Economics 101

What is Your Advantage?

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Peter Boettke of George Mason University, my graduate school professor and mentor, used to talk about Michael Jordan a lot in his lectures. He said, unabashedly, that Michael Jordan was and is the best basketball player in the history of the sport.  There was and may never be anyone better. I suspect that Michael Jordan knows this about himself.

If Professor Boettke is correct, that means Michael Jordan has an absolute advantage at basketball— he is better than everyone else.

Most of us don’t have a Michael-Jordan-situation going on; we are not the best in the world at what we do.  If we did, it would be fairly easy to understand exactly how to harness our energy and skills. Regardless, we do  bring a set of skills and abilities to the table that may make us relatively better at producing and supplying certain things than others.

There is no arrogance in knowing our strengths. In fact, God calls us to know them and pursue them with excellence.  Knowing our skills and gifts is important because of how God has uniquely created each of us.

This is a powerful economic concept called comparative advantage. Comparative advantage has everything to do with something we have talked about before, opportunity cost. That is, the value of what it is we give up associated with producing a good or service.

We should focus on producing things at which we are lower cost producers than others.  We tend to be lower cost producers when we focus on our specific gifts and talents.  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.

At a former office, I happened to work with someone who was great at putting together events.  She loved it and it was part of her work responsibilities.  So, when I needed to get a group of people together, I always went to her for help with the planning. Even though I love to entertain at home and could do this type of logistical planning, it made more sense for me to work with her because she was better at the logistics than I was.  Just because I could do it, doesn’t mean I should do it at all times.

In my new office, I have more experience putting events together, so I now have the comparative advantage in event planning.  I do not have an 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 this type of work. However, it would be a high-cost decision for me to forgo economics and pursue event planning full-time.  We want to engage in the production of things for which we are lower-cost producers.  This will depend 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 less fulfilled.  But just because those are our relative comparative advantages in the home, does not make them necessarily so outside of the home.  I am not a professional chef and he is not a professional financial planner.

Knowing your gifts and focusing on them is important for faithful stewardship.  It allows us to specialize, especially with regard to things we produce and sell through our labor (our work). This specialization frees us from having to be good at everything and allows us to trade with others.

Next week we will talk about the importance of trade based on comparative advantage.

Question: Have you noticed areas of comparative advantage in your own life? Leave a comment here.

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