Why diamond is much more costly than water?

It has been a long time since I wrote something here..Time has changed, it is no longer the free "vacation" after the collegedays..
Many days have passed and now I am at bangalore, working in Wipro.Well, now let's have a different topic..(Does the title looks strange ..?)
It all happened during a usual chit-chat during the lunch, somehow that became really serious ..!!The new economic policies & their impacts andall..Here in the corporate world , many people strongly support capitalist views, free market etc.What is really suitable to a country like India..? Discussion got heated up ..and this time, I got new title , "Wealth of Nations" , by Adam Smith.I didnt know anything about that, and later I ( as usual ) googled..:).Interistingly I stuck with with an idea "Why Diamond is costier than Water"?.
It is all about "Theory of Value"..The author uses practical theory ofValue and tells that an object's value was rooted in how useful it is to mankind. If this theory were true, why was it that diamonds (which had, at thetime, little practical use) have a much higher price than water(which is utterly crucial to man's existence)? It is "the diamond-water paradox". He again uses Labour theory of value, and sees diamonds are worth morethan water because of their rarity, and because great effort is requiredto mine and cut them.But then, it does not sufficiently describe why diamonds are worth morethan, say, emeralds (which require even more labour to mine, and areconsiderably rarer), or why a large, easily mined diamond is worth more than a small, difficult-to-spot one.
I admit this is not a new issue to be stated, but for me it has triggered an act of opening this blog once again :) Atleast, I feel it is good to think of something away from the really tech things..right?