The diamond-wafer paradox: A modern mystery

I confess that I did not intend to take an inventory of the modest wealth my wife and I had accumulated in nine years of married life. But a pair of birds got stuck in the attic, tried to find their way out the rear window, and made a mess of things. It was not as psycho as a Hitch-cock movie, but it forced my wife and me to look hard at our belongings. We found our daughter Rebecca's baby clothes, several pieces of luggage, and many used electronic gadgets, specifically, two stereos, several old PCs, a very old TV, a college dorm refrigerator, our first video camera, several phones, an answering machine, an old cellular handset, and many of the boxes and instructions for the electronics. There were no Rembrandts. Such are the components of modest wealth; virtually all the gadgets worked except one computer, but all of them are worthless. Nothing could serve as collateral on a loan or fetch a dime on eBay. There is a paradoxical connection between economic growth and old electronic gadgets. It is paradoxical because wealth is usually associated with accumulating durable goods, not turning them into paper weights in an attic. Let's call this the diamond-wafer paradox. Specifically, in growing modern economies, goods embedded with silicon wafers lose their value much faster than other durable goods or jewelry, such as diamonds. And this is a good thing. This mystery will take some explaining. Working citizens of industrialized countries store most of their modest wealth in durable goods, such as automobiles, furniture, and houses. Hence, the resale value of these goods—less outstanding mortgages and loans—determines the wealth of most households. A household's wealth grows as it accumulates durable goods. It declines as the value of these good depreciate, which they do at a variety of rates. For example, a heavily driven car tends to break down eventually, while the diamond on my wife's ring finger tends to retain its resale value. To be sure, it is notoriously difficult to figure out the value of a particular durable asset. Indeed, the figuring can be quite involved if you want an answer without a shadow of doubt. Anybody who has ever bought a used car—not to mention a used diamond—knows about such figuring. Accordingly, market participants develop sophisticated procedures for forecasting the likelihood that a product will endure, and assign a price to durability. This …