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- [Don Bourdreaux] 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 vanished.
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 10 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 Ann produces 15 fish.
In total they produce 10 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 10 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
of 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 Ann 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!
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