The diamond water paradox

Why does water, which is of such vital importance to us, cost so little, and why does a diamond, which has no earthly use, cost so much?

Economists have provided various answers to this question.  Not all of them I find satisfactory.  Marx made the distinction between value-in-use and value-in-exchange.  Water has much value-in-use, but little value-in-exchange.  The converse for diamonds.  Some economists posited the low marginal utility of water, and the high marginal utility of diamonds.  These marginal utilities evidently underly the demand curves.  Where the demand and supply curves intersect, gives us the equilibrium price.

But Marshall was not so facile.  He saw that time played an essential role in supply and demand.  In the market period, that period in which the factors of production (land, labour, capital, enterprise) are committed and thus relatively fixed (in amount and proportion to one another), supply curves are near vertical, with huge increases in prices offered, bringing forth only a small increase in supply.  He then goes through the short period, and the long period, to the secular period, in which all factors of production are flexible (as to amount as well as proportion).  In the secular period, supply curves are near horizontal, with a small increase in bid prices, bringing about a large response in supply.  In the secular period, equilibrium price approximates to cost of production.  And since labour is the only real cost of production, Marshall can be said to have had a long period labour theory of value. 

What then would Marshall make of the diamond water paradox?  What in fact did he make of it?  Will have to burrow into Principles.

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