WEBVTT

00:00:00.210 --> 00:00:04.039
♪ [music] ♪

00:00:11.419 --> 00:00:14.239
- [Don Bourdreaux] Let me tell you 
about the island of Tasmania.

00:00:14.239 --> 00:00:18.149
It's about 130 miles off the coast 
of South Eastern Australia

00:00:18.149 --> 00:00:20.640
A long time ago when seas were low

00:00:20.640 --> 00:00:23.260
Tasmania was part of Australia.

00:00:23.260 --> 00:00:25.319
During that time 
the archaeological record documents

00:00:25.319 --> 00:00:28.189
that Tasmanians fished, 
and they used bone tools.

00:00:29.549 --> 00:00:31.089
About 10,000 years ago,

00:00:31.089 --> 00:00:34.089
rising waters cut Tasmania off 
from Australia.

00:00:34.729 --> 00:00:36.720
On at least three 
at the smaller islands

00:00:36.720 --> 00:00:40.320
the isolated human population 
died out completely.

00:00:40.320 --> 00:00:43.560
In Tasmania the four thousand 
hunter-gatherers remained

00:00:43.560 --> 00:00:46.710
with no contact with 
the rest of humanity at all.

00:00:47.280 --> 00:00:49.740
They lost technologies 
they once had;

00:00:49.740 --> 00:00:53.349
no more fishing no more bone tools;
they also missed new inventions

00:00:53.349 --> 00:00:56.279
such as stone tools,
fishing nets, and fire

00:00:56.279 --> 00:00:58.229
that were adopted in Australia.

00:00:58.229 --> 00:01:02.280
When Europeans "discovered"
the Tasmanians in 1642

00:01:02.280 --> 00:01:04.300
they found that 
this extreme isolation

00:01:04.300 --> 00:01:06.360
had created 
the simplest material culture

00:01:06.360 --> 00:01:07.940
of any people in the modern world.

00:01:08.980 --> 00:01:10.680
Without access to other people,

00:01:10.680 --> 00:01:14.720
some island populations shrink,
others even vanished.

00:01:15.760 --> 00:01:17.590
Fortunately for most of us

00:01:17.590 --> 00:01:20.160
human cooperation 
has expanded over time.

00:01:21.290 --> 00:01:24.710
As we saw in the previous videos 
we enjoy enormous benefits

00:01:24.710 --> 00:01:27.050
from specialization and trade.

00:01:27.050 --> 00:01:29.269
One reason for this 
beneficial cooperation

00:01:29.269 --> 00:01:32.410
is what economists call
"comparative advantage."

00:01:33.310 --> 00:01:35.840
Two things are surprising 
about comparative advantage.

00:01:36.770 --> 00:01:40.149
First, just by rearranging 
who does what

00:01:40.149 --> 00:01:42.529
we can make more stuff 
through specialization and trade.

00:01:42.529 --> 00:01:46.261
Even if no one ever gets any better
at doing any line of work.

00:01:46.550 --> 00:01:49.230
But the second insight
is my favorite.

00:01:49.230 --> 00:01:50.550
If you get better 
at doing something

00:01:50.550 --> 00:01:54.470
that obviously benefits you
but it also benefits me,

00:01:54.470 --> 00:01:58.110
even though my abilities to produce
haven't changed at all.

00:01:58.110 --> 00:01:59.700
Let me show you how this works.

00:02:00.440 --> 00:02:02.590
It's best seen with 
a simple example.

00:02:02.590 --> 00:02:07.330
Just two people, Bob and Ann 
who produce just two goods:

00:02:07.330 --> 00:02:09.526
bananas and fish.

00:02:10.190 --> 00:02:13.330
Here's what Bob can do 
if he spends all it is time

00:02:13.330 --> 00:02:14.890
producing only one good.

00:02:15.570 --> 00:02:20.812
Bob can either gather 10 bananas or
he can catch 10 fish.

00:02:21.370 --> 00:02:26.800
Ann can either get a 10 bananas 
or catch 30 fish.

00:02:26.800 --> 00:02:28.310
So let's say they each split their time

00:02:28.310 --> 00:02:30.060
between producing 
bananas and fishing.

00:02:30.650 --> 00:02:33.260
Bob and Ann each produce 
five bananas.

00:02:34.050 --> 00:02:38.729
Bob produces five fish 
and Ann produces 15 fish.

00:02:39.149 --> 00:02:43.119
In total they produce 
10 bananas and 20 fish.

00:02:44.149 --> 00:02:45.450
You math wizards in the audience

00:02:45.450 --> 00:02:48.299
surely see an obvious way 
to increase his total.

00:02:48.299 --> 00:02:52.329
If Bob produces just bananas 
and Ann produces just fish,

00:02:52.329 --> 00:02:55.400
then the total rises to
10 bananas and 30 fish.

00:02:55.400 --> 00:03:00.189
So just by rearranging who does what
we get more total stuff.

00:03:00.189 --> 00:03:02.660
You might think this outcome 
is simply the result

00:03:02.660 --> 00:03:05.739
of the division of labor 
that we covered previously

00:03:05.739 --> 00:03:07.239
but you'd be wrong.

00:03:07.659 --> 00:03:09.840
The key insight from 
the division of labor

00:03:09.840 --> 00:03:11.950
is that workers individually 
get more productive

00:03:11.950 --> 00:03:13.499
when they specialize.

00:03:13.499 --> 00:03:16.730
Yet in this scenario 
neither Bob nor Ann

00:03:16.730 --> 00:03:19.369
has gotten any better 
at producing bananas or fish.

00:03:19.369 --> 00:03:22.229
Just by rearranging 
what tasks each does

00:03:22.229 --> 00:03:23.889
is what made 
total production increase.

00:03:23.889 --> 00:03:26.239
The key to understanding 
how this works

00:03:26.239 --> 00:03:27.849
is opportunity cost.

00:03:27.849 --> 00:03:31.339
Bob has to choose to gather bananas
or catch fish.

00:03:31.339 --> 00:03:34.349
When he chooses to gather 
a banana he gives up one fish

00:03:34.349 --> 00:03:37.059
In essence Bob trades with himself.

00:03:37.059 --> 00:03:39.329
He can use his time 
to gather bananas

00:03:39.329 --> 00:03:41.749
or trade that time to catch fish 


00:03:41.749 --> 00:03:45.940
and the cost at that trade 
is one fish per banana.

00:03:45.940 --> 00:03:48.310
That's Bob's opportunity cost.

00:03:48.310 --> 00:03:50.170
The same holds true for Ann

00:03:50.170 --> 00:03:53.730
but her cost of producing 
one banana is three fish.

00:03:53.730 --> 00:03:56.529
In the amount of time it takes Ann
to gather one banana

00:03:56.529 --> 00:03:59.229
she could have caught three fish.

00:03:59.229 --> 00:04:02.759
She trades with herself:
one banana for three fish.

00:04:03.649 --> 00:04:06.889
So Bob only has to give up one fish
to produce one banana

00:04:06.889 --> 00:04:10.609
but Ann must give up three fish to
produce a banana.

00:04:10.609 --> 00:04:13.179
Ann's opportunity cost 
of gathering a banana

00:04:13.179 --> 00:04:15.099
is higher than Bob's.

00:04:15.099 --> 00:04:17.700
She can improve her situation 
if she can get bananas

00:04:17.700 --> 00:04:20.880
for less than three fish 
and Bob can improve his situation

00:04:20.880 --> 00:04:23.759
if he can get fish for less 
than one banana.

00:04:23.759 --> 00:04:27.670
Let's say Ann trades two fish
to Bob for one banana.

00:04:27.670 --> 00:04:29.880
They each gain.

00:04:29.880 --> 00:04:33.270
If Ann wants a banana, 
she can either gather it herself

00:04:33.270 --> 00:04:37.930
and give up three fish
or she can catch only two fish

00:04:37.930 --> 00:04:40.310
and then trade them to Bob.

00:04:40.310 --> 00:04:43.950
She prefers the lower cost option 
and so she trades.

00:04:43.950 --> 00:04:46.470
Bob prefers the lower
cost option too.

00:04:46.470 --> 00:04:48.960
Instead of giving up a whole banana
to catch a fish

00:04:48.960 --> 00:04:51.620
he can trade that banana 
for two fish.

00:04:51.620 --> 00:04:55.620
Now he's only giving up 
a half a banana for a fish.

00:04:55.620 --> 00:04:58.680
You can see that even if Ann 
is better at everything,

00:04:58.680 --> 00:05:01.130
nothing in this story changes.

00:05:01.130 --> 00:05:02.530
She still benefits from trade

00:05:02.530 --> 00:05:04.420
because the number of fish 
Ann gives up

00:05:04.420 --> 00:05:07.660
to pick a banana herself 
is greater than the number of fish

00:05:07.660 --> 00:05:11.630
that she must catch and give to Bob
in order to get a banana from Bob.

00:05:12.500 --> 00:05:15.340
Now for the insight that is 
really counterintuitive.

00:05:15.340 --> 00:05:17.990
What happens if 
Ann gets better fishing.

00:05:17.990 --> 00:05:20.920
Let's say that she can 
now catch 40 fish.

00:05:21.260 --> 00:05:23.010
Obviously that's good for Ann,

00:05:23.010 --> 00:05:24.350
but it also means that bananas

00:05:24.350 --> 00:05:27.030
just got more costly for Ann
to produce herself.

00:05:27.030 --> 00:05:28.780
She would now have to 
sacrifice four fish

00:05:28.780 --> 00:05:32.330
for each banana that she gathers 
by becoming a better fisherman

00:05:32.330 --> 00:05:36.330
Ann becomes a comparatively 
worse banana gatherer.

00:05:36.330 --> 00:05:38.700
And this fact helps Bob.

00:05:38.700 --> 00:05:41.390
The reason is that Ann 
is now willing to trade

00:05:41.390 --> 00:05:44.700
more fish for each banana 
she gets from Bob.

00:05:44.700 --> 00:05:47.460
So although Bob's ability 
to produce hasn't changed

00:05:47.460 --> 00:05:51.230
he can now get more fish 
for his bananas.

00:05:51.230 --> 00:05:53.890
Comparative advantage 
is a beautiful thing.

00:05:53.890 --> 00:05:57.180
No matter what my talents are 
I can still help you

00:05:57.180 --> 00:05:59.460
even if you are better 
at everything.

00:05:59.460 --> 00:06:01.320
The more different we are 
from each other,

00:06:01.320 --> 00:06:03.780
the more we benefit 
from trading with each other.

00:06:05.160 --> 00:06:07.020
Let's get back to the real world.

00:06:07.020 --> 00:06:10.130
What comparative advantage 
practically means for most people

00:06:10.130 --> 00:06:13.270
is that we each spend most of our
working time at a job

00:06:13.270 --> 00:06:16.450
that utilizes each 
of our comparative talents.

00:06:16.450 --> 00:06:18.869
How do you know what 
you're comparatively good at?

00:06:18.869 --> 00:06:21.720
What you get paid for your job 
tells you that.

00:06:21.720 --> 00:06:24.020
Comparative advantage 
is the main force

00:06:24.020 --> 00:06:28.300
driving us to use our talents 
in those jobs that we do best.

00:06:28.300 --> 00:06:30.880
It's why people who are good at math
tend to become engineers

00:06:30.880 --> 00:06:34.630
and those who have a graphic sense
tend to go into the arts.

00:06:34.630 --> 00:06:37.100
Specialization and trade played key roles 
in the movement

00:06:37.100 --> 00:06:39.119
from poverty to prosperity.

00:06:39.119 --> 00:06:41.809
We would be desperately 
poor without them.

00:06:41.809 --> 00:06:45.260
But they alone do not explain 
the full extent of our prosperity.

00:06:45.260 --> 00:06:49.910
Another feature of the modern world
is important: innovationism.

00:06:49.910 --> 00:06:53.450
Our society is an orgy 
of innovations.

00:06:53.450 --> 00:06:55.960
This innovationism would be 
impossible without specialization

00:06:55.960 --> 00:06:58.059
and trade and yet 
specialization and trade

00:06:58.059 --> 00:07:00.350
do not guarantee innovationism.

00:07:00.350 --> 00:07:02.909
This is a topic for a future video.

00:07:02.909 --> 00:07:06.019
Here's the current leader board of
questions submitted from our viewers.

00:07:06.019 --> 00:07:07.439
We're going to pick a few 
at the top ones

00:07:07.439 --> 00:07:08.789
to answer with more videos.

00:07:08.789 --> 00:07:10.769
So go and vote!

00:07:10.769 --> 00:07:15.200
♪ [music] ♪