"Trade Is Made of Win," Part 2: Cooperation

Release Date
March 28, 2011

Topic

Free Markets and Capitalism
Description

Prof. Art Carden examines how trade creates wealth, by allowing people working together to produce more than they could individually. Using a simple two-person example, he shows another example of how cooperation during production benefits everyone.

Desert Island Game (game, beginner): Can you learn something about trade and cooperation by being marooned on a desert island?
Trade Ruler (game, advanced): As the Supreme Ruler of an island, you want the country to prosper. By engaging in international trade, you can achieve this goal.

“Trade Is Made of Win,” Part 2: Cooperation
Does trade create wealth, even when we are concerned with high-tech kinds of things, like producing computers, producing cellphones, producing mobile technology? Let’s consider an example.
Fritz and Lou work for P computers, and P computers has a flagship product, thepPod. The pPod is a revolutionary product. And Fritz and Lou can do one of two things. They can either designs apps for the pPod or they can assemble pPods.
Fritz can design 1,000 apps in a year or he can assemble 200,000 pPods. Lou, on the other hand, can only design 1 app per year or he can assemble 100,000 pPods. The question now is, well, what does Fritz have to gain by cooperating with Lou? What does Lou have to gain by cooperating with Fritz? First, let’s assume that they each spend exactly half of their time designing apps and assembling pPods. Fritz designs 500 apps and assembles 100,000 pPods in a year. Lou designs half an app and assembles 50,000 pPods in a year. In total, we as a society, we as a world, get 500.5 apps and 150,000 assembled pPods.
Lou comes along and makes a proposal. He suggests to Fritz, “Why don’t you specialize in apps, and I’ll specialize in pPod assembly? Spend three-fourths of your time designing apps for the pPod and spend one-fourth of your time assembling pPods. I will design no apps for the pPod, and I’ll assemble 100,000 pPods every year.”
Now let’s see what happens to total output. When they were both splitting their time evenly, they were getting 500.5 apps and assembling 150,000 pPods. Now, Fritz is designing 750 apps and assembling 50,000 pPods. Lou is designing no apps and assembling a 100,000 pPods. Total output is 750 apps and a 150,000 P Pods assembled. We as a society are richer by 249.5 apps that we didn’t have before. Trade is a positive-sum game, meaning that when people can trade, they can produce more stuff than they will be able to if they didn’t trade.