Tuesday, October 13, 2009

The Pursuit of One's Comparative Advantage

When I see a price that seems to be usually high, I try to then to figure out why: Is this a scarce resource? How many potential substitutes are there? What is the Elasticity of Demand? However, when prices are relatively low I don't even have to think about it’s the magical concept of comparative advantage at work. Pursuing ones comparative advantage lowers costs.

One of the best places to evaluate the process of comparative advantage and specialization is Wal-Mart. Most American's enjoy a good-ol trip to Wal-Mart to buy lots of plastic junk with wide eyes because it is just so "freak'n cheap." Why is this stuff so cheap? Who do we have to thank? China...thank you China for following your comparative advantage in labor. This has not always been true in China’s past they have been known to pursue to industrialize industries in which they lacked an advantage and suffered. The main example is that of the production of natural resources. At the height of Mao, Communist China was trying to emulate the Soviet Union’s resource economy and decided that it would be a good idea to produce steel. The Chinese government then went through and collected pots, pans, and farm implements to melt down in kilns and sell. The result was very poor quality metal that no one wanted to buy. It easily to see the waste of resources that took place in this situation but it’s not always so simple.

While it’s easy to look at areas where countries or groups of people have skills and strengths that they are good at, and hence should pursue, it becomes more difficult on a personal level. I’ve been raised by this American idealism that with a can do attitude I can do anything if I invest my time and effort. This is an expensive attitude as far as resource allocation goes, and well it seems clear from a standpoint of a country it is hard at a personal level. For example I am not the best at math so I have to invest a substantial amount of work and time to improve my skills, and even if I were to work on math six hours a day (I know that also the law of diminishing returns would account for this too, throwing a little math like thinking in here) there would still be a large group of people who are naturally more amazing at math than me. It seems obvious that I should outsource my math requirements, but I can’t there is an internal part of me that wants to get the math, complete it, and grow and even if that is relatively expensive the benefits outweigh the costs (plus economists are supposed to be good at math). So on a personal level not pursuing one comparative advantage is viable if the benefits outweigh the costs.

1 comment:

  1. It would be amusing if you got stuck on an island with one other person who had a comparative advantage in math and all other areas. But this other persons weakest area was math so like the Palmer's trading water your best bet would be to do the math and trade it even though you may do it worst.