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Let me tell you about the island of[br]Tasmania. It's about 130 miles off the

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coast of South Eastern Australia

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A long time ago when seas were low Tasmania was[br]part of Australia.

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During that time the archaeological[br]record documents that Tasmanians fished, and

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they used bone tools.

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About 10,000 years ago, rising waters cut[br]Tasmania off from Australia

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On at least three at the smaller islands[br]the isolated human population

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died out completely. In Tasmania

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the four thousand hunter-gatherers[br]remained with no contact with

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the rest of humanity at all. They lost[br]technologies they once had

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no more fishing no more bone tools, they also missed new inventions such as

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stone tools fishing nets and fire[br]that were adopted in Australia.

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When Europeans discovered the Tasmanians[br]in 1642

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they found that this extreme isolation[br]had created the simplest material

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culture of any people in the modern world.

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Without access to other people, some[br]island populations shrink

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others even vanish. Fortunately for[br]most of us

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human cooperation has expanded over time.

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As we saw in the previous videos we[br]enjoy enormous benefits from

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specialization and trade.

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One reason for this beneficial[br]cooperation is what economists call

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comparative advantage. Two things are[br]surprising about comparative advantage.

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First just by rearranging who does what

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we can make more stuff through specialization[br]and trade. Even if no one ever gets any

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better

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at doing any line of work. But the second[br]insight is my favorite. If you get better

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at doing something that obviously[br]benefits you

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but it also benefits me, even though my[br]abilities to produce

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haven't changed at all. Let me show you[br]how this works.

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It's best seen with a simple example.[br]Just

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two people, Bob and Ann who produce[br]just two goods:

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bananas and fish. Here's what Bob can do

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if he spends all it is time producing[br]only one good.

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Bob can either gather 10 bananas or

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he can catch ten fish.

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Ann can either get a 10 bananas or catch[br]30 fish.

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So let's say they each split their time[br]between producing bananas and fishing.

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Bob and Ann each produce five bananas.

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Bob produces five fish and Anne produces

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15 fish. In total they produce

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ten bananas and 20 fish. You math wizards in[br]the audience

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surely see an obvious way to increase[br]his total. If Bob produces just bananas and

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Ann produces

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just fish then the total rises to[br]ten bananas and 30 fish.

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So just by rearranging who does what we get[br]more total stuff.

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You might think this outcome is simply[br]the result at the division of labor

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that we covered previously but you'd be wrong.[br]The key insight from the division of

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labor

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is that workers individually get more[br]productive when they specialize.

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Yet in this scenario neither Bob nor Ann

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has gotten any better at producing bananas or fish. Just by rearranging what tasks

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each does is what made total production[br]increase. The key to understanding how

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this works

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is opportunity cost. Bob has to choose[br]to gather bananas or catch fish.

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When he chooses to gather a banana he gives[br]up one fish

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In essence Bob trades with himself. He can[br]use his time to gather bananas

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or trade that time to catch fish and the[br]cost at that trade is

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one fish per banana that's Bob's[br]opportunity cost.

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The same holds true for Ann, but her cost of[br]producing one banana is three fish.

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In the amount of time it takes Ann[br]to gather one banana

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she could have caught three fish. She[br]trades with herself.

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One banana for three fish. So Bob only[br]has to give up one fish to produce one banana

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but Ann must give up three fish to[br]produce a banana.

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Ann's opportunity cost of gathering a banana[br]is higher than Bob's

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She can improve her situation if she can[br]get bananas

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for less than three fish and Bob can improve his situation

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if he can get fish for less than one[br]banana. Let's say Ann trades two fish to

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Bob for

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one banana. They each gain. If Anne wants a banana,

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she can either gather it herself and give up[br]three fish

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Or, she can catch only two fish

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and then trade them to Bob. She prefers[br]the lower cost option

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and so she trades. Bob prefers the lower[br]cost option too.

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Instead of giving up a whole banana to[br]catch a fish

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he can trade that banana for two fish. Now[br]he's only giving up a half a banana for

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a fish

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you can see that even if Ann is better at[br]everything, nothing in this story changes.

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She still benefits from trade because the[br]number of fish Ann gives up to pick a

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banana herself

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is greater than the number of fish that[br]she must catch and give to Bob

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in order to get a banana from Bob. Now[br]for the insight that is really

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counterintuitive.

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What happens if Ann gets better fishing.[br]Let's say that she can now catch

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40 fish. Obviously that's good for Ann,

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but it also means that bananas just got more[br]costly for Ann to produce herself.

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She would now have to sacrifice four fish for each[br]banana that she gathers

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by becoming a better fisherman Ann[br]becomes a comparatively

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worse banana gatherer. And this fact

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helps Bob. The reason is that Ann is now[br]willing to trade more fish for each banana

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she gets from Bob. So although Bob's[br]ability to produce hasn't changed

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he can now get more fish for his bananas.

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Comparative advantage is a beautiful[br]thing. No matter what my talents are

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I can still help you even if you are better[br]at everything.

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The more different we are from each[br]other the more we benefit from trading

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with each other.

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Let's get back to the real world.

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What comparative advantage practically means[br]for most people

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is that we each spend most of our[br]working time at a job

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that utilizes each of our comparative[br]talents. How do you know what you're comparatively

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good at?

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What you get paid for your job tells you[br]that. Comparative advantage

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is the main force driving us to use our[br]talents in those jobs that we do best.

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It's why people who are good at math tend [br]to become engineers, and

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those who have a graphic sense tend to[br]go into the arts. Specialization and trade

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played key roles in the movement from[br]poverty to prosperity.

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We would be desperately poor without[br]them. But they alone do not explain the full

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extent of our prosperity.

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Another feature of the modern world is[br]important: innovationism.

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Our society is an orgy of innovations.

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This innovationism would be impossible without specialization

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and trade and yet

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specialization and trade do not guarantee[br]innovationism. This is a topic for a future

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video.

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Here's the current leader board of[br]questions submitted from our viewers.

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We're going to pick a few at the top ones to answer[br]with more videos

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So go and vote!

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