In economics, having comparative advantage is “having the the ability to produce a product most efficiently given all the other products that could be produce”. However, just because Andy can make 10 kilos of play dough a minute while Benny can only make 4 kilos, doesn’t necessarily mean that Andy has a comparative advantage at making play dough when they could also make other things.
Let me explain. Suppose that Andy and Benny can also make clay. Andy makes 8 kilos of clay per minute and Benny can make 6 kilos per minute. We say that Andy dominates Benny in the production of clay and play dough. If Andy needed both play dough and clay, the intuitive thing for him to do is to produce both products himself since he can produce both more “efficiently”.
That’s not so. The theory of comparative advantage says that “given all other goods”, in this case, clay, Benny is actually comparatively more efficient at producing clay than Andy. Hence, there’s a benefit for Andy to produce only play dough and trade with Benny for clay. This is because when Andy produces 8 kilos of clay, he could have produced 10 kilos of play dough in that minute. So his opportunity cost of producing one kilo of clay is 1.25 kilos of play dough. However, when Benny makes 1 kilo of clay, his opportunity cost is only 0.67 kilos of play dough, so it’s cheaper for Benny to produce play dough than it is for Andy.
Benny’s ability to produce clay at a lower opportunity cost than Andy means that he has a comparative advantage at producing clay. Assuming of course that in our imaginary economy, play dough and clay sell for the same amount of money, then it is better for Benny to make the clay because his opportunity cost is lower. Similarly, Andy should keep producing play dough.
You could apply this to life and say that everyone should do exactly what they’re good at: if maths is your best subject in school, you should become a mathematician, and if you were better at sports than anything else then you should become an athlete. On the face of it, this sounds like a good rule of thumb to follow, “do what you do best”, especially now that there seems to be an economic theory that proves you should. However, it makes the naive assumption as I did in the Andy and Benny example that everything that anyone does has the same value. That’s never the case. Instead of saying “do what you do best”, the theory of comparative advantage applied to life should say “do what makes you produce the most value”.
It doesn’t sound nearly as catchy as the naive rule of thumb, and value is subjective and can mean anything from economic value, to personal value, to social value, but it is something to think about when making decisions. Life is a series of decisions after all, but I’ll leave that thought for another post.
