Trade or Comparative Advantage (cont.)

Last post I claimed that trade could improve the lot of all participants, be they more productive or less productive, higher cost producers or lower cost producers, advanced or backwards.

I even claimed that if you are better then me at every productive activity, I can benefit from trade with you. This is the opposite of the wisdom that capitalism and voluntary exchange allows the “stronger” to take more from the “weaker”.

To simplify everything I imagined a shipwrecked pair, Mr. A and Mr. B on an island. Their little economy was focused on survival and the main element of GDP was fishing and gathering fruit. Reality compels them each to somehow obtain four fish per day and four small fruit to thrive.  I claimed that if Mr. A was better at fishing and Mr. B was better at gathering, if they traded the products of their effort they could get the same output for less work because they could specialize at that which they were best.

As a baseline we could imagine each of Mr. A and Mr. B had to work four hours each day at fishing and four hours at gathering to get their requirements. Now suppose Mr. A has some sort of absolute advantage over Mr. B.  Mr. A. can not only catch his four fish in three hours but is a killer at gathering, getting four fruit in two hours effort.

Of course, Mr. A could work five hours per day getting everything he needs (3 hrs for 4 fish, 2 hrs for 4 fruit). He could with satisfaction watch poor Mr. B work eight hours a day for the same. Or he could be smart and realize that if he traded with Mr. B, he could spend all his time on his most productive activity – gathering fruit. He could gather enough fruit for all their needs in four hours instead of personally meeting his fish and fruit needs in five, but he could only do it if Mr. B joined in an agreement with him. Mr. B had to give him some of his fish for Mr. A to specialize in fruit. Even though Mr. A is better at fishing then Mr. B, he is even more better at gathering fruit. Obviously they would come to some agreement that splits the gain for Mr. A (five hours work reduced to four hours work) with Mr. B in exchange for Mr. B allowing him to specialize in his best field.

Mr. B stops gathering fruit and spends all his time fishing. Even though he is no more productive fishing than gathering fruit, his specialization enables Mr. A to produce more at less effort. His reward for enabling Mr. A is some of Mr. A’s higher productivity.

That is why the lawn care guy benefits from the brain surgeon. When I was a kid in a working class neighborhood nobody paid to have their lawn mowed.  Well maybe a few people did as favors to enterprising kids or when facing declining health.  Where I live now, people make lots of money when they are working. In fact most would trade money for a little free time for themselves and their family. Their high productivity makes it possible for very low productivity people (perhaps someone who can not read or write or speak English) to get a little of the higher productivity person’s production.

Far from the strong taking advantage of the weak, capitalism and voluntary exchange spreads the wealth. If Mr. A with his higher productivity did not exist, poor Mr. B would be stuck working eight hours a day to live. When higher productivity Mr. A arrives, there is surplus available for them to split. If Mr. A tries to claim all the new surplus for himself, Mr. B can simply decline to trade with him being no worse off then before.