I’m no football expert, but it’s easy to see that Patriots comeback, led by Tom Brady, was amazing. It is reasonable even to assert that Tom Brady is the best quarterback of all time. (He now has more Super Bowl wins than any NFL quarterback in history.) That kind of talent is rare, giving him an advantage over possibly everyone. In economics, we would call this an absolute advantage.
But most of us aren’t Tom Brady. We are not the best in the world in our jobs, our studies, our hobbies. If we were the best in some field, how we spend our time would be a pretty straight forward calculation: We should practice and perfect that skill.
Given that most of us do not have an absolute advantage, knowing how to leverage and develop our skills and talents is a bit more complex. We each do bring a distinct set of skills, talents, and abilities to the table; and market economies give us reason to develop them so that we can help others and profit ourselves. The relief here is that we don’t have to be like Brady and have an absolute advantage to profit — we can hone our comparative advantages and thrive in the process.
Comparative Advantages and Opportunity Costs
The concept of comparative advantage is core to the economic way of thinking. It has everything to do with our relative opportunity costs — that is, the value of the forgone opportunities associated with making a choice. If you decide to stand in line for concert tickets on a Monday morning instead of deciding to go to class, then the opportunity cost is the missed class.
The concept of comparative advantage is core to the economic way of thinking.”]
Our opportunity costs are always changing and they are always relative to our alternatives.
To become more productive in the market, each of us needs to focus on producing things for which we are lower cost producers than other people are. Trade increases the number of “other people,” allowing us to specialize more and more.
We tend to be better producers when we focus on our specific gifts and talents, just like Tom Brady. But this is a relative comparison, so we must understand the gifts of those with whom we work to best harness and unleash our productivity. Economist Dwight Lee has said in an article on the subject of comparative advantage:
The concept of comparative advantage is deceptively simple. Tiger Woods surely has the potential of being one of the best caddies in the world. How many people could give you better advice on lining up a putt or selecting a club? He has an absolute advantage. But everyone knows that the opportunity cost to Tiger Woods of becoming a caddie is too high to make that a sensible option. He would be sacrificing the return from being a professional golfer, the activity in which he has a strong comparative advantage.”]
Compared to Whom?
In my former workplace, I happened to work with someone who was great at putting on events. She loved doing it, she did it well, and it was part of her job. So, when I needed to get a group of academics together for a conference, I always went to her for help with the planning and the details.
Now, I am known to love to entertain in my own home, and I could do this type of logistical planning for academic conferences myself. But this fact alone didn’t mean I should do it.
In many cases we can do things, but not at the lowest relative opportunity cost, which means trading with other people helps us.
I have no absolute advantage in event planning (I’m no Martha Stewart) but depending on the situation, there may be a time and a place for me to focus on that type of work. Making this decision is always about assessing relative tradeoffs and opportunity costs. It would be a high-cost decision for me to forgo teaching economics and pursue event planning full-time, because I’m just not very good at the latter.
We want to produce things for which we are the lower-cost producers, and whether we are lower or higher-cost depends on time, place and circumstance.
Your comparative advantage in your home may be different than your comparative advantage at work. At home, I am a lower-cost provider of making meals than my husband, and he is a lower-cost provider of managing our finances. If I paid the bills and he cooked, we would both be less efficient (and probably broke and hungry to boot!). But just because those are our relative comparative advantages in the home does not necessarily make them so outside the home — because the institutions and trading partners are different.
Tom Brady’s skillful execution as a NFL quarterback time and time again gives him an absolute advantage. It also makes him fantastically wealthy.
The beauty of market trade is that you don’t have to have the absolute advantage in something to do very well. Tom Brady may be a superstar, but he doesn’t make the footballs or coach his team or build the stadiums or write the employment contracts. All of those tasks, which are necessary for him to do his job well, are done by other people.
Tom Brady is only able to unleash his skills when hundreds of thousands of others are also able to unleash their comparative advantages through trade. This process frees up our time and makes us all rich. Trade begets more specialization, more trade and greater wealth. If we all want to have more we all must become more productive — which means we need trade.