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Tuesday, September 6, 2016

Civilization Exists Because I’m Bad at Basketball

The beauty of the market economy is that we can all enjoy a variety of goods and services despite the fact that some people, like myself, are really lousy at many tasks.

There is something you are not good at. We are all bad at a lot of things. I’m useless when it comes to brain surgery, singing, astrophysics, basketball, keeping track of my own belongings, and residential electrical work – among many other things.

The beauty of the market economy and the division of labor is that we can all enjoy a massive amount and variety of goods and services despite the fact that some people, like myself, are really lousy at many tasks. In fact, the gains from trade in the division of labor rely on that fact: that some people are relatively good at certain tasks while others are good at different tasks.

Comparative advantage is what makes it all possible.

Improved by Inability

Someone has a comparative advantage when they forgo production of another good to a lesser extent than anybody else. It literally means that because you are bad at A, you must be relatively good at B. This is because by doing B, you don’t do A, but since you’re bad at A, it’s no big deal.

You can be a successful entrepreneur by simply performing the tasks that keep others from performing their best tasks.Nobody complains about how I choose to teach economics instead of playing professional basketball. And, trust me, everybody would complain if I decided to quit economics and try my hand at basketball.

Everybody would complain if LeBron James pulled a Michael Jordan and quit NBA basketball  to play minor league baseball instead. Imagine how much more everyone would complain if LeBron switched to teaching economics, depriving us all of any kind of showcase of his athletic abilities.

Everybody is most satisfied when I stick to economics and the LeBron Jameses of the world stick to sports, preferably their best sport. Said another way, we are all made better off when people can specialize in their comparative advantage.

This holds true even when somebody has an absolute advantage. An absolute advantage is the ability to produce something with fewer inputs than anybody else – said another way, it’s the ability to produce more with the same amount of inputs.

Suppose LeBron could teach twice as many students per semester as I can. In this case, he would have an absolute advantage in teaching economics and playing basketball.

Even then, I could keep my job teaching economics, because I’m terrible at basketball. Even then, everybody would be better off if the super-economics-teaching LeBron stuck with basketball, because every hour he spends teaching economics is that much less basketball we get as spectators. Therefore, comparative advantages supercede absolute advantages when it comes to total productivity.

Importantly, I, as the half-as-productive economics teacher and terrible basketball player, am also made better off through this division of labor. The most disadvantaged when it comes to productivity have the most to gain from the division of labor. This is a general rule that applies to all cases with one impossible exception: a situation in which everybody is exactly equally productive in producing all goods. Since everyone has differences in their capabilities, we can deduce that everyone has a comparative advantage in something.

Inability on the Global Scale

 This concept scales up to the level of the global economy and international trade, with the same result: when countries specialize in their comparative advantages and then trade, all countries are made better off. Every individual and every nation has a place in the division of labor.

This profound insight, called the Law of Association, is one of the older ones in economics, going back to David Ricardo. It was especially championed by Ludwig von Mises. Mises famously attributed the existence of civilization itself to the benefits of the division of labor:

Therefore it is manifest that the division of labor brings advantages to all who take part in it. Collaboration of the more talented, more able, and more industrious with the less talented, less able, and less industrious results in benefit for both. The gains derived from the division of labor are always mutual.
The law of association makes us comprehend the tendencies which resulted in the progressive intensification of human cooperation. We conceive what incentive induced people not to consider themselves simply as rivals in a struggle for the appropriation of the limited supply of means of subsistence made available by nature. We realize what has impelled them and permanently impels them to consort with one another for the sake of cooperation. Every step forward on the way to a more developed mode of the division of labor serves the interests of all participants.

Entrepreneurs find the areas in which total wealth can increase through comparative advantages. This means you can be a successful entrepreneur by simply performing the tasks that keep others from performing their best tasks. Since the value of your contribution in the division of labor is dependent on the contribution of others, civilization grows and becomes more prosperous when trade and markets are allowed to flourish to the fullest extent possible.

These important lessons – indeed, not much is more important than human civilization itself – and more are presented in FEE’s free online course, The Economics of Entrepreneurship.

  • Jonathan Newman is Associate Professor of Economics and Finance at Bryan College in Dayton, TN. He was Online Learning Manager at FEE and is a Mises Institute Fellow. Newman earned a PhD in economics from Auburn University.