On water and diamonds
The Weekly Wrap Up (4/23/21)
You’ve just wrapped up a nice dinner with your partner at that local Italian spot, and you’re feeling good. Some risotto, a glass of wine, and tiramisu will do that to you.
But then the waiter comes rushing over to you and it doesn’t seem like it’s for the check. He has some bad news: your car was broken into and it seems like a bunch of valuable items were taken.
When you think of valuable things that may have been taken from the car, you probably think of expensive goods. Maybe a laptop or a phone that you shouldn’t have left behind in your car.
The weird thing is though, that these expensive things often don’t have real value. Meanwhile, things that are truly valuable are often quite cheap.
The water-diamond paradox is a great example of how price and value diverge. Water has real value and is cheap while diamonds are useless and expensive. The classic explanation of this paradox is simple supply and demand: there’s way more water than there are diamonds.
In this case, the free market actually works well for society. I’d much rather live in a world where water is cheap and diamonds are expensive than vice-versa.
Sadly, things don’t always turn out this way, particularly in the labor market.
Just look at the salary gap between social workers and investment bankers. Similar to the water-diamond example, this pay gap is simply a result of differences in supply: there are way more people with the skillsets of a social worker than there are people with the skill sets of an investment banker.
This pay gap is a pretty big problem, given how we as a society conflate price with value.
Don’t believe me? Just think of all the movies glorifying the high-flying, fast-moving lives of people in finance. These people dress well, exude cash, and are often attractive. Yes, in these movies, there’ll be some didacticism around the evils of greed, but that moralism almost comes off as a disclaimer at the end of some pharmaceutical commercial. At the end of the day, these rich financiers will be able to live comfortably, send their kids to good schools, and retire well before 55. That’s the life we all want to have, isn’t it?
Sadly, there’s a kind of circular logic here. Market dynamics allow investment bankers to live a life that’s 5x more comfortable than that of your average social worker. This leads to us desiring the lifestyle of an investment banker and thus valuing the profession more, despite the fact that social workers are making a more significant ground roots impact on society.
This divergence of societal value and wages is arguably the biggest problem in capitalism today.
It’s easy to say that cultural change could help address this problem. For example, we could do a better job of communicating to our children the value of certain underpaid professions (e.g. teacher, social worker). Sure, this may help raise the social status of these professions, but this increased social status doesn’t change how being an investment banker gets you the lifestyle where you can afford both piano lessons for your kid and a babysitter for date nights on Fridays.
I’m not totally sure how to address this gap between wages and value. Some might say that subsidizing altruistic professions might be the move. Maybe, artificially constraining the supply of altruistic professions through licensing (e.g. lawyers, doctors) could boost wages as well.
Or maybe, we can think of an economic system that closely couples wages with some notion of how much good one brings to the world.
One can dream.