The impossibility of the ham sandwich
Welcome to the first installment of Economics for English Majors. In the future it will (probably) be part of my weekly newsletter, land of wanderingwhich will debut shortly (and, hopefully, eminently.) Like many of my Dispatch colleagues, I discovered the famous film by Henry Hazlitt Economics in a lesson revealing, and I hope to offer Dispatch drives something along those lines, but sometimes you want more than one lesson.
I was, for a minute, studying economics, until one of my professors did me the great favor of talking me out of it. The conversation went something like this:
“Do you know what you’re doing with an undergraduate degree in economics, Williamson?”
“Not really. I hadn’t thought that far ahead.”
“You get a doctorate. in economics, model. And a doctorate. in economics is essentially a Ph.D. in applied mathematics. Math, Williamson. A lot. Tons of that. Ooodles and scads. Math all day and all night. Does it look like fun yours?”
“Does this sound like the thing your talents and interests are best suited to?”
“I think I need to visit the registrar or the mental health center.”
I changed my major for the fifth or sixth time, it doesn’t matter. I chose English because while I might not have the math skills for an economics major, I had too much self-respect to major in journalism. I guess I could have chosen what the University of Texas bluntly calls “government,” having heroically resisted at least the formal claim that there is such a thing as “political science.”
I am better at writing about economic ideas for a general audience than formal economic scholarship. Another way of saying this is that writing rather than economics is where I find my comparative advantage.
Comparative advantage is one of the most misunderstood concepts in economics.
We start, inevitably, with one of those desert island scenarios adored by economists. Our desert island has two inhabitants and two occupations: Bob, who is older and not very fit, and Steve, who is younger and fitter. Bob can collect six coconuts in an hour or catch three fish. Steve, the most energetic, can collect 12 coconuts in an hour or catch 18 fish. So where is Bob’s comparative advantage? Some of you will be tempted to answer: “Bob does not have a comparative advantage – Steve is much better at both tasks. Steve may have a Absolute advantage in both activities, but that’s not what we’re talking about. It turns out that everyone has a comparative advantage, which is explained by a more familiar economic concept: opportunity cost.
One way to define comparative advantage is how they do it in the Oxford English dictionary: “the ability of an individual or group to carry out a particular economic activity (such as making a specific product ) more efficiently than another activity”. Another way, more common when talking about trade, is, as they said at Investopedia: “the ability of an economy to produce a particular good or service at an opportunity cost lower than that of its trading partners”.
Time is a limited resource. Neither Bob nor Steve can work an infinite number of hours to satisfy his needs. Let’s say the Desert Island Department of Labor mandates a 40-hour work week. If Bob and Steve each split their time equally between picking coconuts and fishing, then the GIP (Gross Island Production) would be: 360 coconuts (120 from Bob picking six coconuts per hour for 20 hours and 240 from Steve catching 12 per hour for 20 hours) per week and 420 fish (60 from Bob and 360 from Steve catching 18 per hour for 20 hours). What if each producer invested a little more time in what they do best? If Bob reduced his fishing to 10 hours per week and increased his coconut harvest to 30 hours, he would produce 180 coconuts and 30 fish. If Steve reacted by reducing his coconut picking time to 15 hours and increasing his fishing time to 25 hours, then the island’s economy would produce the same 360 coconuts (180 from Bob and 180 from Steve ) but 480 fish (30 from Bob catching three an hour for 10 hours and 450 from Steve catching 18 hours for 25 hours). Same workers, same working hours—a lot more food for everyone.
The opportunity cost of shifting some of Bob’s time from fishing to picking coconuts is relatively low, meaning Steve can make up for the loss of coconuts and still have time to invest in extra fishing. Now, this scenario wouldn’t play out as well if the comparative advantage calculations worked exactly the same way for Bob and Steve, but here’s the thing: in an economy with millions or billions of workers and entrepreneurs, that’s not a problem. In this, if nothing else, the cliché is true: diversity is our strength. In a complex, modern global economy, you can do a little fine-tuning in terms of comparative advantage. In the scenario above, we don’t even need to know Bob and Steve’s relative preferences for fish and coconuts: in one scenario there is more to do, and in the ‘other scenario, there’s less to do around.
More is more.
What happens when we allow the natural division of labor to evolve based on comparative advantage is called exchange gains. If we trade goods and services – between neighbors or between nations – when we can specialize our efforts in ways that benefit the entire trading population.
Much of the argument for free enterprise and free trade is that it allows everyone to work where their comparative advantage is, which maximizes overall economic output, allowing material abundance to emerge. . If everyone does what allows them to create the most value, there will be more things to do than if we pursue the things where we create less value. Because economic production is fundamentally other-directed – we produce to meet our own needs by providing for the needs of others – we have no power to unilaterally declare what is our most productive work. The market tells us. Market prices are society’s way of telling us how much it really values what we produce – which is not always the same as what we think society should value our work. It doesn’t mean that we have do what the market tells us to do, and the real world is never as simple as an economist’s scenario: the kind of work we do is influenced by how much it pays, of course, but it’s also influenced by considerations such as whether we enjoy it, whether we can do this job in the place where we currently live, whether we think it will continue to be a well-paying job in the future, etc. Well-being has many components, and wealth is just one of them. The fact that economists do not always explicitly take these factors into account does not mean that they do not recognize their existence.
Material abundance is not the only thing that matters in our lives as individuals or in our shared lives in society, but material prosperity helps create the conditions in which we can pursue interests beyond the mere physical survival.
Economies also have comparative advantages. Specifically, they usually have wallets of them. One of the challenges for policy makers is that people sometimes want their economies to have a different comparative advantage or a different set of comparative advantages because individually and nationally it is usually more cost effective to produce microchips or automobiles than to produce flip flops or sugar. Changing this usually means big investments in capital and education, as well as finding new opportunities through innovation and trade.
Do you know the guys who decided to make a ham sandwich? Locavore enthusiasts in the Netherlands decided to make a batch of croque-monsieur sandwiches really from scratch: they raised pigs and made ham, made and aged cheese, grew wheat and ground it into flour, etc. It took over a year and cost almost $50,000 to produce around 350 sandwiches. A croque-monsieur from La Madeleine is about seven dollars. (It’s $25.57 to have one delivered via Seamless to my current location, estimated delivery time 40 minutes or less.) Other people have had similar experiences, and enlightening as they are, they under -believe the case: these Dutch locavores may have milled the wheat they grew to produce flour, but they didn’t build the mill, and they didn’t mine the iron and refine it into steel to make the tools they needed to harvest that wheat or slaughter those pigs. It takes a certain infrastructure to create cheese. In truth, without the advantages provided by the division of labor in accordance with comparative advantage, a ham sandwich would not be something that cost fifty thousand dollars – it would be something that is impossible create at any cost.
You can, if you want to go a little crazy, do an endless recurrence on this ham sandwich: the guys who built the flour mill used tools and raw materials produced by others, who were themselves produced with tools and raw materials produced by the previous work of others, which, in turn, etc. : In a sense, we all benefit from all the accumulated production that has been undertaken since the first H. sap. took a break from barking at the moon to pile one rock on top of another and consider the possibilities.
One of the great failures of theorists and defenders of capitalism is their insistence on the competitive nature of free enterprise. But this competition is only a way to help us organize what is really a cooperative enterprise: an effective species-wide partnership between people of different nations and cultures, working together around the world and across decades and centuries, to produce . . . a ham sandwich. And fish and coconuts.
And you know, everything else.