Welcome to E Con Talk, part of the Library of Economics and Liberty. I'm your host, Russ Roberts of George Mason University and Stanford University's Hoover Institution. Our website is e con talk dot org's where you can subscribe, find other episodes, comment on this podcast and find links and other information related to today's conversation. Our email address is male Addie Con talk dot org's We'd Love to Hear from You.

Today is February 4th 2010 and today's podcast is a bit unusual. There's no gas. Just me. I want to share with you some of my thoughts on trade that I've been thinking about for a while and in the meanwhile, I want to thank everyone who's been responding to my request for feedback on the experimental Mike Munger podcast. Uh, my volume a male has increased lightly, and my ability to respond sadly has not been very high. But I assure you I read every one of your e mails and they're very gratifying to me and informative, and please keep in common. Ah, and I also appreciate your suggestions for guests, so keep those coming to finally, I want to mention before I get started that we're on Twitter at e con talker e c o N T a l k e r. And I use that Twitter account to mention upcoming podcast, solicit questions for guests and add some occasional thoughts and other things as well. So please follow us there if you're interested onto today's topic.

About 15 years ago, I wrote a book, The Choice of Fable of Free Trade Protectionism, and in the book, David Ricardo comes back to life as a ghost to try to convince an American television manufacturer in 1960 The trade is good for America, good for the next generation of Americans, even though it will destroy his company and hurt his hometown. At the center of that book is Ricardos Central Contribution to Economics, the idea of comparative advantage, something about compare advantage for a long time. And a few years ago I wrote a couple of essays for the Library of Economics and Liberty, that bowling to exploring some of what I've learned and been thinking about. But in the last couple of years, my thinking on trade has has changed. I've realised there's perhaps an even deeper insight about trade, perhaps even more important than David Ricardo's and David Ricardo's Inside of Compared Advantages.

It's in every economics class, every principles class, most macro classes, most micro classes. It generates a lot of good exam questions. And I wrote that book the choice because I felt that I knew that I hadn't understood fully what the significance of comparative advantage was, even though I was pretty good at those exam questions. But in recent years, the last couple I'd say, Uh, my ideas on trade have not changed so much as gotten, I think richer. And these insights come from conversations I've had with Don Boudreau seminar I attended of James Buchanan's podcast with Mike Munger on the division of Labor, and it's also related to a podcast I did with Paul Romer on Growth. So to get started, I wanna give you a quote from an article by Robert Frank in The New York Times,

and Robert Frank isn't we did a podcast with him a while back off. He's a writes a column at The New York Times, and he's an economist at Cornell. And here's what he wrote as a Peace Corps volunteer in a Paul long ago. I hired a cook who had no formal education but was spectacularly intelligent and resourceful. Beyond preparing excellent meals, he could butcher goat Thatcher roof plaster walls, re soled shoes and fix broken alarm clocks. He was unable 10 Smith and a skilled carpenter. Yet his total lifetime earnings were less than even a very lazy, untalented American might earn in a single year. So the question is, that's the end of the quote. The question is, why does a spectacularly intelligent and resourceful person in a Paul earned spectacularly less than a lazy, untalented American?

I've been thinking about my daughter. She's 17 years old. She's been baby sitting. Oh, for maybe two or three years. She makes about $10 an hour, which is a lot more than anybody in a Paul makes, who's incredibly talented. Her main talent in earning that $10 an hour is a baby sitter. Is her ability to show up on time and not burn the house down? It's It's not really ah, at an enormously demanding job. Patients helps. It's great. Three kids don't tell the parents when they come home that, you know,

you locked the kids of the in the basement while they were screaming and there was a few other skills. But it's not like that on a roof for butchering a goat. Um, and in America, that's common. As Robert Frank points out, relatively, I would say seemingly unskilled people make a lot more than an incredibly talented person in the Paul. So why is that? And they're a lot of different answers you could think about Robert Frank gave one David Henderson at our sister site E com log gave one. And I thought, uh, although David, I thought was closer to the truth, I thought Robert Frank's answer didn't get what I thought was the heart of the answer. And so I'm gonna try to answer,

Ah, that question of why a skilled person and they, Paul earn so little relative to an unskilled American. And in doing so, I want to try to give you an idea of these insights into trade that I've been thinking about. So the one sentence the answer, Mister, why a skilled person in the Paula and so little comes from ah, quote of in that book I mentioned earlier. The choice and that is self sufficiency is the road to poverty. Self sufficiency is the road to poverty. Now, self sufficiency is in everyday language is a good thing. It means standing on your own two feet, not relying on others in the context of economics in the context of trade. If you start thinking about it,

realized quickly that standing on your own two feet is if you mean it literally. If you mean literally not relying on anyone other than yourself, you are desperately you're going to be desperately poor and you probably will not survive. It was a wonderful documentary PBS put out a few years ago called Frontier House, where people were given the challenge of living by the rules of 18 80 Montana and Ah, they were challenged to see if they could come up with enough. Resource is at the end of the of the summer that would tide them over through a brutal Montana winner. If I remember correctly, none of the families made it. They did not generate enough output with their modern skills. They weren't sufficient. Ah, and most of these families were self sufficient, other than, uh, the only relied on themselves other than one.

If I remember correctly, family who was seen as cheating by the other families because that family created a still made some whiskey and swapped it for other people's goods, and that was considered cheating. It was it was most of the participants, the other four families. The whole idea was to see if, by being self sufficient, you could make it. And of course, most of us would struggle to do that, certainly because of our modern skills not being very well suited for 18 eighties Montana, but also simply because if you only rely on yourself, you're going to be very, very poor. And again if you push it literally, too,

you can't use tools other people make. You can't use any, uh, implements like that. You're going tohave. Ah, really, really poor life. So that's the quick answer. Self sufficiency is the road to poverty. A slightly longer answer coming from David Ricardo would be that special specialization and trade make us rich. The more America trades with Nepal, the better both of us will be. Trade is mutually beneficial. Trade allows people with diverse skills, even efforts,

Ricardo pointed out. Even if you're not as good and everything is someone else. So even if I'm not as good at thatching a roof or butchering a goat or anything is, you're you're better at all those things that I am. Usually we're going to be better off if each of us specializes in certain tasks and trades for the the other things that we want. And again, it's important to point out that the power of specialization in that setting isn't so much what we normally think of which is learning. By doing that, the more you do something, the better you get at it. It simply has to do with the fact that if you devote yourself to what you're relatively good at the two of us, can you do the same. The two of us can produce more than we otherwise would. Now the opponents of globalization want us to be more like Paul, a country that is pretty cut off from the rest of the world. But I think the deeper answer as to why nay Paul is relatively poor or by the people in a Paul struggle,

despite their tremendously talented set of skills, comes from this inside of James Buchanan that I heard him delivering a seminar based on a paper he wrote with Young Eun on Increasing Returns and Adam Smith, and I'm going to use the example that they use. I think it's in their paper. Ah, it's certainly the example that you can and used in the salmon arm. So here's the idea. You and I and a bunch of our fellow fellow human beings were part of a small group of hunter gatherers who are living in very primitive subsistence conditions. Ah, oui. Get all of our food from hunting. We could do some gathering as well, I suppose. But basically, there's one task. There's hunting and meat is what sustains us.

Apologize again to the vegetarians in the crowd, especially after the Munger podcast, which received a lot of interesting comment. Criticism, uh, I'll mention again. My daughter's a vegetarian and my wife is, but I think in primitive societies vegetarian ism was a was not that common. So we're going to be talking about a primitive society of hunters. So we're all sitting around the end of a very long, exhausting day of hunting and tramping through the woods. We've been trying to kill deer all day, and some of us have had success and suppose in that setting. You're tired of living on a very small amount of venison. A very small amount of deer meat. You've really her hungry pretty much every night.

And there's some nights. You're very hungry and you'd like to have more meat. You'd like to have more output. You'd like to be have higher income. What would your choices? How could any of us Ah, get better off? How could we move toward a higher level of prosperity? Ah, is these hunters were We're really hungry. So what are our options? There really three options that we have for doing better. You can bang your neighbor on the head and take his meat in. That way you can get more. You can develop a technique that allows you to be a more successful hunter. For every hour or day that you're out in the woods,

you could improve the knife that you use. You could invent a bow and arrow. You could invent a gun. You could have been a net. You could learn to track deer more successfully. There's a whole bunch of stuff you could do, and we call that generally productivity. So there's a theft or plunder. That's option Number one option Number two is productivity, and there's 1/3 option, which is trade, and we're going to talk about that a little more detail. I just want to say first that the inside about banging people on the head, Walter Williams pointed out to me that heard, I'm gonna talk. Give the observation that that first method of self improvement of banging people on the head that's pretty,

the historical favorite for a long, long time. It's only in the last few centuries that people could imagine improving themselves by something other than stealing it from someone else. You tend to think of theft as a negative. Excuse me. It's a zero sum game that if I get richer by taking your venison, I'm better off in. You're worse off and they cancel each other out. But in fact, it's important to remember that theft is actually a negative sum game. If I know that I might get banged on the head, my incentive to accumulate wealth is smaller, and only that I'm going to have to devote resources to keeping you for making me on the head. I'm gonna lock up my meat. I'm gonna hide it from you. Ah,

Theft. The potential for theft. Costas resource is so secure. Property rights are incredibly important part of prosperity. Just want to put that I'm not gonna say anything more about that, but it's important to mention as we go along. The other two methods productivity increases in trade are not zero sum. They are positive sum. They certainly make me better off without making anyone worse off. By the way, I'm assuming through this example that there's lots of deer and no congestion problems there. But so I can figure out a better way to kill deer. Or if I could trade somehow for deer meat. Uh, I'm going to make you better off as well as may. Certainly in the trade case in the productivity case,

you might say Well, but if if I figure out a way to make a sharper knife or throw a spear better or et cetera, then that only benefits made the innovator. But in fact, when you see me coming home with more meat, you see me with ah Fuller, happier face. You see me adding clothing that's larger, you're going to say you're gonna wonder, How did I do that? You might follow me around. I might share the idea with you because I like you or I might sell it to you. Or you just might figure it out on your own under the impetus that there's a technique to find. So productivity and trade tend to benefit the whole group. Theft punishes the group. So when we think of trade is on turn of the third technique,

we think of trade. We think of David Ricardo. We think of specializing in some aspect of the production process. Some task and trading make just doing that full time, doing it relatively well so that I can accumulate enough stuff of that thing. I'm doing well to trade for other stuff rather than trying to do everything myself. So in that Ricardo's story, what drives trade and what Dr Specialization is diversity is our differences, the fact that we're not the same, and that allows for the possibility that I can improve myself by specializing and then interacting with you. And it's Rabbi Jonathan Sacks, the chief rabbi of England, is pointed of the United Kingdom's pointed out trade makes diversity of blessing. Often, diversity is a source of conflict and tension. But because of this opportunity specialize in trade,

trade, trade takes our differences and encourages us to cooperate through the trade and exchange process. But what if we're all identical in the case where we're all identical? The Riccardi in incentive to trade, goes away. And if you you're an economics student or a teacher, you know that it doesn't just, uh it isn't just a special case where we're all literally identical. If if you're twice as good at two tasks as I am, are incentive to trade disappears? If you're three times is good, what really matters is our differential ability in task A versus task be. And so, if we're all identical, if we're all equally good at all tasks, it looks like there's not gonna be any specialization.

There certainly isn't gonna be any Ricard ian specialization, but it turns out, and this is the Buchanan in point. It turns out that there is a possibility for specialization and trade even when we're all identical and it's rather spectacular. It's rather I certainly for me was I didn't appreciate it or know about it and thought about it, and I think it's also incredibly important. So let's go back to our hunting scenario. You know, I said, it's only one task hunting, but of course there's lots of other tasks as well. Hunting is the way we gather our food or protein, but we have to eat during the day. We have to keep our tents, Orlean twos or thatched huts. Thatch.

There's all kinds of other tasks along the way, but our when I say there's only one test before of deer running. I met this line one way of gathering food. So one of the things we have to do before we go out into the woods is we have to make sandwiches silly but fun example. We have to make sandwiches to take out into the field with us, because we're not going to be able Thio no restaurants and our primitive society. So each of us every morning take some time and makes a sandwich for breakfast, say in a sandwich for lunch, so that we don't have to come back home to fuel up during the day of hunting. And that sandwich making task takes away time from the task of hunting. So one of us decides, Hey, I'm gonna open a business that offers a takeout breakfast and lunch solution. I'm going to sell premade sandwiches. So the hunters, my fellow hunters don't have to do it for themselves.

And that's gonna let the hunters spend more time hunting, were doing something else. You know, fixing the hatch in the roof. Whatever it is, when you think about it for a little bit, you realize that at first glance, this takeout business cannot succeed. Because if you think about it, what's required for this business to succeed? Is that you? I'm the sandwich maker, and I've opened the takeout business for my businesses succeed. You have to be willing to pay more for a sandwich. Then I give up by not being able to hunt. So I'm gonna by making a sandwich for you,

I'm not gonna be able to hunt. I'm gonna lose time. I could have spent hunting. You're gonna free up time. So I have to get enough for the sandwich to compensate me for the time. I'm not hunting you as the buyer of the sandwich. Want to pay less than what you would normally have to spend in time for gone hunting to acquire this, to make the sandwich yourself. So as a result, if we're all identical, I hope I said that previous example, right? The basic intuitions, very straightforward. If we're all identical and it takes me Justus long to make a sandwich is it takes you and were equally productive as hunters. Me making the sandwich for you is not a viable business.

Altar is not a viable business opportunity. It can't be profitable. So there's no market for sandwiches if we're all identical. It seems, it seems we need the Riccardi in world, where some of us are not very good hunters or very good sandwich makers or something like that. But what you can and you point out, is that even when we're all identical, it is possible that the sandwich business could thrive. And I want to emphasize that I'm leaving out nonmonetary factors, which I'll bring back in a little bit later, at the very end. And by that I mean you might want to stay home and make sandwiches, even though it means giving up a little bit of meat production. You're going to sell the sandwiches cheaper than it would. Normally.

Your foregone costs of going out into the field, you're willing to sell them or cheaply because you hate hunting. Either it discuss you or because you hate being out in the wet woods or because you feel bad for the dear. It could be 100 reasons or you love cooking. You love being in the kitchen. You love making a beautiful sandwich that wood might mean that you're willing to forego more meat than you otherwise would. And so there's not monetary factors that come into our choice of job Gonna put those to the side, and I want to keep the example where were all identical in all ways. And I want to show you then that even despite that, there were huge potential gains from trade and specialization, so that's rather surprising. So at first glance is I said, it appears there's no possibility of exchange but in fact and specialization in trade. But in fact, if there are enough hunters, if our group is large enough,

it can be productive for May to become a sandwich maker and make all of us better off and what it requires is the addition of technology to the sandwich making process that makes sense when I'm making 100 sandwiches or 500 sandwiches. But that doesn't make sense when I'm on Lee making one. So if their economies of scale, if the addition of technology can lower the cost of sandwich making, suddenly I can now produce a sandwich at a low enough cost to me in terms of what I give up from it. I could do it quickly enough that my foregone time per sandwich is actually less than it would take you if you made it yourself with a production process of a single sandwich so that some of the obvious ways that might happen, uh, and again I'm gonna use some facetious examples from modern times that wouldn't be available to our hunter gatherers to show you the idea of it. If I'm making one sandwich, I'm going to make one loaf of bread, say, and use it over the course of the week it and making one loaf of bread. I might have a little small oven, and I might need the bread myself, the dough myself by hand, of course,

and I would slice the meat with my knife, and I would spread the mustard with my knife and I would grow the mustard, perhaps in my mustard field, out back. So all those things are the technology when I'm making one sandwich, if I'm making 500 I might have a special oven for break baking bread. I'll have a food processor or a mix master for producing the kneading the dough. I'm will have a power electric meat slicer rather than using a knife. Um, I'm gonna have a mustard field. It's different. Easier to cultivate when I'm making enough mustard for 500 sandwiches a day rather than one. So when all these examples, what's interesting about this and shocking a little bit is that when I'm making 500 sandwiches instead of one the addition of those technologies of adding capital, adding the the oven adding the meat slicer. Those technologies make the sandwich cheaper in terms of foregone time cheaper per sandwich,

which allows me to then make a profit selling to does price it at a price that would make it worthwhile for you to want to buy it. You can't say then, as the buyer of that sandwich. And here's what's interesting. Oh, I'll just do that myself. I'm not gonna pay this guy to bang my sandwich. I get my own meat slicer. But if you're making one sandwich of meat slicer makes a sandwich Maur expensive, not cheaper. The price per sandwich one sandwich is not enough to advertise the higher cost of capital that the meat slicer ads. You have to have a large volume to exploit the advantages of that technology. So this is a very important point in and of itself, just mentioning. I never thought of it before until I was thinking about these issues. It's a little bit of a puzzle.

Sometimes. Why in primitive societies mentioned this a long time ago in a podcast somewhere with somebody I remember who? Why don't they use the Why don't primitive societies today use the most up to date technologies and the simple? It's not because I don't know about them. The simplest answer is it's not profitable. It's not productive to use a grain thresher. When you have a plot of land that's 20 feet by 30 feet, you gotta have a big farm to make a wheat harvester or someone sophisticated piece of modern technology profitable. And so it's very important to notice that the scale the operation has a huge impact on what technologies were sensible to employ, how much capital you should employ. And this was one of Adam's Smith's most fundamental insights in the wealth of nations. The division of labor is limited by the extent of the market. And, as Mike Munger pointed out on the podcast, we did on that concept one of the It's not just that you divide the task up into smaller and smaller pieces and have each person specializing that's part of it. And that's kind of what this is.

The sandwich specialization. And you could imagine if you're making thousands of sandwiches, you might have one person working the slicer. You have a baker who bakes the bread. You have someone else who just thinks the mustard. If someone who assembles the sandwich is somebody who tears the aluminum foil, that's true. That's one of Smith's points that the tasks as the volume and the size of the operation expands people specializing more more tasks mean sees me that there's warm or specialization each task being done by one person but something more important insight, which applies even here on one person, is making all the pieces of the sandwich is the application of capital the application of technology. The application of what I think of is the embodied knowledge of other people, which is that meat slicer that suddenly becomes profitable. That suddenly becomes wise to use. And then, even more importantly, you have an incentive to continue to improve that technology.

And so, I mean, this is just an enormous way that we leverage our our potential as human beings are productivity. The most trivial example this that is obvious is that if you lift weights, you can be stronger and you can carry more books around with you. That's great. Or you can do push ups. You don't even need technology to get stronger to carry more books around with you as you walk through life. Ah, but you can add some technology. You can add a backpack in a backpack, lets you carry more books more comfortably, but then you can really take it up a notch. You can add a kindle, and when you add a kindle, you could take 1000 books.

You can leverage your human abilities to carry stuff in ways that no matter how many hours you spend lifting weights, no matter how well you designed the backpack, the Kindle just crushes it. And so you get enormous leveraging of human capability when their technology comes along, and that's just that's just a trivial example. So the point is, is that the economies of scale? If I'm producing enough sandwiches and we don't know what that number is, by the way it might be 500 it might be 100 might be 20 If I'm producing enough sandwiches, it can be possible for me to add technology to add capital that process, bring the cost down and make it worthwhile to specialize in sandwich making and not go hunting. A couple points about that. First, it's that technology isn't sitting there. It's not like somebody says, Hey,

look at that meat slicer over there would not be great to use. You have an incentive to invent a meat slicer when you have 500 sandwiches to make. That's the whole idea of the Kindle. The whole idea of most enormously large numbers of human innovation is that someone has to come up with a way to make the process cheaper, and that's only worthwhile when you have lots of people to exchange with. When you have lots of people around you, it might take. It might take a few 1,000,000 people around you to trade with more than a few 1,000,000 tens of millions of people around you to trade with to make it worthwhile to invent an assembly line process for producing an automobile instead of crafting something in a more artisanal, craft ish way. So the whole modern technology process, the modern manufacturing process, is the leveraging of technology and creating the technology of the incentive to create that technology that comes from the ability to trade with large numbers of people. At this point, let me just add that you realize why way we start thinking about this, that 50 people gathered in the wilderness. Let's make them the incredibly the most.

The 50 most skilled Nepalese cooks are Tin Smith's Roof, Thatcher's Goat Butchers, that Robert Frank was marveling at how skilled these people were and how little they had to show for in terms of income, take the 50 most incredibly skilled people are the 50 smartest people or the 50 wisest people are the 50 strongest people or a mix of all 50. And of those skills in the 50 and you put him in the woods, you put him in a Paul by themselves, you put him in isolation, they're gonna be desperately poor. Self sufficiency is the road to poverty. Not just because one person is gonna be poor trying to be self sufficient, but even 50 people trying to be self sufficient can't maintain the modern standard living that we've become accustomed to. The modern standard of living comes from our ability to interact with tens of millions, hundreds of millions of people, which allows the incredible specialization we see around us. And that specialization is partly driven by David Ricardo. The fact that we're not all the same but a lot of it is driven by the fact that if I can interact economically with millions of people with scale of of the operation and the technology and capital I add to it can make it incredibly inexpensive and give us an incredible start living so those goods inexpensive.

Now hear me ask you a question. I've said even if we're all identical. We can have this potential for special days for specialization. There, enough of us. So here's the question. Which one of us, if we're all identical, is going to become the sandwich maker and open that takeout business? And one answer is, it doesn't matter any one of us could. But the better answer, which came from a student of mine. Forget to it as I apologize. When I taught this, ah,

couple classes back said, Well, it's the first person to think of it, and that's exactly right. It's not obvious that there is a profit to be made from sandwich making. It's not obvious that there there are potential for two jobs in our little society called hunting and sandwich making a za former productivity. Someone has to think of that, and that's an incredibly important insight. And I say it's important because when we teach comparative advantage of trade, we often get stuck in this two by two matrix. So there's two people and there's two tasks. There's fishing and there's hunting or there's hunting and there's water gathering, and we then say, Well, if we could specialize, one person doesn't want the other desert.

They can then trade and do better than if they try to do both for themselves, long as bubble ball. But there aren't two tasks. There's n were in is unknown. We don't know how many tasks are the number of tasks that's appropriate for us to specialize in, emerges from our interactions. And it emerges from our innovations and emerges from our entrepreneurial insights. There's no book that says what the end tasks are. They have to be figured out by human creativity. So, uh, in the real world, though in the real world we're not all identical, we're all different. So Smith, by this silly assumption that people are all the same,

we can see right away not right away. But we can see that even in the world were all identical, there's potential for trade if the market is large enough, if there enough of us, if the technology is potentially created, can be created that will allow the price of a sandwich to come down sufficiently. So that's if we're all identical. But we're not all identical. We're all different. So that brings us to the question is, and this is gonna be David Ricardo's question. If we're all different, which one of us becomes the sandwich maker? Suppose we've figured out or someone has announced or someone had the insight that there could be a sandwich takeout business Who would do it best? Who's of our group? The best person to assign to that task?

And I said that two different ways because they don't really mean the same thing. We often say, Well, the person is the best sandwich maker should be the sandwich again. What we mean by best is, well, I don't mean literally the best, because what we're trying to do in that phrasing is to get at comparative advantage. It's very often hard to word it carefully in English, so let me try to say it a little better and again we make the distinction. There's a person who's best. It's sandwich making sort of, and I'll describe what that is. It a minute, and there's the best person for the job, and that may not be the same person often will not be.

And that was Ricardo's inside. So let's get to that. So who will it be? It's tempting to say that the sandwich maker and by the way you think of this, either as a competitive process, who is going to be the most profitable sandwich maker? So there might be one to start with. Who thinks of it is actually not the best person for the job, but somebody else out competes them and drive them out of business. Or a few of them might open up, as happens in the real world of size, of the markets large enough so we could think about a competitive process. But we could also think about a cooperative process where we as a group sat around and said, OK, there's 50 of us Somebody came up with this idea sandwich making which of the 50 of us should not be a hunter and should stay home every day and make those sandwiches for the next day. Either of those can come up with the right answer under the same answer under the right conditions.

I want to focus on that now, but I want you to think about what appears to be the obvious answer as to who should do it and why it's wrong. So the obvious answer beat well. Let's have a competition. Let's have everybody. Big sandwiches. Whoever causes were all different in this more realistic world, whoever could make sandwiches the quickest that person should be the sandwich maker. Well, that's not true is I'll show in a minute. A second obvious but not true way. Decide who should be The sandwich maker is. Well, let's just take the worst hunter. Whoever the worst hunter is, let's get that force it into the kitchen making sandwiches.

But that's not the right answer reserve. And the reason those answers are wrong is David Ricardo's great insight. David Ricardo's insight is you have to look at opportunity cost, and we have a nice summary. This on the website. Put link up to, ah that Laura Landsberg wrote up very well done opportunity cost. What you give up is the true cost of making the sandwich. It's not the price because you know prices. Yet in this discussion, there's no money. Even you're going to swap stuff. Potentially, the cost of making a sandwich isn't money. It's the time that you give up in particular what you can do with that time as a hunter. So you might be the best sandwich maker,

but you're such a good hunter that it would be a mistake to, even though you're the best sandwich maker in the competition. When we we held a stopwatch to people and so who could make the sandwiches, you might be the best hunter seemed the best sandwich maker You're so good at hunting, it would be nuts to assign you to the task of sandwich making End. The market in a competitive process would never assign that to you because you give up too much in coming out of the field. And similarly, even for the worst hunter it could be. You're so horrible a sandwich making you better off staying is hunter. So that was Ricardo's insight that what you give up to do a particular task is really the determinant of what tasks that people are going to choose in up markets, Lewis's adding. And what you would assign people to as well, um, now another way to think about Ricardo's insight, which I really like, is Ricardo's insight is it matters who does what it matters,

who does what. You don't assign people randomly two tasks. We want to maximize our meat production and consumption. We want to make the pie of economic activity as large as possible. Then we don't just assign people randomly because people are different and it matters not you don't just assign people to the thing they're quote best at that. They're the best at you. Don't just assign the sandwich making to the best sandwich maker because that could be too costly. Could be giving up a lot of venison if that person's a really extraordinary hunter. So the first inside of Ricardo is who does what matters. You don't want to sign people randomly and which people do. Which thing is that obvious? Because you want to look at their relative capabilities among the different tasks. Now, what about one of the lessons here is, And by the way, I'm talking about economic output here.

And how about maximizing the size of the pie? Remember that I've held off to the side nonmonetary aspects of life. They do matter. And when we talk about the true size of the troop, I we would want to include those non monetary aspects as well. So I want to just say that in the background. So one of the lessons of the Riccardi in Insight and the recording and approaches. There's two ways to get venison. There's the direct way you go out to be a hunter, but there's an indirect way The indirect way is to make sandwiches and swap them for meat. That's the roundabout way to produce stuff via trade. That's true for individuals, and that's true for nations. If we want stuff we could even make for ourselves, or we can make other stuff that people want, that's important or they won't trade with us and then exchange it.

So trade is fundamentally in this record ian story or the well, especially the guardian story. It's about implicit cooperation where we leverage each other skills. Important point in the record. Ian's story, an important point in the world where we're different and have different abilities and skills, is that the pattern of trade that results is a bit can be a lot on illusion and say that very well. The observed pattern of trade can fool us into thinking as the caught what the underlying cause of trade is. So if you and I are in this primitive society and I become the sandwich maker and after a few years of course I've. I've added all kinds of fancy new breads and different kinds of spices to the venison because this is all I do all day, and I have the incentive in the the return from figuring this out for 500 people instead of just for myself. So I've improved the sandwiches a lot over the years that you guys are out there hunting, doing a great job. And you could look at us that if you were an observer who showed up in the middle of this process, you'd say, Well,

it's obvious why that guy's sandwich maker He's a horrible hunter and it would be true. After not hunting for five or 10 years and running the sandwich shop full time, my hunting skills would probably depreciate or atrophy, and I would look like a horrible hunter. And if you observe behind ing for fun, if you took me out in the field, say, well, maybe we should hunt coming out with us, you'd find out I'm a horrible hunter because I haven't hunted for a while and I've got this opportunity specialized in sandwich making and similarly, you in the kitchen as one of the hunters would look a little bit in AP, trying to slice the meat and to do the bake the bread. You haven't done it for years. I've been the guy doing that so it would look like the pattern. A trade waas Oh, there's Of course they trade.

There's a guy's good at sandwiches is bad hunting. A bunch of guys were good hunting, not good at sandwiches. Well, of course they trade, But that pattern of skills is in Dodge Innis. It emerges from the innovation that I made. So the differences between us, the apparent differences get magnified by the observed up by the opportunity to trade so that an outside observer is gonna be fooled into thinking what our skill set is. So I'm horrible. Thatching roof. I could barely get up on a ladder to clean out the gutters. I couldn't Thatch roof. I can't butcher a goat. I can't fix an alarm clock. But one of the reasons I can't is it because I don't have any incentive toe learn those skills.

Whereas the person and a Paul who has to do those for himself. The cook of Robert Frank in his opening story, That person can't rely on others to do those things because there aren't enough of them around to make it economically profitable. To specialize. He that's the smithy in point. So as a result, you end up Lauren. Hi, doing yourself. So it's Frank was really, I think, deceived in a sense, maybe understood. I don't mean to suggest you didn't understand this point, but by looking at the exterior skills, the apparent skills of the his cook,

he was fooled into thinking there was some weird thing going on. Perhaps when, in fact, it simply was the fact that because he did not have a market to rely on for most of his goods, he had to learn to do them himself. Whereas in America, the modern system or modern society that has more people to trade with, uh, it doesn't make sense to learn how to do those things that's too costly. It's expensive to do those things for yourself. Self sufficiency is the road to poverty, and I should mention that name Paul, By the way, it is a relatively cut off country from the rest of the world. They have tariffs and perhaps equally important, and this comes back to up the podcast with Michael Spence probably don't have a lot of good infrastructure in Nepal to get goods to market,

to allow specialization and exchange. The roads are probably not so good. Maybe the ports and harbors aren't so good s, so it's difficult to take advantage of economies of scale on truck stuff around and get the lower prices that result in the higher standard of living. So the bottom line I'm gonna keep going, but other points to make. But I just want to mention that to answer the question. Why is that Nepalese person so desperately bored? Americans desperately rich? The simplest answer is that that, I think, takes into account both Smith and Ricardo is that that Nepalese cook doesn't have as many people to exchange with as the average American, and as a result, there's less specialization as a result. Good, sir,

more costly. As a result, they're poorer in a Paul. Then we are in the United States, and the number of people you can exchange with is an enormously important factor for both Smithy and more kardian reasons. It's Smith and because the more people going to change with the easier. It is the leverage, the economies of scale that make it useful toe apply technology and capital. And it's important for the record ian idea, because the more people you can exchange with, the more diverse they're likely to be. And the more chance there is. You could specialize because of her kardian reasons. One more thought on the difference from Ricardo and spent before I continue. Which is that the Smiths the Ricardo story, that it is our differences that encourage specialization is a different story in terms of timing than the Smith story that says It's the number of people you can exchange with that determines specialization via economies of scale.

This record Ian story is about a point in Time says, At this point in time, given our skills, given our technology, it really makes sense for some Mr Specialized in the things we do relatively well and that'll maximize our output as a society or is a group or the Klan. They were smithy, and idea is about unleashing the power of exchange and trade in a much more dynamic way. It's not just, oh, you know, the pie can be a little bit bigger if we make sure that the right people do the tasks. Smith ideas. If I could apply technology If our exchange circles are large enough, if I can interact with enough people to make it worthwhile to apply technology, I can get a lot richer and we all can get a lot richer through the growth of innovation and technology. And that's really the Paul Romer point about the power of ideas and knowledge and the incredible public nous of that and the ability for lots of people to regenerate output in innovation and well being from public ideas.

Okay, let me continue. The few more points to to talk about so to summarize were right now, when I ask you a question, we've said that if they're enough people to exchange with and we don't know what that number is, obviously and there could be some false starts where somebody opens a sandwich shop and goes out of business, and maybe that people will think that's a bad idea for a long time, and then someone else will try it again when they're more hunters and they find out it does work. What we said is that if there are enough people. Even if there are no differences in skills, then it trade and specialization or say back different reverse specialization and exchange specialization and trade makes us all better off, even when we're identical. And when we're different. We could do them better than that by making sure that the right people do the task that relatively good at. And we're gonna say, I'm gonna make the point later that the way that happens isn't by us sitting around and trying to figure out who does what relatively well.

You don't have this competition and see who makes sandwiches Well, then a competition and who make who hunts the best and then make sure you figure out through some linear programming optimization problem how to maximise the output of society. The wages and prices steer people into the task that they're relatively good at, which is just the coolest thing, and I'll come back to that at the end. But I won't ask you a question. What is the difference between becoming a better hunter? That is adding a knife, making the knife sharper, proving the handle of the spear, making this spear more aerodynamic, adding creating a bow and arrow, creating a net, some kind of trap. What's the difference between becoming a better hunter and having the opportunity to buy a sandwich on the way to the field? And the answer is,

there is no difference. It doesn't matter to me is a hunter whether I've got a better tool or I can buy the sandwich on the way to work because both of them allow me as a hunter to become more productive. Both create time whether I can hunt more effectively, freeing up time to hunt Maur or spending creating, freeing up if I could gather enough protein in a shorter period of time that I can do other tasks around the house and in my life. That is whether I do that by being a better hunter or by having the opportunity by a sandwich, which means I don't have to spend the time making the sandwich myself. Both of those create time, which is our most precious resource. That means that they're really only two ways to improve your standard. Living two ways. You can bang your neighbor over the head and take your stake, the neighbor stuff, or you can figure out ways to make your resource is more productive. Say it again. There two ways to improve your life.

You can steal your neighbour's stuff, or you can find a way to make your scarce resource. Is your time your energy? What your skills yield more stuff than they did before. Now there's two ways to be more productive. The first way is the way we usually think of ad technology to a process and improve the technology so that the machine works faster so that the spirits, Sharper said that the bow and arrow goes farther. That's the standard where we think of technology, making us more productive. You go first, user use a fishing ride, then you use it. Ah, a better fishing rod than you add a net. Then you had a trawler, et cetera.

Those air the obvious ways You add technology to a process and you become more productive. But the second way is specialization with trade and adding technology. In that way, specialization, driven by the opportunity to exchange, allows us to use all of our skills together and interact with each other. So two ways to get more as a society or as an individual theft, plunder, theft and plunder or productivity two ways to be more productive either at technology of the process or specialize and trade more, taking veg of the economies of scale and had the technology that way. Fundamentally, it's all about technology, but one's a direct way, and one is a roundabout way. Um, over the last 300 years or so,

this has been the story of the human enterprise, increased trade, increased opportunity to interact with each other, which leads to increased specialization, increased capital and technology, and an increase in stared a living oven enormous amount in the United States over the last century. It's an increase of probably 2010 to 20 times. So we're scared. The living over the last 100 years is improved by 10 or 20 times, all brought about by economic change by ever increasing specialization and the results of that specialization, more capital and the most productive people assigned the most productive people relative to their opportunity costs. Assigned to each task. Smith and Ricardo working together those two economic forces, our differences and how many of us we are to interact with, create the incentives for exchange and in turn, allow the possibility of technology to be applied to the process,

which improves their center living year after year after year. But but not everyone is better off every minute. So a textile worker in North Carolina can have a lower standard living today than a few years ago because of technological change and because of trade and because of the Samantha McCarty in forces. So I'll give you an example from this about 50 years ago. Unbelievable, uh, numbers. About 50 years ago, a typical North Carolina textile worker operated five machines at once, each capable of running a thread through a loom 100 times a minute. So five machines in each machine threading the loom 100 times a minute. That's 50 years ago. Today's machines are six times as quick. They could do 600 threads a minute. Now that's the quote standard productivity change we think of. In addition,

the machine itself is easier to oversee. And instead of overseeing and operating five machines, a typical worker overseas 100 that's a 120 fold increase in output per worker. So instead of each machine I work on, is now six times more productive, and I can operate 20 times the number of machines I could operate 50 years ago, so I'm 100 and 20 times weren't productive. Not surprisingly, we don't need as many textile workers as we needed a long time ago to produce the clothes we wear. If you're 100 and 20 times weren't productive because of the addition of capital and technology. That's the Smith point. The Ricardo point is, Well, maybe you shouldn't have the textile mill in North Carolina. It could put it in China and even be more productive, freeing up the labor off the textile worker in North Carolina to do something else.

The problem is, is that that person may not find out right away. It might be the next generation that enjoys the fruits of that of that. That might be the kids of that textile worker. So not every textile workers benefiting from the fact that technology in textiles has improved and it's cheaper to produce the textiles in China. The people who were close benefit from it and they in turn have more resource is to use. That might create other opportunities that the Children of the textile worker North Carolina can now do. But any particular textile worker might be punished and suffer from the fact that the demand for that person's skills aren't as large as they used to bay. Ah, the same is true of farmers in 1900 used the example of farming in 1900 by the way, is important to mention again. This is how our standard living improves every not every single person certo living improves from anyone change but overall, are staring. A living improves from the fact of all the changes that occur as people compete, improve their technologies and as there's more exchange, trade and specialization.

So in 1900 about 40% of the American workforce was on the farm. Today it's about two and a bit percent a little under three. That's an enormous change. Uh, you'd think if you were a farmer in 1900 you were told that only 2% plus percent of the American workforce would be on the farm 100 years from now, you assume two things. One people would starve to death because there wouldn't be enough food produced, and there'd be riots in the street because nobody would have jobs because all the people used to work in agriculture wouldn't be able to do it anymore. But of course, what actually happened is a whole bunch of new jobs came along. New specialized opportunity sticks to use your skills and stand a living of Americans over that 100 year period became much higher, partly because food was much cheaper, partly because it didn't take his much as many resource is or as many people to produce the food that we wanted to consume. So the point of that is that I don't want a whitewash economic change. It does have challenges but is down. Boudreau was pointed out.

I think in a podcast we did, uh, it's easy to say, Well, I want all the benefits of specialization but not, you know, in my industry. I don't want to compete everything that we observe around us, look out the window and think about your daily life. All that as a result of an enormous nexus, an enormous web of specialization and trade that the people in a Paul do not have are not able to take advantage off. We have that incredible blessing that we have an enormously large country with pretty much open borders to goods. And as a result, our ability to change with people is enormously large, and we specialize a lot and it's really cheap, and as a result,

we have leisure and time to ensure life that previous generations could not do. Even in our economic downturn. Uh, most Americans still have that. And of course, at any point in time, the other people who are struggling. And it's also true that even when the economy is humming along, they're going to be economic changes as certain sectors rise and fall that make it in the short run, difficult for people. Thio do as well as they've been doing before. But even when they're struggling, there stood still doing immensely better than people did 300 years ago because they're benefiting from lots and lots of specialization. Ah, across industries, even though their own might be struggling at a particular point in time,

let me ask you a couple more questions and then we'll wrap it up. The story I've told about specialization and trade increasing are scaring the living our output because of the opportunity to take advantage of economies of scale and apply capital and technology. That's the Smith story. And then we add in the Ricardo Story, which is the opportunity to that some people do other some tasks relatively well. We're going to assign We're not gonna sign made clear in a minute. But people are going to be doing different tasks based on their relative skills. What is that story have to do with Borders? Is there anything in that story that has to do with the borders between nations? So if the hunter gatherer group we're talking about was in Maine or Minnesota, and the guy who had the idea for the takeout sandwiches was a Canadian a few feet across an invisible line called the border between U. S. And Canada, would it change the conclusions at all about the virtues and the productivity of trade? Not at all. Porters have nothing to do with it.

Both sides are better off. What's the difference between Toyota driving down the price of cars and Ford figuring out a way to make cars with fewer people? There's no difference to the rest of us. What's the difference between finding ways to make your land more productive through fertilizer or harvesting or planting techniques. When you grow food, what's in between that and buying cheaper food from foreigners? They're the same. They both free up resources and raise our standard of living. But again, neither is technique. Trader productivity is guaranteed to help every single person, every single second. To be better and better off. There are obviously ups and downs that we all experience. Let me close with a question in the real world that we live in. That's David Ricardo's world,

the world where people are different. How do we decide who does what How do we decide when there are millions or billions of people who can choose from millions of different kinds of jobs? It's not just the two by two matrix, the two by two table of hunting and fishing, and you and me and Robinson Crusoe on Friday. Who's the appointments are whose science people to the tasks that make us as a group as productive as possible on the answer, of course, is there isn't one. What steers people into the different tasks are the wages of different jobs that are constantly adjusting, sending messages and signals to people as to what is the most productive use of their time. And suppose you believe you have a God given obligation to use your skills and talents to serve mankind. You want to do the thing that's most productive. How would you know what to do? What is Roger Federer better at tennis or fly fishing? It's a meaningless question, really surprising,

you say, Well, let's have him play tennis for a while. It turns out he's the best tennis player in the world. And then let's see him fly. Fish, maybe is the best fly Fisher in the world. Maybe is not the best fly fisherman, but he's the return to fly. Fishing is so high that he should be a fly fisherman. You said that silly golfs, more productive tennis's were productive than fly fishing. But that's not obvious. It only turns out to be the case because that's what people like. It's the value of tennis that matters, not his absolute aptitude.

It's not how good he is at fly fishing, which doesn't mean anything. So, for example, he could be we'll take Andy Roddick and Iraq's of very good tennis players on the top 50 tennis players in the world is not as good as Roger Federer, but he's a great tennis player, and he devotes his professional activities in. This is a current age to tennis playing, but it could be he's the best, not tire in the world. He's even better. Even though you didn't out 50 antennas, he's really good at tying knots, and he's the best in the world that that. So that's what he should do. So it's pretty obvious that that's pretty silly,

that your absolute physical aptitude, something tells you nothing about what you should do. It's the value that your activity produces relative to its value in other applications, other things that people might joy you doing. So we think of the 1,000,000 tasks. Imagine taking each of us and doing the 1,000,000 tasks that created this enormous matrix of physical capabilities. Who's the best at this? Who's 73rd best at that? That would be, as Hayek pointed out, an impossible knowledge problem to solve. You could never use that information. You could never gather that information. You certainly could never practically use it to allocate people. So how can we possibly allocate people to the millions of potential tasks, making sure that we don't waste people skills.

And the answer, of course, is that the wages and the price is steer people into the activities that they're relatively best at. So Roger Federer never thinks of giving up tennis for not tying because not tying doesn't pay, even though he might be a phenomenally good not tire. Anybody would be, um, and again he might be inferior in some weird physical sense that tennis compared to knot tying. But they're not really comparable until you put the value in what you put the value when he gets stared into tennis. Now, it could be that Roger Federer beat even better. Golfer could be. He could beat Tiger Woods on the golf course, make more money at golf, but he sticks with tennis because he loves tennis. And that's okay,

too. That's the non monetary aspect I talked to before. You don't just take the job that pays the most money, you take the job. That's most rewarding. That includes both the non monetary and the monetary aspects of the job. You take the job that pays the most where the pay isn't just the monetary bay, but the return of satisfaction and the pleasure you get from the job as well. So very few of us take the job that pays the most. And that would be a mistake to as a general principle. I hope you've enjoyed this podcast. I look forward to your comments. It's kind of a dent set of topics. But, um, it's something I think about a lot, and I look forward to thinking about a little bit more down the road, and I hope it helps you think about these issues as well.

This is e contact part of the Library of Economics and Liberty for Maury. Contact body contact dot org's where you can also comment on today's podcast and find links and readings related to today's conversation. Sound engineer. Free contact is rich guy, yet I'm your host. Russ Roberts. Thanks for listening.