First of all, whether it is neoclassical, classical or marginalist, what is the target subject of economics as a discipline?
I mean, today's economics is to some extent, a branch of the old Austrian-school. Is the goal to set the price of things on the market?
From a materialist’s point of view, this is one of the first questions to ask.
As far as modern economics is based on the assumptions in questions, paradoxes such as the following will never occur and will never be solved.
But suppose you were offered an all-or-nothing choice: 100 gallons of water for $500 monthly or no water at all. (Many American families use 100,000 gallons or more a month.) If you could afford it, you would willingly pay at least $500 per month for water, limiting its use to drinking, preparing food, and sponge baths. Your lawn and plants would die, your car would go dirty, and washing machines and flush toilets would be forgotten luxuries. (Do you think this might explain why prospectors smell ripe after a few days of roaming the desert?) If you had to, you would pay considerably more for the 10,000 gallons of water you use each month than the $20 or so you do pay, so water yields an enormous consumer surplus.
Here, you are put in the middle of the desert and you have nothing with you. Neoclassical or not, as far as modern economics sticks to its own assumptions, the diamond has more value than the water even if water is the only thing that can save your life in the above situation.
Then, let's say, someone in the middle of a desert changes his preferences, he now values water way more than diamonds. Then the whole model should be completely abandoned. And then where is the first premise gone? It explains nothing if the assumption itself is only valid within a specific paradigm.
In this middle of the desert-case, since modern economics is completely ignoring the workforce (= the amount of labor) put into the the item in the process of the production, such a paradox can occur. In this middle of the desert-case, you have no tools such as shovels or drill to dig the hole, and you don’t even know where to find the water which could save your life.
So, it could take an enormous amount of labour effort to find the water. So the price is likely to skyrocket very high, maybe in extreme cases such as this, there would be no limit on the price, as far as the consumer A or B do not want to die.
However, on the premise of the preference assumption, there might exist a diamond worshipping consumer C who prefers diamond in all situations, irrespective of context. As far as consumer C exists, preference assumption-based modern economics will not have such a paradox, which to me, is quite nonsensical.
As far as modern economics is completely forgetting the amount of labour input required in the process of production, economics of this sort will remain in the metaphysical realm.
And here we might see the Marxian common (mis)understanding of the price analysis written by Engels in Capital Vol.2, which is the price will be set based on the amount of the labour put into the target item. (Actually, he failed. We might think of Okishio's theorem. People tend to misunderstand Marx’s work Contribution to the Critique of Political Economy, 1859, and Vol1 of Capital.
Marx never said that the price will be set based on only the amount of labour input , but he said something along the lines of "the commodity can be a commodity as far as the commodity is accepted by the other people". This view is not dismissive of the necessity of preference (Preference in a way, is exchangeable with necessity, or am I wrong here?)
In the view of the consumer, producing socially unaccepted items is not social-production (irrespective of the social condition)
Therefore, in the desert case, the diamond is not a socially accepted good. Under such circumstances, you may suspect that nobody would want to produce a diamond; they would all want to produce water.
Here is a clarification:
The total utility of water is substantially higher than its marginal utility and price, while the total utility of diamonds is close to their marginal utility and price. The areas representing consumer surpluses in Figure 4 are shaded. This analysis should help you understand why diamonds, which are not nearly as necessary to life as water is, are valued and priced much higher than water. The total utility, marginal utility, and price of diamonds are nearly identical for those of us who own, at most, a few of the baubles. The lesson to be learned from the paradox of value is that marginal utility, not total utility, determines the value and market price of individual products."
In my opinion, we can easily solve this. Diamond is metastable allotrope of carbon which means it is not as easily breakable as gold is. In ordinary life, it is simply treated in the same way that gold, silver accessories are treated. We can ultimately convert all three into money. Under the normal circumstances, marginalists would say that Diamonds have more utility than water. Unlike the extreme case above, let me use a more relevant, 20th century example. When Nazi Germany established concentration camps throughout the Lebenstaum, for those in the concentration camps, would they have preferred diamond or food? They would have sacrificed diamonds just for a loaf of bread in order to survive.
At that moment, the Reichsmark meant very little. In concentration camps, you are not even allowed to work, to produce crops and vegetables, in order to survive. A minimal ration of food was given until the prisoners died. Marginalist principles fail here. There was no choice. If prisoners had been allowed to work, they would have definitely put their "power" into labour such that they could have produced the goods necessary for their survival. Here we begin to understand the value of labour.
In short, economics, to me, cannot dismiss both of these premises:
B: The amount of labour required.
Since modern economics relies only on premise A, a paradox such as the one mentioned above, could occur.
We should also abandon the following premise:
People act independently on the basis of full and relevant information.
Nobody has full and relevant information all of the time, unless they are omniscient.
Footnote : Okishio's theorum --> regarding the Marx's proposition that all the value existing in the world equals with the total amount of the price.
--> To me, this is nonsensical. When we consider about the reification, the price is also the thingnification of the human activity, thus when we take the above mentioned premise A, Peference-neccesity, if an item was produced under the circumstance in which the item is not socially accepted, then the price will go down below the amount of the investment ( = materials plus added amount of the labor ( Although Marx admitted from the first there is a "facial" difference between the price and the amount of the value the target items holds )). In short, personally unless we conquer the above reification-thingnification, the difference between price and the total volume of the value the target item holds will be never solved. Therefore, I said Economics need the premise A ( since premise A is in a way only the reification-thingnification of human beings's inner desire ). But we can not abandon the premise B, since there is no item to which price is added in this world which has no amount of the labor ( even if it is an art ( = the thingnification of the artist's brain-image ( artists need to move their fingers so carefully in order to make their product to be sold )) Ordinary air which we inhale and exhale every second has no price since there is no amount of the labor added. But the special air such as the air for the relaxation purpose or scuba diving has the price since these have both the premise A and B.