Gains From Trade - Why Ringo played the drums

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The Beatles were pros at thinking like economists.
The Beatles.
Yes, haven't you heard how they used comparative advantage to
their well advantage?
And what can the Beatles teach us about economics?
Well, there's a legendary story that at the height of
their fame, someone asked John Lennon if Ringos style was
the best drummer in the world, He's not the best
drummer in the Beatles. Lennon replied, that's because Paul McCartney
was also an excellent drummer.
So you'd think maybe Paul should have been the drummer instead,
given he was so good. But he's also a really
good bass player, and he was a great singer too,
so it made sense for Paul to focus on playing
bass and singing instead of playing the drums.
Now, this is a rumored story, so we don't know
if John Lennon actually said these words, but it doesn't
really matter because still teaches us a great economics lesson,
and it's related to opportunity costs.
The opportunity cost is about or what. So I guess
what would each member of the Beatles be doing if
they weren't playing their instrument exactly?
Ringo played the drums. If Ringo hadn't played the drums, well,
he wouldn't have been a Beatle. If Paul had played
the drums, then the Beatles would have lost a great
bass player and singer.
Okay, So in the Beatles, the opportunity cost of playing
drums was lois for Ringo, as he wouldn't be playing
anything else if not. So you're saying that it made
sense for Ringo to drum.
Yes, this is the idea we call comparative advantage. We'll
be exploring in this week's episode of Think Like an Economist.
I'm Justin Wolphus.
And I'm Betsy Stevenson, and we're teaching you the tools
of economics to help transform your life. As ever, NaSTA
and Tabacoli far joins us.
Betsy Justin aside from learning how to choose the best
lineup for your band. What are we looking at today.
We're doing the same thing the Beatles were doing. We're
trying to figure out how best to allocate tasks. If
we can figure out how to assign each task so
that it's done at the lowest opportunity cost, then we'll
be able to get more done.
If you step back and think really hard about it,
you'll see that markets are all about reallocating tasks so
that each is done by the right person for the job.
If we get this right, we can produce more stuff
or better stuff without working any harder. Economists call this
gains from trade because it's the benefit that follows from
trading tasks.
And as we've seen with the Beatles, the right person
for a job is not necessarily the person who's best
at that job exactly.
So let's start with an easy example. We have two kids,
Matilda and Oliver, and they feed our pets. The kids
truth is, they spill the dog food and scatter the
kit and chow across the kitchen, and it takes some
ages to get the pets fed and the mess cleaned up,
But we still get them to feed the pits, even
though Betty and I could have done it quicker.
Okay, So part of this is about parenting and instilling
good values. They gotta do some jobs, but part of
it's also about economics. It's all about the opportunity cast principle.
So the opportunity cost of one of you feeding the
dog is that you could be making podcasts about economics,
writing textbooks about economics, teaching economics. I assume your kids
can't do these things.
Not yet. Their opportunity cost of feeding the dog is
they could be reading a book or playing a game.
So it makes sense for them to do those small
tasks around the house whilst Betsy and I concentrate on
the more complicated household tasks and teaching economics. The opportunity
cost of feeding the pets is lower for our kids,
so they do those small tasks.
This is called comparative advantage. It's the ability to do
a task at a lower opportunity cost, and Matilda and
Oliver have a comparative advantage when it comes to feeding
the cat and dog.
This is different than absolute advantage, which is defined as
the ability to do the job better or faster. Betsy
and I have the absolute advantage here.
Yes, so you too do a better job of feeding
the pets, so you have the absolute advantage, But the
opportunity cost of feeding the pets is lower for your kids,
so they have the comparative advantage, and the person with
a comparative advantage should do the job.
That's because the opportunity cost is the best way of
measuring the actual resources that are being used. That's why
in the Beatles, Ringo played the drums, freeing up the
superb drummer Paul to focus on playing the base and
singing things that Ringo really wasn't very good at.
Don't forget the classic Octopus's Garden, which Ringo sang. But
let's not get a rivalry going between the remaining living beetles. Basically,
it sounds like you're talking about something I love, and
that's delegating. I passionately believe in it. I think people
don't delegate enough because they say, it's okay, I can
do this thing, but is it worth their time to
do that thing if they can do something else better.
Yes, Comparative advantage is all about figuring out how to
delegate well. It lets us focus our time on tasks
where we have a comparative advantage, and that's really what
markets are based on.
So I can see how this works in the example
you gave around your house and around how I like
to delegate tasks. How do we see this in markets? Though?
Well, do you tend to buy your lunch or do
you make it?
If I have a busy day at work, then I'll
definitely buy my lunch.
And that makes sense right the time you'd be spending
making money, you could spend making podcasts about the economy.
But what if I'm a good cook? You don't know
if I am or not.
You may be a great cook, nas I don't doubt it,
but I think you're really great at making economics podcasts.
Think about it like this. There are two ways you
can make your lunch. The first is that you can
buy bread and fillings and make a sandwich in your kitchen,
and it might take you an extra hour each week.
The second is that you can spend an extra half
hour each week producing podcasts and take the money you
get paid for that work and use it to buy
a sandwich. If it costs you a few more minutes.
The second way, then you're saving time and being more efficient.
So it sounds like you're saying I should focus on
what I'm best at and pay for the.
Rest pretty much. And that's really what trade is about.
You should spend more time making podcasts while someone else
spends more time making sandwiches. By getting the important work
of both sandwich and podcasts making done by the person
who can do it at the lowest opportunity costs, you
both benefit, hence the term gains from trade. So let's
think through some other examples. Nas who washes your hair
when you go to the hair salon? Is it the
hairstylist or an assistant.
It's usually an assistant and not the hairstylists themselves.
Yes, that's because the hairstylists can either wash people's hair
or cut their hair. They get paid a lot more
for cutting hair, so the opportunity cost of them washing hair,
or what they would be doing if they weren't washing hair,
it's to cut people's hair and to make more money
doing so. Whereas an assistant can't cut people's hair, their
opportunity cause for washing hair is lower, and so the
assistant washes your hair.
Or Another good example. As actors, as you must know
that the biggest stars don't do their own.
Stunts, yes, and I assume that's because they don't want
to get hurt or something about it costing a lot
of money. If they get injured doing dangerous stunts.
That's it. If someone's a huge Hollywood star making millions
of dollars per movie and they get injured through doing
their own stunts, well they'll miss out on a lot
of money while they sit out to recover the opportunity
cost of a stunt double. Doing the stunts is much lower,
which is why big stars use comparative advantage and use
stunt doubles.
Let's do some more examples so we can really get
to grips with this.
Sure, we can go back to our household where I
sort out the bills.
Hey, I do tech support.
So I assume Betsy is better at bills and Justin
is better at tech related stuff.
Not necessarily, nas Look, Justin is pretty capable at sorting
out the bills and managing the money, and I can
do the tech stuff just fine if needs be.
So you can both do everything, so why don't you?
It comes back to comparative advantage. We each want to
focus our time on the best use I can do.
The bills in the IT, and the truth is, if
I did both, it would take longer than if Betsy
did both the bills and the IT.
Does this mean that Betsy should do everything?
Absolutely not.
We can both spend around the same amount of time
doing tech support each week. If Betsy's a lot faster
with the bills, therefore, she has a comparative advantage in
doing the bills, and I have a comparative advantage in
doing the tech support.
So I'm Paul McCartney, the Justin's ringo star.
So it's like a market. Justin focuses on the tech
support in exchange for Betsy focusing on the bills.
Markets allow us to each specialize according to our comparative advantage.
This logic works even if Justin and I don't know
each other. In that case, I could sell my accounting
skills and with the money I make, I could hire
Justin for his IT support skills.
Remember, we should focus on doing tasks or jobs or
are our opportunity costs low. The opportunity cost is lower
for me to do the IT support, and the opportunity
cost is lower for Betsy to manage the money.
By focusing on what we both have comparative advantages over
we both gained from trading, and hence the term gains
from trade.
So we're expanding this concept from your house to the economy,
which is kind of cool.
Let's go one step further. Let's say justin and I
draw line down our house. My part of the house
is called betsy Land.
Hey, my side of the house is justin Land. I,
as justin Land, can sell my IT services to Betty Land,
and she, as Betty Land, can sell her accounting services
to justin Land. You may be able to see where
I'm going with this.
Betsy Land and justin Land sound like countries.
Bingo, and that invisible line is basically a border. Now
we've just introduced international trade into the.
Mix in the concept. Let's call betsy Land the USA
and justin Land Australia. And that's exactly what happens. Americans
tend to focus on producing those goods and services where
they have a comparative advantage, and they sell them to
willing customers, including some who are in Australia. Likewise, Australians
focus on producing the goods and services where they have
a comparative advantage, possibly even selling them to customers in
the United States.
And so folks in the US and folks in Australia
both benefit from doing this. We each can get our
accounting and it work done at the lowest possible opportunity cost.
As a result, people in both countries use fewer resources
to get their work done, which means that we can
make more stuff, provide more services, or work less hard.
So trading with each other, even when it's across invisible
lines called borders, still helps us benefit from trading.
That's gains from trade. Again.
We're going to go into this in more detail in
the next episode, which is about international trade. But remember
the concept is the same. We gain from trade by
each focusing on our comparative advantage, which is the job
or task we can each do at the lowest opportunity cost.
How can we summarize comparative advantage and gains from trade?
The Nobel Prize winning economist Paul Samuelson was once teased
by a mathematician who was terribly dismissive of economics. The
mathematician asked Samuelson to quote name one proposition in all
of the social sciences which is both true and non
trivial Samuelson said that comparative advantage was the best example.
It's true, as the mathematics can demonstrate. But despite this,
he said, there are quote thousands of important and intelligent
men who've never been able to grasp the doctrine for themselves,
or to believe it after it was explained to them.
Thank god we got women into the workforce so they
could understand it. It's just not really that complicated. There
are tons of tasks to allocate in the world, and
the question is how to do this best. The answer,
which is obvious when you think about it, is that
you should allocate each task to the person who can
do it at the lowest opportunity cost.
That means each of us specializing in what we're relatively
best at and relying on others for the other stuff.
And that's a lot of what markets are all about.
They effectively allocate tasks. Each of us picks an occupation
in which we have a comparative advantage, and then we
use the money we earn to buy the other stuff
we need, effectively giving those tasks to others.
And the really exciting thing is that this can also
explain international trade, which we'll dig into on the next episode. So,
as our listeners wait, what do you want them to
think about this week?
As you do various things from domestic chores like feeding
your pets or paying your bills to professional ones in
your workplace, ask yourself, what is the opportunity cost of
this task for me?
And if it's high, think about whether there's another way
to get the task done, perhaps by trading tasks with
others or paying someone to do it. That'll free up
more of your time to focus on the stuff you're
really good at.
Your goal is to figure out whether there are ways
you can make your life better and enjoy more of
those gains from trade.
Betsy justin thank you very much.
Thanks Na, We definitely enjoy gains from trade with you.
That's I feel really flattered and touched. My compliment from
It's saying.
That you have a very low opportunity cost.
I can't even respond right now because there's no explicit
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