“In The Short Run” Vol. 2, Issue 3. John Maynard Keynes, perhaps the most famous economist of the 20th century, famously said, “In the long run, we’re all dead.” The purpose of this series is to pose that, in the short run, we are all alive, and economics can teach us to live well.
Within the human race, there is vast diversity. Within the human race, there are also emotions, idiosyncrasies and beliefs that unite us all. We are all creatures of love, we all hunger and thirst and we all trade.
Consider a first-grade lunchroom. Goldfish swap for gushers; strawberries go for three bananas and promises about bringing food tomorrow inundate the conversation. Even where trade is outlawed, it springs up like a fire unable to be put out. The undercover markets in North Korea cause even Soviet-born communist economists to admit that “it’s human to trade” (Andrei Lankov). Trade is like gravity – one cannot escape the draw.
Trade is so magnetic because it is incredibly beneficial. Consider the following fictitious countries:
Maximum Production | ||
Good Produced| | Country A| | Country B |
Steak | 90 | 100 |
Eggs | 30 | 200 |
Assume for the moment countries A and B can only produce steak or eggs. If Country A produces 90 steaks, it then produces no eggs. Likewise, if it produces 30 eggs, it produces no steak. In this situation, country A must sacrifice 3 steaks for every 1 egg it wants.
Trade can change this closed system. Assume country A only produces steak while country B only produces eggs. They then trade half and half. Country A just gave away 45 steaks in order to receive 100 eggs. Previously, 45 steaks would have earned them a mere 15 eggs. Country B experiences a similar phenomenon and mutual increase in goods occurs.
The benefits of trade are seen in real-life examples as well. Consider Korea, an essential colony of Japan up until the 1950’s. South Korea opened itself up to trade and is now nearly as prosperous (GDP/capita) as France. On the other hand, isolated North Korea is 196th in the world. Trade makes bank.
This revolutionary model is not only applicable to countries but also to individuals. The common saying “there are only 24 hours in a day” laments the scarcity of productive time. However, there are more than 24 hours in day. I have 24 hours, you have 24 hours, your coworker has 24 hours. If we trade effectively, we can exceed the productive limits of a 24-hour time period.
We must trade intelligently. In our example, why did country A choose to produce steak when country B could have actually made more? The answer lies in a fancy-sounding economic term: comparative advantage. To make steak, country A needs only to give up one third of an egg (30 divided by 90). Contrariwise, country B must give up 2 eggs (200 divided by 100) to get one steak. Country A makes steaks much more efficiently than country B – it has a comparative advantage. The opposite is true for country B. Both nations specialize in their respective niches and abundance ensues.
To the reader, how can you find your comparative advantage? Perhaps you are in a group project. You have excellent writing skills while your partner is a master of PowerPoint. Divide accordingly. Perhaps you are married. Can you divide jobs to make quicker work? Perhaps you are thinking of whom to room with next semester. What roommate will maximize your comparative advantage?
Before you jump in, a couple words of advice:
First, be flexible. What you like best is not always what you are best at. You must let down your ego and do what is best for the team. That might be different in different situations. Your comparative advantage for a task might be lower than your roommate but higher than your colleague. Be flexible.
Second, know thyself. Knowing your strengths is key to determining how to trade effectively. Be honest, be firm, be smart.
Can you trade in your life for a better one?