If I’m being completely honest, I learned more about economics from a computer game I played in middle school, than I ever have from reading a book.
In Runescape, players take on the role of a stereotypical “fantasy kingdom” character and then proceed to waste the next several days working desperately to “level up” alongside thousands of other players from around the world. It’s terribly exciting— especially when you’re twelve.
Within the game, there are literally dozens of skills in which you can choose to specialize and "level up." However, any amount of time spent increasing one skill, is time not spent improving another.
Without realizing it, I observed the economic phenomenon Adam Smith once described as, “the greatest improvement in the productive powers of labour, and the greatest part of skill, dexterity, and judgment with which it is anywhere directed, or applied.” This, of course, is in reference to the market phenomenon known as the division of labor.
The pencil is the product of the labor of thousands across the globe.
As a player, I took pride in my mining skills while my little brother specialized in cooking. I learned very quickly that I could obtain a great deal of food from others in exchange for my iron ore. I could then, for example, use that food to acquire a nice sword from someone else.
What I later concluded is when everyone has a unique skill— each directed towards a diverse end— the result is technological innovation and progress.
By leaving my cooking skill at “level one” and instead directing my time towards improving my mining abilities, I increased the whole of Runescape’s access to rare ore. And, I didn’t have to worry about food because a player with a “Level 30” in cooking could bake a big chocolate cake and happily swap me for some iron.
The Miraculous Pencil
Milton Friedman filmed a television documentary series that aired in 1980 called, Free to Choose. In one of the most profound and simplistic scenes of the show, Freidman sits in Adam Smith’s chair at the University of Glasgow and holds a pencil up to the camera. The pencil, he explains, is the product of the labor of thousands across the globe. One person cuts down the tree, which then becomes the wood, another ships the supplies, another mixes the paint, and so on and so forth until a nice “No. 2 pencil” is miraculously in Friedman’s possession.
The division of labor is profitable only when everybody profits.
This scene was actually inspired by Foundation for Economic Education (FEE) founder Leonard Read. In 1958, Read published an essay called I, Pencil. Describing the factors that contribute to the creation of a simple pencil, he said:
“I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding!”
None of the many disparate interests—or at least very few—were attempting to make a pencil. In fact, they probably weren’t even thinking of pencils while they labored. Chances are, many were thinking only of the paycheck they would receive in exchange for cutting down a tree or transporting a shipment. What Smith called the "invisible hand" of capitalism guided the resources to where they were needed. Somehow, a million separate interests colluded to give Milton Friedman his pencil.
Thomas Sowell further impacted Read’s point in Basic Economics when he wrote:
“No one is at the top coordinating all of this, mainly because no one is capable of following all the repercussions in all directions… The overwhelming complexity of economic repercussions throughout an economy is rendered manageable when millions of people each deal with only a relatively small number of transactions and leave the coordination of the whole economy to the fluctuation of price.
The division of labor is profitable only when everybody profits. A farmer and a car mechanic each do their own job better when neither has to devote time to doing each of the other’s job as well. The rest of society also benefits because it retains access to both services.
If my character mines iron and is prevented from trading it for food, then the time I invested in mining has been wasted since I am unable to use the ore to access other products. Moreover, now I need to “level up” my cooking skills. The division of labor is undone when my access to other’s goods is impeded.
This illustrates the importance of an economy free from regulation. The division of labor affords each individual more access to better services and commodities than we could acquire if we had to produce everything for ourselves.
When the regulations vanished, labor became more specialized.
When we are cut off from the use of another's "high-level" skill, we must supplement with our own potentially “low-level” skill. This, in turn, forces each laborer to take time away from developing their talents further. Labor becomes united in single, inefficient entity once again.
Take, for example, the country of India. The government of India enacted sweeping reforms in the early 1990s, which greatly accelerated their economic growth.
However, the beginnings of an economic boom were born out of the stagnation that began some half-decade before they initiated their major policy reforms. The International Monetary Fund published a paper in which economist Dani Rodrick is quoted saying:
“What seems to have set off growth were some relatively minor reforms. Under Rajiv Gandhi, the government made some tentative moves to encourage capital-goods imports, relax industrial regulations, and rationalize the tax system. The consequence was an economic boom incommensurate with the modesty of the reforms.”
Ad hoc repeals in the mid-1980s and the systemic reduction of the brutal import/export duties that the Indian government had mandated in the 1990s, fostered much of the economic growth during this time. In 1980, India exported $8.5 billion worth of goods and imported $15.9 billion. In 2000, after a decade and a half of reduced governmental control, India exported $44.9 billion worth of goods and imported $59.3 billion.
The lesson here is quite simple. Undoubtedly, there was a multitude of factors and reforms contributing to this growth in both imports and exports, but reducing import/export duties was a significant aspect. With substantial regulation of foreign industry, India could divide its labor only to a certain point. Until tariff repeal, for instance, it had to produce virtually all automobiles consumed by the Indian people.
When the regulations vanished, labor became more specialized. Suddenly, India had access to commodities from other countries and could begin focusing its labor on creating products other countries wanted to purchase.
While the number of Indian people who regularly drove automobiles climbed exponentially, petroleum production in India remained relatively stagnant. Foreign imports of petroleum, however, surged. The world supplied India’s needs in that regard, while India devoted its burgeoning economy to fulfilling the demand created by foreign markets.
If we don’t have to supply all of our own needs and instead, can focus on bringing what we each do best to the marketplace, then the quality of life improves not only for ourselves, but for the entire world. Everyone benefits from India’s capacity to cheaply and expertly manufacture chemicals and plastics. American corporations, for example, don’t have to devote their resources to such tasks. Instead, American entrepreneurs, businessmen, and workers can involve themselves in industries like petroleum.
In the end, thanks to an open market, we get petroleum and plastic, and India does too. In other words, I can spend my days mining and still feed my little Runescape avatar, so long as I am allowed to freely trade with others. The division of labor affords humanity incalculable progress – but only if we maintain an economy free enough to encourage it.
Anything and Everything
Intriguingly, I also had a woodcutting level higher than my brother’s. Nevertheless, I found myself often trading with him in exchange for wood. The reason for this lies in a concept called comparative advantage.
There is all the difference in the world between being able to produce anything at a cheaper cost, and being able to produce everything at a cheaper cost. Economist Thomas Sowell explains comparative advantage by measuring cost, not in terms of dollars and time, but in things that dollars and time can produce. “The cost of anything,” he writes, “is anything else that could be produced for the same resources.”
While I could produce better wood, in higher quantities, and in less time than my brother, it was far less profitable than iron ore. Essentially, cutting down trees cost too much ore. Likewise, while my brother suffered from an absolute disadvantage in skill, he discovered that there was an entire class of players willing to buy his wood in order to avoid having to cut down trees themselves. Instead, my brother’s customers were free to bring their own talents to bear upon the economy.
In short, there was a comparative advantage gained by both parties involved in the exchange of goods. Even though I could produce more wood and more ore than he, by a purely accidental collusion of market forces, our virtual society emerged more prosperous by allowing each player to focus on their own specialized skill set. By doing so, one individual can focus on producing the wood, while another, like myself, can devote time to mining.
Dividing labor is the precursor to prosperity.
Even if America can produce anything at a cheaper cost than in India, we certainly cannot produce everything at a cheaper cost. Dividing labor – allowing each party to focus on what they do best— is the surest way to stimulate progress.
Tariffs are but one of the many ways a government will try to squash the division of labor. This is usually born out of a political figure’s desire to see his country enjoy an absolute advantage in as many industries as possible. But we mustn’t be fooled. The capacity to be entirely self-sustaining might sound desirable, but, with few exceptions, most of us would rather retain access to the farmer’s crop,
The capacity to be entirely self-sustaining might sound desirable, but, with few exceptions, most of us would rather retain access to the farmer’s crop, the seamstress’s garments, and the construction firm’s houses.
The more I think about my Runescape days, the more pronounced the economic parallels become between India and the United State and my brother and me.
At first, my brother refused to trade with me—he wanted to produce everything for himself. Discovering how time-consuming that was, he soon found himself rescinding his protectionist barriers and swapping goods with me.
And while, in many cases, I retained my absolute advantage—I had, after all, been playing the game much longer than he—trading was still extraordinarily profitable to both parties. The same is also true with the United States and India.
Thus, one can only hope that other countries of the world move toward this policy of freedom. Dividing labor is the precursor to prosperity. So long as we retain, foster, and increase our access to the markets of the world, we have a bright future ahead. We can all—Americans and foreigners alike— “level up.”