It's Money I Love

I don't love the mountains, Don't love the sea
I don't love Jesus
He never done a thing for me
I ain't pretty like my sister, Smart like my dad
Or good like my mama
It's money that I love...
They say that money can't buy love
Guess what
Get your half pound of cocaine
for sixteen year old girls in a great big long limousine
On a hot September night
Now, that may not be love,
but it's alright.
It's money that I love
You used to worry about the poor
But I don't worry any more
You used to worry about the black man
Now I don't worry about the black man
You used to worry about the starving children of India
You know what I say now about the starving children of India
I say, oh mama, it's money that I love
It's money that I love.

Randy Newman, from Guilty, Thirty Years (also on the album Born Again)

Harry and Larry Again

Following table specifies how much beer and pizza Harry and Larry can produce per hour:

In order to figure out comparative advantage, it's useful to set the problem up this way:

To graph:

put beers on vertical axis,
pizzas on horizontal axis

What is the slope of Harry's production possibilities curve?

(the rise over the run)

What is the slope of Larry's production possibilities curve?

(the rise over the run)

Ask:

How many beers can Harry produce if he produces no pizza? This gives you Harry's vertical intercept

How many beers can Larry produce if he produces no pizza? This gives you Larry's vertical intercept

How many pizzas can Harry produce if he produces no beer? This gives you Harry's horizontal intercept

How many pizzas can Larry produce if he produces no beer? This gives you Larry's horizontal intercept

What's the equation for a straight line?

y=mx + b

Specify the equation for Harry's production possibilities curve (remember beers are Y and pizza is X)

beers= slope (pizza) + some constant

You know everything here except the constant, so solve for the constant:

when beers are 0, pizza is 2

when pizza is 0, beers are 10

0= -5 (2) + b

0= -5 (2) + b

what's b?

b=10

Cool!

You could have figured out the y-intercept by asking:

what is y when x is 0--

Or what is beer when pizza is zero.

10.

equation for Harry's production possibilities curve is

y= -5 x + 10

Now, how do you add the two curves?

A short digression: Let's make sure you understand lines that are not straight:

Compare the following two lines:

What's the slope of these lines?

In both cases, slope is negative

Which slope is steepest? The curve in graph B.

Remember: the slope of a vertical line is infinite. Slope is equal to rise/run. A vertical line rises to infinity and doesn't run anywhere (divide by 0 and you get infinity). Slope of a horizontal line is 0. It doesn't rise at all, and runs to infinity. If you look at the graphs above you can see that the curve in graph A is close to horizontal, while the curve in graph B is close to vertical.

The curves below also have a negative slope.

Graph C

Graph D

But the curve in Graph C starts out close to horizontal and becomes quite vertical. This means its slope is INCREASING. The curve in Graph D starts out close to vertical and becomes quite horizontal. This means its slope is decreasing.

This is important because production possibilities curves are always depicted with increasing slope, reflecting increasing opportunity costs--

Go over Figure 3.7 (An Especially Useful Division of Labor). This shows a greater contrast in the comparative advantage of two people...one is EXTREMELY PRODUCTIVE picking nuts (relative to coffee); one is EXTREMELY PRODUCTIVE picking coffee (relative to nuts).

Go over Figure 3.8 (PPC for a Large Economy). This is a production possibilities for a large economy. Note how the curve goes from having a relatively flat slope toward a steeper, more vertical one. It is "bow-shaped"

All points on or inside that curve are "attainable." All those beyond it to the upper right are "unattainable" unless something changes, like technlogy...

Now let's take this further into the real world and draw a picture of the gains from international trade. Suppose that Susan and Tom are to only two workers in a small island nation, ISLANDIA, and that another production possibilities curve represents a large SUPERPOWER. This SUPERPOWER IS ABSOLUTELY MORE PRODUCTIVE, AND EQUALLY PRODUCTIVE IN COFFEE AND NUTS.

Go over Figure 3.11 (Gains from International Trade).

Do Susan and Tom gain from trade? It depends on what they want.

If they are at point E (56, 56).

But what if they wanted to be at point D, consuming at least 28 pounds of coffee and at least 60 of nuts?

They could avoid trade and choose go to that point on their production possibilities curve. OR, THEY COULD PRODUCE AT POINT E ON THEIR PRODUCTION POSSIBILITIES AND USE TRADE TO GET TO POINT G OR POINT F.

AT E, THEY CAN PRODUCE 56 COFFEES AND 56 NUTS. SO, FOR EXAMPLE, THEY COULD SELL 28 COFFEES AND GET 28 NUTS. THAT WOULD PUT THEM AT A TOTAL OF 28 COFFEES AND 84 NUTS, OR POINT F ON THE GRAPH.

ANYTIME TRADE ALLOWS YOU TO MOVE FROM A POINT THAT WAS PREVIOUSLY UNATTAINABLE, YOU GAIN.

Specialization can increase risk.

Especially if you specialize in something that might become obsolete, or that might decline in value over time, or that is hard to "take with you" when you go.

Like, Honduras has a comparative advantage in producing bananas, and the U.S. in producing computer technology. So should Honduras specialize in bananas? Ummm, if they do, they will be a) completely dependent on another country for technology and b) unlikely to develop the skills and capabilities of their workforce and c) dependent on increased demand for bananas for any future growth. But people can only eat so many bananas, whereas their demand for computer technology seems insatiable....

Another good example is the traditional gender division of labor.

Oh, let men specialize in earning money and women specialize in taking care of family members.

This doesn't imply that men have an absolute advantage or are any smarter or harder working than women in general. It just implies that women have a comparative advantage in taking care of kids, which is obviously true for kids that are breast-feeding.

But women who specialize in raising kids are extremely vulnerable to the economic effects of non-marriage or divorce--they can't sell their "output" on the market, and taking time out of paid employment lowers their lifetime earnings...so they become economically dependent on their husbands...and even if they don't experience a divorce, they may be so intimidated by the thought of what would happen to them if they DID experience one that they are easily bullied....

There's more on these themes in The Invisible Heart, especially the first and the last chapters.

I want to turn now to another "down side" of specialization--what it does to human capabilities.

As Frank and Bernanke, put it (p. 64).

...one of Karl Marx's central themes was that the fragmentation of workplace tasks often exacts a heavy psychological toll on workers. Thus, he wrote, "All 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..."

Charlie Chaplin's 1936 film Modern Times offers a classic interpretation.