There are two types of leaders: one thinks, wealth is limited in this world, and the other thinks, there is unlimited wealth. One functions with the thought of scarcity, and the other, with the thought of plenty. One believes, he should do everything on his own to accumulate more wealth for himself, while the other believes in partnering with experts for mutual success. Who, do you think, is right? Let’s try to find out.
Every human has a Personal Culture (values and core beliefs). Their Personal Culture help them to weigh out the costs and benefits, in every single interaction, and glean out incentives. These incentives, in turn, make them behave in the way they do. This is Economics.
As you know, creating wealth is dependent on increasing productivity. (Check this post on increasing individual productivity, based on science.) There is a famous book that gave birth to modern Economics that teaches how to increase a nation’s productivity.
Adam Smith’s book, The Wealth of Nations, offers one of the world’s first collected descriptions of what builds nations’ wealth. Essentially, it says that specialization, which is the breaking down of large job into tiny components, makes a nation productive. The success of Victorian factories, and even, today’s MNCs, could be attributed to his theory.
In every improved society, the farmer is generally nothing but a farmer; the manufacturer, nothing but a manufacturer….
Try to imagine the number of specialized people, who worked in harmony, for us to be able to enjoy surfing the internet on our smart-phone. Imagine, if we made all of its components, ourselves. A simple cost-benefit analysis would, probably, keep us from doing that; but, suppose, if we were to go ahead with it, imagine, the quality of the smart-phone we’d produce when compared to the one we are holding in our hands, right now.
When a person has been doing a specific task for a long time, and became expert at it, it is very hard to outdo that person at that task.
Specialization, certainly, makes people more productive!
But, hey, there’s more. The book further says, it’s TRADE that makes people better off.
Under the field of macroeconomics, the production possibility frontier (PPF) represents the point at which a country is most efficiently producing its goods and, in turn, allocating its resources in the best way possible. Ideally, the combination of goods produced should fall on the Efficiency curve for the highest productivity. Any combination, falling below the curve, is inefficient use of resources, and any combination, falling above the curve, is impossible to achieve.
Now, suppose country A can, either, produce 500 Cars, using their entire resources, or 1,000 Shoes. Every Car they choose to produce costs them 2 Shoes, not produced. Suppose there is another country, B, whose numbers are 100 Cars and 10,000 Shoes. Every Car they choose to produce costs them 100 Shoes, not produced. The opportunity cost of not producing Shoes is lesser for country A than for country B, and similarly, the opportunity cost of not producing Cars is greater for country A than for country B.
So, we can say that Country A specializes in producing Cars, and country B specializes in producing Shoes.
In such a situation, wouldn’t it be ideal if both the countries traded their speciality products with each other? Each of them would end up with higher number of Cars and Shoes (with better quality, possibly) than they would have if they tried to produce both the products, on their own. A win-win for the countries, isn’t it?
So, the next time you hear politicians talk about disallowing foreign trade, you know, they are being ignorant, or perhaps, they harbour some ulterior motives. 🙂
“Do what you know the best, outsource the rest” – Peter Drucker