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♪ [music] ♪

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

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

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

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During that time, 
the archaeological record

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documents that Tasmanians 
fished and they used bone tools.

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About ten thousand years ago,

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rising waters cut Tasmania 
off from Australia.

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On at least three 
of the smaller islands,

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the isolated human population
died out completely.

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In Tasmania, the four thousand
hunter-gatherers remained

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with no contact with the rest 
of humanity at all.

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They lost technologies 
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 
and fishing nets and fire,

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that were adopted in Australia.

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When Europeans "discovered"
the Tasmanians in 1642,

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they found that 
this extreme isolation

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had created the simplest 
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 --
others even vanish.

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Fortunately, for most of us,

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human cooperation 
has expanded over time.

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As we saw in the previous videos,

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we enjoy enormous benefits 
from specialization and trade.

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One reason for this 
beneficial cooperation

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is what economist 
call "Comparative Advantage."

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Two things are surprising 
about Comparative Advantage.

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First, just by rearranging 
who does what,

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we can make more stuff 
through specialization in trade

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even if no one ever gets any better
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,
that obviously benefits you,

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but it also benefits me

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

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Let me show you how this works.

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It's best seen 
with a simple example --

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just two people -- Bob and Ann --

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who produce just two goods --
bananas and fish.

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Here's what Bob can do
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
or he can catch 10 fish.

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Ann can either gather
10 bananas or catch 30 fish.

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So let's say they each
split their time

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between producing 
bananas and fishing.

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Bob and Ann each 
produce five bananas,

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Bob produces five fish,
and Ann produces 15 fish.

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In total, they produce 
10 bananas and 20 fish.

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You math wizards in the audience

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surely see an obvious way
to increase this total.

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If Bob produces just bananas
and Ann produces just fish,

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then the total rises 
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 
of the division of labor

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

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The key insight 
from the division of labor

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is that workers individually
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
has gotten any better

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at producing bananas or fish.

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Just by rearranging
what tasks each does

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is what made 
total production increase.

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The key to understanding
how this works

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is opportunity cost.

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Bob has to choose to gather
bananas or catch fish.

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When he chooses to gather a banana,
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
or trade that time to catch fish,

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and the cost of that trade 
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 
one banana is three fish.

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

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she could have caught three fish.

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She trades with herself 
one banana for three fish.

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

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

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Ann's opportunity cost 
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 
for less than three fish,

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and Bob can improve his situation

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if he can get fish 
for less than one banana.

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Let's say Ann trades two fish
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
and give up three fish,

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

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

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Bob prefers the lower 
cost option too.

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Instead of giving up 
a whole banana to catch a fish,

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he can trade that 
banana for two fish.

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

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You can see that even
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 
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
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 
that is really counter-intuitive.

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What happens if Ann
gets better at fishing?

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

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Obviously that's good for Ann,

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but it also means that 
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
for each banana that she gathers.

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By becoming a better fisherman,

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Ann becomes a comparatively 
worse banana gatherer,

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and this fact helps Bob.

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The reason is that Ann is now
willing to trade more fish

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for each banana 
that she gets from Bob.

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

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he can now get more fish
for his bananas.

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Comparative Advantage 
is a beautiful thing.

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No matter what my talents are,

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

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The more different 
we are from each other,

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the more we benefit 
from trading with each other.

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Let's get back to the real world.

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What Comparative Advantage
practically means for most people

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

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that utilizes each 
of our comparative talents.

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How do you know what 
you're comparatively good at?

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What you get paid 
for your job tells you that.

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Comparative Advantage 
is the main force

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

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

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and those who have 
good graphic sense

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tend to go into the arts.

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Specialization and trade
play key roles

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in the movement 
from poverty to prosperity.

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We would be desperately
poor without them,

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

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Another feature of the modern 
world is important --

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"Innovationism."

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Our society is 
an orgy of innovations.

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This Innovationism 
would be impossible

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without specialization and trading,

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yet specialization and trade 
do not guarantee Innovationism.

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This is a topic for a future video.

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♪ [music] ♪