Commerce Enables Me to Share My Gains With Others

by Don Boudreaux on October 25, 2006

in Trade

When I teach comparative advantage to my students, I point out that that the improvement in the skill of one person redounds to the benefit even of those whose skills (or, more generally, productivity) remain unchanged.

Suppose at first that if Tom spends all of his time fishing he can catch 50 fish each month; if, instead, he spends all of his time gathering bananas he can gather 50 bananas each month.

Suppose also that if Sue spends all her time fishing she can catch 200 fish each month; if, instead, she spends all of her time gathering bananas she can gather 100 bananas each month.

In this simple example, Tom has a comparative advantage in banana-gathering and Sue has a comparative advantage in fishing.  The reason is that the cost to Tom of producing one banana is one fish, while the cost to Sue of producing one banana is two fish.  (And the cost to Sue of producing one fish is 1/2 a banana while the cost to Tom of producing one fish is one banana.)

So both Tom and Sue can become wealthier if Tom specializes in banana-gathering, Sue specializes in fishing, and then each trades part of his or her output for part of the output of the other.

Note that Sue is willing to pay Tom up to 2 fish for each banana that she buys from him.  The reason is that to produce her own bananas would cost Sue a minimum of 2 fish for each banana that she produces.  Because Tom’s cost of producing each banana is one fish, gains from trade are possible.

Now let Sue’s skill as a fisherwoman improve (which, as Adam Smith pointed out, likely happens when workers specialize).  Suppose that Sue’s skill as fisherwoman improve so much that she can now, were she to devote all of her worktime to fishing, produce 300 fish per month — 100 more fish than she was able to produce before her fishing skills improved.

Let’s assume also that there’s no change in Sue’s banana-gathering skills, and no change in any of Tom’s skills.

Two facts are interesting to note about Sue’s improved skill at fishing:

First, becoming a better fisherwoman makes Sue a worse banana-gatherer.  It’s not that the number of bananas she can gather per month has fallen; it hasn’t.  It’s that Sue’s cost of gathering bananas has risen.  Sue’s ability to catch more fish per month means that any given amount of time that she spends gathering bananas obliges her now to sacrifice more fish than she sacrificed in the past when gathering bananas.  The better she becomes at fishing, the more costly becomes any bananas that she might gather.

Second, Sue’s improved fishing skills — by raising her her cost of gathering bananas — also increases Tom’s efficiency of gathering bananas relative to that of Sue.  Before Sue’s fishing skills improved, Tom could produce bananas at half the cost of Sue (one fish per banana for Tom; two fish per banana for Sue).  Now, because Sue is a better fisherwoman than before, Tom’s can produce bananas at one-third the cost of Sue (one fish per banana for Tom; three fish for Sue).

Sue’s acquisition of more fishing skills at least potentially benefits also Tom.  Before Sue’s skill-enhancement, the most she would have paid for one of Tom’s bananas was two fish; now, being a better fisherwoman, the most Sue will now pay for one of Tom’s bananas is higher, at three fish.

Reflecting on these truths about comparative advantage recalls to mind Wilhelm von Humboldt‘s observation about one of the great benefits of commerce:

It is through a social union, therefore, based on the internal wants and capacities of its members, that each is enabled to participate in the rich collective resources of all the others [The Limits of State Action, p. 11].

[This Humboldt book's title is also sometimes translated as The Sphere and Duties of Government, and is available on line here.]

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Steven October 25, 2006 at 5:47 pm

I don't know how I stumbled across this silly none sense ..

How can you base any intelligent applicable idea apparently applicable to the entire world population on a fictional closed circuit of two people who apparently both want fish and banananananas——— and nothing else.

Real world Tom sees Sue's excellent work abilities .. therefore he beats, rapes and enslaves her calling himself the goverment and her the governed. Or he calls her comrade ….. and gives her the same treatment.

"Before Sue's skill-enhancement, the most she would have paid for one of Tom's bananas was two fish; now, being a better fisherwoman, the most Sue will now pay for one of Tom's bananas is higher, at three fish."

No; she trades one for one and with the surplus employs thugees to keep Tom off of her ass.

Is this any sillier than your Tom n Sue story?

Don Mynack October 25, 2006 at 5:58 pm

My man Steve, all fun, all the time.

happyjuggler0 October 25, 2006 at 7:06 pm

Is Steven going bananas because he finds the story fishy?

Or is he merely having a bad day that he chooses to share with us, and agrees with (and understands) the principle of comparitive advantage anyway?

I think Don Boudreaux's story would have been even better if he showed both Sue and Tom each having more bananas and fish than before, and also with both having vacation days too.

Finally, in another example, one could add in one employee of Sue named Juan, and one employee of Tom called Ricardo. Juan is better at picking bananas than at catching fish, and Ricardo is better at fishing than at picking bananas. Sue hires Juan (who is from Mexico) to pick bananas because she is better at fishing. Tom hires Ricardo to fish because Ricardo is a better fisherman. After a while of trading, Sue does some math and realizes that she is better off laying off Juan and hiring Ricardo, because she realizes she can teach him how to fish even better than he does already. Tom follows suit and hires Juan and teaches him how to pick bananas more efficiently. Sue and Tom then trade, both wind up with more fish and bananas than before, and also so do Juan and Ricardo. Juan and Ricardo are lifted out of Mexican poverty, and Sue and Tom abandon the "shrinking middle class" they hear so much about on Lou Dobbs' show, and become rich.

David Z October 25, 2006 at 9:35 pm

Tom wouldn't trade with sue on a 1:1 basis Steven. He could do that on his own accord. No trade would take place at that price.

Adam Malone October 26, 2006 at 12:18 pm

Actually David to Tom it wouldn't matter. Since the government is not present in this illustration (therefore neither is taxation) and Tom and Sue are in small geographical areawe can assume that there is no cost (taxation, transportaion costs) to inhibit trade.

Therefore say that Tom wouldn't trade on a 1:1 basis is difficult to prove either way. BUT because we know that Sue is willing to pay for than 1:1 the extreme case doesn't really matter.

At anything greater than 1:1 Tom will be willing to trade and anything less 1:2 Sue will be willing to trade. Determining exactly those terms of trade will be is impossible with the information given, but it is also unnecesary.

The extreme case doesn't matter, because it wouldn't exist.

triticale October 27, 2006 at 6:48 pm

A woman without a man is like a fish without a banana?

The real win comes when Charlie arrives on the scene with skills in making fishing lures and banana picking poles. At that point each of the producers sees their productivity go up forever in return for a one-time transaction with Charlie. Now there are surplus fish and surplus bananas to trade with Mary who traps rabbits and Bill who gathers berries.

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