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101 Econ Lecture 5 How much does specialization matter? (I) Example 5.1. George and Tom are mechanics. Tom can replace 15 clutches per day or 10 sets of brakes; George can replace 10 clutches per day or 15 sets of brakes. At their garage, the number of brake replacements performed each day is the same as the number of clutch replacements. How much more can they accomplish if they specialize than if each performed an equal number of brake and clutch replacements? By specializing, they can replace 15 clutches per day (Tom) and 15 sets of brakes (George). If they don't specialize, each can replace only 6 clutches per day and 6 sets of brakes, for a total of 12 daily replacements of each type. Clutch replacements per day 25 15 0 15 Brake replace25 ments per day Clutch replacements per day 10 6 0 6 George Clutch replacements per day 15 Tom 6 Brake replace15 ments per day Brake replacements per day 0 6 10 A 25% increase in output isn't bad, but cannot explain why industrialized countries produce so much more than developing countries. Aside: How do we know that George can produce 6 jobs of each type if he doesn't specialize? First write the equation for George's production possibilities curve: C = 10 - (2/3) B To say that we want an equal number of both types of jobs means that C = B. So substitute C for B in the production possibilities curve equation to get C = 10 (2/3)C and solve for C = 6. And since C=B, that means B=6 also. How much does specialization matter? (II) Example 5.2. George and Tom are mechanics. Tom can replace 30 clutches per day or 6 sets of brakes; George can replace 6 clutches per day or 30 sets of brakes. At their garage, the number of brake replacements performed each day is the same as the number of clutch replacements. How much more can they accomplish if they specialize than if each performed an equal number of brake and clutch replacements? By specializing, they can replace 30 clutches per day (Tom) and 30 sets of brakes (George). If they don't specialize, each can replace only 5 clutches per day and 5 sets of brakes, for a total of 10 daily replacements of each type. 2 Clutch replacements per day 36 30 0 30 36 Brake replacements per day Clutch replacements per day 30 Clutch replacements per day Tom George 6 5 0 5 Brake replacements per day 30 5 Brake replacements per day 0 5 6 Now the gain in output is threefold. Clutch replacements per day 36 30 25 15 0 30 36 0 15 25 The gains from specialization are larger when differences in opportunity cost are larger, and when individuals enjoy absolute advantage in their respective specialties. In truth, the gains from specialization will often be far more spectacular. Division of labor according to talent and temperament Learning by doing Specialized capital equipment 3 Adam Smith on specialization: One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations... I have seen a small manufactory of this kind where only ten men were employed... [who] could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day..." Too much specialization? Specialization boosts productivity but it also entails costs. For example, variety is one of the first casualties as workplace tasks become ever more narrowly specialized. Karl Marx: [A]ll means for the development of production ... mutilate the laborer into a fragment of a man, degrade him to the level of an appendage of a machine, destroy every remnant of charm in his work and turn it into hated toil... Example 5.3. Which job should Jane choose? Suppose Jane is a factory worker who must choose between two jobs--one that pays $1000 per week and offers little variety, and another that pays $800 per week and offers high variety. If Jane values the additional variety offered by the second job at $400 per week, which job should she choose? Although the first job pays $200 more than the second, the second is actually worth more to Jane because its additional variety is worth $400, or $200 more than necessary to compensate for its lower salary. Jane should choose the second job. Example 5.4. Why does excessive specialization create profit opportunities? Suppose Jane from the preceding example is forced to move to the more specialized firm at a salary of $1000 per week when her original employer dies. Explain how a new firm could lure her away from this job and make additional profit itself for in the process. We may assume that her original employer was at least breaking even by paying Jane $800 per week. Because the additional variety in her original job was worth $400 per week to her, she would be indifferent between working at the more specialized job at a salary of $1000 and working at the less specialized job at a salary of $600. If a new firm went into business and offered Jane a salary of, say, $700 per week for the less specialized job, she would accept and the new firm would earn resulting profits of at least $100 per week. Efficiency: A situation is efficient if it results in the largest possible economic surplus. A situation is inefficient if it fails to achieve the largest possible economic surplus. Too much specialization is inefficient. The Efficiency Principle Efficiency is a good thing, because when the economic pie is larger, everyone can have a larger slice. 4 The Voluntary Simplicity Movement Voluntary Simplicity, Duane Elgin, 1981 Your Money or Your Life, Vicki Robin and Joe Dominguez, 1992 Simple Abundance, Sarah Ban Breathnach, 1995. The Circle of Simplicity, Cecile Andrews, 1997 Cut Your Bills in Half: Thousands of Tips To Save Thousands of Dollars, Rodale Press, 1989 Many bookstores now have entire sections entitled "Simplicity" Four large national newsletters on voluntary simplicity The first national Voluntary Simplicity Conference was held in Washington, DC in May 1997. Why is a voluntary simplicity movement needed? Why don't people just choose the level of simplicity that seems to work best for them? Possible answers: Spending is tempting. Hard to cut back when others don't. Bottom line: Life entails compromise. Specialization may be unpleasant, but those who don't specialize at all must accept low wages or work extremely long hours. We can expect to meet life's financial obligations in the shortest time--thereby freeing up more time to do whatever else we wish--if we concentrate at least a significant proportion of our efforts on those tasks for which we have a comparative advantage. Economic Naturalist: Where have all the .400 hitters gone? As discussed in the text, specialization by pitchers and other members of the defense has made it much harder to hit safely. But then why are new home run records now set every few years? Comparative Advantage and International Trade The same logic that leads the individuals in an economy to specialize and exchange goods with one another also leads nations to specialize and trade among themselves. As with individuals, each trading partner can benefit from exchange, even though one may be more productive than the other in absolute terms. Example 5.5. How does international trade expand domestic consumption possibilities? Elizabeth and Dennis are the only two workers in Islandia, a small island nation, and their production possibilities curve is as shown in the diagram. In the world market, tea can be purchased or sold at a price of $2 per pound and bananas can be bought or sold at a price of $1 per pound. How does the opportunity to trade in the world markets for bananas and tea affect consumption opportunities in Islandia? Bananas (lb/day) 120 100 E 100 120 Tea (lb/day) If Islandians specialized at the point E and sold all their produce in the world market, they would earn $200 +$100 = $300 per day. Thus they could buy as many 300 pounds of bananas per day (point F) or as many as 150 pounds per day of tea (point G). Islandia could also consume any combination of tea and bananas on the line FG. 5 Bananas (lb/day) 300 F 120 100 E G Tea (lb/day) 100 120 150 Example 5.6. In the preceding example describe Islandia's domestic consumption possibilities if the world prices were $10 per pound for bananas and $20 a pound for tea. If Islandians again specialized at the point E and sold all their produce in the world market they would now earn $2000 +$1000 = $3000 per day. Note, however, that although their income is 10 times as large as before, so are the prices of all goods. Thus their menu of consumption possibilities is unchanged. It is again the line FG. Bananas (lb/day) 300 F 120 100 E G Tea (lb/day) 100 120 150 Example 5.7. Same as the preceding example, except now the prices of both tea and bananas are $2 per pound. If Islandians again specialized at the point E and sold all their produce in the world market, they would earn $200 +$200 = $400 per day. Thus they could buy as many 200 pounds of bananas per day (point F) or as many as 200 pounds per day of tea (point G). Islandia could also consume any combination of tea and bananas on the line FG. 6 Bananas (lb/day) 200 F 120 100 E G 120 100 200 Tea (lb/day) Example 5.8. True or false: There is no way the United States can gain by trading with a nation whose workers are less productive than ours, in absolute terms, for every production process. False. Each country can gain by specializing in the products for which it is relatively more efficient, then exporting those products and importing the products for which it is relatively less efficient.

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