). After the swaps, compare: is everyone happier than before?
Further reading
- Menger, C. (1871). Grundsätze der Volkswirtschaftslehre (Principles of Economics). Vienna: Wilhelm Braumüller.
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