February 14, 2008

No, we're not talking about the former insurance company pitchmen from a series of highly entertaining commercials who later went on to star in a lackluster US sitcom. Instead, we're talking about the original cavemen who worked out that even if one caveman is an all-around better hunter-gatherer compared to another, less capable hunter-gatherer, it still may make a lot of sense for them to each specialize in a given task and trade with one another (HT: Free Exchange):

Even if Iga is better than Og at both fishing and fruit gathering --

-- It takes Og 3 hours to catch a fish and would take 4 hours for him to gather some fruit,

-- While it only takes Iga 1 hour to gather some fruit, and 2 hours to catch a fish,

Then is still pays for Iga to get her fish from Og. She could gather 2 meals of fruit and swap one of them for Og's second fish.

Because that way Iga works only 2 hours for a meal of fruit and fish, instead of 3 if she was self-sufficient, and Og only works 6 hours, instead of 7 if he was self-sufficient.

As we see in this example, Iga is the superstar hunter-gatherer, able to leave hapless Og in the dust when it comes to both fishing and fruit gathering. But, as the example points out, they both come out ahead when they divide the hunting-gathering tasks between them and trade with one another. Both end up with the same amount of food as they did before, but now, they have a lot more time to do all other things cavemen would do if they didn't have to spend so much time barely eking out a subsistence level of existence!

But, what if Iga wasn't such an over-achiever compared to Og? Or, what if Iga was even more of a hunting-gathering dynamo? What if Iga and Og combined their efforts? Would it still make sense for Iga and Og to trade with each other?

To find out, we pulled a page straight out of the caveman playbook: we built a tool! In the input fields below, enter how many hours each it takes for Iga or Og to catch 1 fish and gather fruit for 1 meal on their own. The tool will work out the math for four different scenarios, each of which will result in two fish being caught and fruit for two meals being gathered:

1. Iga and Og Fish and Gather Fruit Individually
2. Iga and Og Fish and Gather Fruit Together
3. Iga Fishes, Og Gathers Fruit, and They Trade
4. Iga Gathers Fruit, Og Fishes, and They Trade

So, here we go - the default data is taken directly from the example above, and the tool will find the number of hours that both Iga and Og need to achieve their tasks for these situations, as well as how many hours they save over doing each task individually (here, positive values indicate that time is saved, while negative results indicate that more time was required than what was needed to work individually):

Iga's Fishing and Fruit Gathering Data
Input Data Hours to Accomplish
Time Required to Catch One Fish
Time Required to Gather One Meal of Fruit
Og's Fishing and Fruit Gathering Data
Time Required to Catch One Fish
Time Required to Gather One Meal of Fruit
Scenario to Consider
Select a Scenario (but try them all!)

Iga's and Og's Results For the Selected Scenario
Calculated Results Hours Needed Hours Saved
Total Time for Iga to Complete Tasks
Total Time for Og to Complete Tasks
Iga's and Og's Combined Hours Needed and Saved
Combined Hours Spent Completing Both Tasks
The Bottom Line

In playing with the numbers, we find that the best benefits come from trade where Iga and Og perform the task in which at least one has a comparative advantage! Perhaps that helps explain the prehistoric graffiti that was found recently written on the wall of an ancient cave:

Trade better than wheel! And fire!

There's no clear indication if either Iga or Og were the culprits, although when you think about it, free trade would be the greatest invention of all time.

Elsewhere, Regarding the Benefits of Trade

The following is courtesy of Art Carden at Division of Labour, who neatly summarized how economists across the ideological spectrum view the benefits of the gains of trade:

We had an interesting discussion about presidential candidates' stances on trade before my 11:00 AM class yesterday. Trade is an issue that definitely cuts across economists' ideological spectrum. Here's Greg Mankiw on Barack Obama's anti-NAFTA stance, including an instructive quote from his colleague Larry Summers on NAFTA's success. Here's Paul Krugman on "Ricardo's Difficult Idea." Finally, here's Brad DeLong explaining why comparative advantage is the most misunderstood concept in economics.

"Trade Promotes Economic Progress" is #4 among the "Ten Key Elements of Economics."

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