Let me tell you about the island of Tasmania. It's about 130 miles off the
coast of South Eastern Australia
A long time ago when seas were low Tasmania was part of Australia.
During that time the archaeological record documents that Tasmanians fished, and
they used bone tools.
About 10,000 years ago, rising waters cut Tasmania off from Australia
On at least three at the smaller islands the isolated human population
died out completely. In Tasmania
the four thousand hunter-gatherers remained with no contact with
the rest of humanity at all. They lost technologies they once had
no more fishing no more bone tools, they also missed new inventions such as
stone tools fishing nets and fire that were adopted in Australia.
When Europeans discovered the Tasmanians in 1642
they found that this extreme isolation had created the simplest material
culture of any people in the modern world.
Without access to other people, some island populations shrink
others even vanish. Fortunately for most of us
human cooperation has expanded over time.
As we saw in the previous videos we enjoy enormous benefits from
specialization and trade.
One reason for this beneficial cooperation is what economists call
comparative advantage. Two things are surprising about comparative advantage.
First just by rearranging who does what
we can make more stuff through specialization and trade. Even if no one ever gets any
better
at doing any line of work. But the second insight is my favorite. If you get better
at doing something that obviously benefits you
but it also benefits me, even though my abilities to produce
haven't changed at all. Let me show you how this works.
It's best seen with a simple example. Just
two people, Bob and Ann who produce just two goods:
bananas and fish. Here's what Bob can do
if he spends all it is time producing only one good.
Bob can either gather 10 bananas or
he can catch ten fish.
Ann can either get a 10 bananas or catch 30 fish.
So let's say they each split their time between producing bananas and fishing.
Bob and Ann each produce five bananas.
Bob produces five fish and Anne produces
15 fish. In total they produce
ten bananas and 20 fish. You math wizards in the audience
surely see an obvious way to increase his total. If Bob produces just bananas and
Ann produces
just fish then the total rises to ten bananas and 30 fish.
So just by rearranging who does what we get more total stuff.
You might think this outcome is simply the result at the division of labor
that we covered previously but you'd be wrong. The key insight from the division of
labor
is that workers individually get more productive when they specialize.
Yet in this scenario neither Bob nor Ann
has gotten any better at producing bananas or fish. Just by rearranging what tasks
each does is what made total production increase. The key to understanding how
this works
is opportunity cost. Bob has to choose to gather bananas or catch fish.
When he chooses to gather a banana he gives up one fish
In essence Bob trades with himself. He can use his time to gather bananas
or trade that time to catch fish and the cost at that trade is
one fish per banana that's Bob's opportunity cost.
The same holds true for Ann, but her cost of producing one banana is three fish.
In the amount of time it takes Ann to gather one banana
she could have caught three fish. She trades with herself.
One banana for three fish. So Bob only has to give up one fish to produce one banana
but Ann must give up three fish to produce a banana.
Ann's opportunity cost of gathering a banana is higher than Bob's
She can improve her situation if she can get bananas
for less than three fish and Bob can improve his situation
if he can get fish for less than one banana. Let's say Ann trades two fish to
Bob for
one banana. They each gain. If Anne wants a banana,
she can either gather it herself and give up three fish
Or, she can catch only two fish
and then trade them to Bob. She prefers the lower cost option
and so she trades. Bob prefers the lower cost option too.
Instead of giving up a whole banana to catch a fish
he can trade that banana for two fish. Now he's only giving up a half a banana for
a fish
you can see that even if Ann is better at everything, nothing in this story changes.
She still benefits from trade because the number of fish Ann gives up to pick a
banana herself
is greater than the number of fish that she must catch and give to Bob
in order to get a banana from Bob. Now for the insight that is really
counterintuitive.
What happens if Ann gets better fishing. Let's say that she can now catch
40 fish. Obviously that's good for Ann,
but it also means that bananas just got more costly for Ann to produce herself.
She would now have to sacrifice four fish for each banana that she gathers
by becoming a better fisherman Ann becomes a comparatively
worse banana gatherer. And this fact
helps Bob. The reason is that Ann is now willing to trade more fish for each banana
she gets from Bob. So although Bob's ability to produce hasn't changed
he can now get more fish for his bananas.
Comparative advantage is a beautiful thing. No matter what my talents are
I can still help you even if you are better at everything.
The more different we are from each other the more we benefit from trading
with each other.
Let's get back to the real world.
What comparative advantage practically means for most people
is that we each spend most of our working time at a job
that utilizes each of our comparative talents. How do you know what you're comparatively
good at?
What you get paid for your job tells you that. Comparative advantage
is the main force driving us to use our talents in those jobs that we do best.
It's why people who are good at math tend to become engineers, and
those who have a graphic sense tend to go into the arts. Specialization and trade
played key roles in the movement from poverty to prosperity.
We would be desperately poor without them. But they alone do not explain the full
extent of our prosperity.
Another feature of the modern world is important: innovationism.
Our society is an orgy of innovations.
This innovationism would be impossible without specialization
and trade and yet
specialization and trade do not guarantee innovationism. This is a topic for a future
video.
Here's the current leader board of questions submitted from our viewers.
We're going to pick a few at the top ones to answer with more videos
So go and vote!