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- [Don] Let me tell you [br]about the island of Tasmania.

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It's about 130 miles off the coast[br]of southeastern Australia.

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A long time ago when seas where low,[br]Tasmania was part of Australia.

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During that time, [br]the archaeological record

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documents that Tasmanians [br]fished and they used bone tools.

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About ten thousand years ago,

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rising waters cut Tasmania [br]off from Australia.

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On at least three [br]of the smaller islands,

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the isolated human population[br]died out completely.

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In Tasmania, the four thousand[br]hunter-gatherers remained

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with no contact with the rest [br]of humanity at all.

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They lost technologies [br]they once had --

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no more fishing, no more bone tools.

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They also missed new inventions,

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such as stone tools [br]and fishing nets and fire,

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that were adopted in Australia.

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When Europeans "discovered"[br]the Tasmanians in 1642,

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they found that [br]this extreme isolation

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had created the simplest [br]material culture

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of any people in the modern world.

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Without access to other people,

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some island populations shrink --[br]others even vanish.

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Fortunately, for most of us,

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human cooperation [br]has expanded over time.

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As we saw in the previous videos,

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we enjoy enormous benefits [br]from specialization and trade.

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One reason for this [br]beneficial cooperation

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is what economist [br]call "Comparative Advantage."

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Two things are surprising [br]about Comparative Advantage.

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First, just by rearranging [br]who does what,

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we can make more stuff [br]through specialization in trade

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even if no one ever gets any better[br]at doing any line of work.

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But the second insight's my favorite.

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If you get better at doing something,[br]that obviously benefits you,

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but it also benefits me

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even though my abilities to produce[br]haven't changed at all.

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Let me show you how this works.

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It's best seen [br]with a simple example --

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just two people -- Bob and Ann --

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who produce just two goods --[br]bananas and fish.

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Here's what Bob can do[br]if he spends all of his time

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producing only one good.

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Bob can either gather 10 bananas[br]or he can catch 10 fish.

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Ann can either gather[br]10 bananas or catch 30 fish.

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So let's say they each[br]split their time

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between producing [br]bananas and fishing.

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Bob and Ann each [br]produce five bananas,

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Bob produces five fish,[br]and Ann produces 15 fish.

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In total, they produce [br]10 bananas and 20 fish.

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You math wizards in the audience

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surely see an obvious way[br]to increase this total.

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If Bob produces just bananas[br]and Ann produces just fish,

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then the total rises [br]to 10 bananas and 30 fish.

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So just by rearranging who does what,

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we get more total stuff.

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Now you might think this outcome

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is simply the result [br]of the division of labor

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that we covered previously,[br]but you'd be wrong.

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The key insight [br]from the division of labor

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is that workers individually[br]get more productive

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when they specialize.

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Yet in this scenario,

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neither Bob nor Ann[br]has gotten any better

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at producing bananas or fish.

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Just by rearranging[br]what tasks each does

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is what made [br]total production increase.

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The key to understanding[br]how this works

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is opportunity cost.

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Bob has to choose to gather[br]bananas or catch fish.

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When he chooses to gather a banana,[br]he gives up one fish.

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In essence, Bob trades with himself.

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He can use his time to gather bananas[br]or trade that time to catch fish,

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and the cost of that trade [br]is one fish per banana.

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That's Bob's opportunity cost.

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The same holds true for Ann,

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but her cost of producing [br]one banana is three fish.

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In the amount of time that it takes[br]Ann to gather one banana,

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she could have caught three fish.

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She trades with herself [br]one banana for three fish.

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So Bob only has to give up one fish[br]to produce one banana,

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but Ann must give up three fish[br]to produce a banana.

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Ann's opportunity cost [br]of gathering a banana

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is higher than Bob's.

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She can improve her situation

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if she can get bananas [br]for less than three fish,

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and Bob can improve his situation

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if he can get fish [br]for less than one banana.

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Let's say Ann trades two fish[br]to Bob for one banana.

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They each gain.

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If Ann wants a banana,

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she can either gather it herself[br]and give up three fish,

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or she can catch only two fish[br]and then trade them to Bob.

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She prefers the lower-cost option[br]and so she trades.

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Bob prefers the lower [br]cost option too.

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Instead of giving up [br]a whole banana to catch a fish,

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he can trade that [br]banana for two fish.

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Now he's only giving up[br]a half a banana for a fish.

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You can see that even[br]if Ann is better at everything,

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nothing in this story changes.

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She still benefits from trade

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because the number [br]of fish Ann gives up

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to pick a banana herself

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is greater than the number of fish[br]that she must catch and give to Bob

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in order to get a banana from Bob.

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Now, for an insight [br]that is really counter-intuitive.

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What happens if Ann[br]gets better at fishing?

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Let's say that she[br]can now catch 40 fish.

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Obviously that's good for Ann,

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but it also means that [br]bananas just got more costly

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for Ann to produce herself.

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She now has to sacrifice four fish[br]for each banana that she gathers.

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By becoming a better fisherman,

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Ann becomes a comparatively [br]worse banana gatherer,

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and this fact helps Bob.

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The reason is that Ann is now[br]willing to trade more fish

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for each banana [br]that she gets from Bob.

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So, although Bob's ability[br]to produce hasn't changed,

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he can now get more fish[br]for his bananas.

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Comparative Advantage [br]is a beautiful thing.

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No matter what my talents are,

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I can still help you even [br]if you are better at everything.

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The more different [br]we are from each other,

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the more we benefit [br]from trading with each other.

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Let's get back to the real world.

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What Comparative Advantage[br]practically means for most people

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is that we each spend [br]most of our working time at a job

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that utilizes each [br]of our comparative talents.

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How do you know what [br]you're comparatively good at?

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What you get paid [br]for your job tells you that.

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Comparative Advantage [br]is the main force

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driving us to use our talents[br]in those jobs that we do best.

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It's why people who are good [br]at math tend to become engineers,

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and those who have [br]good graphic sense

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tend to go into the arts.

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Specialization and trade[br]play key roles

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in the movement [br]from poverty to prosperity.

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We would be desperately[br]poor without them,

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but they alone do not explain[br]the full extent of our prosperity.

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Another feature of the modern [br]world is important --

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"Innovationism."

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Our society is [br]an orgy of innovations.

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This Innovationism [br]would be impossible

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without specialization and trading,

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yet specialization and trade [br]do not guarantee Innovationism.

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This is a topic for a future video.

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♪ [music] ♪