Lessons From Ricardo

Let's leave Ricardian Equivalence and Labor Theory of Value aside for a moment. The second day has just ended. What lies ahead of you is a stressful day which culminates in the final presentation to the directors. Your commentators are currently in no position to provide contextual advice to you. Besides the fact that army and perhaps stagnation after JC have created a fermented dish out of our brains, the impressive amount of research undertaken by all 5 teams leaves us impressed and in awe. Even then, the two of us are far from being structurally unemployed (or we so choose to believe that we are not). We shall give you some advice on preparing your presentations.

Paul Samuelson began the "new testament" in economic history. After his regrettable death last year, we wonder why his face isn't on any of the dollar bills yet. He made classic comment on Samuelson's theory of comparative advantage, which we liberally borrowed from wikipedia.

Stanislaw Ulam once challenged Samuelson to name one theory in all of the social sciences which is both true and nontrivial. Several years later, Samuelson responded with David Ricardo's theory of comparative advantage: That it is logically true need not be argued before a mathematician; that is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.

For those who have never heard of the term "comparative advantage", we feel that it is about time you did. To illustrate the concept to those who don't, and to further illustrate the wide ranging applications that the theory can be used for, allow us to introduce a simple anecdote.

Linan is a JC graduate who has just entered the army, and is on leave to help out at the EDB Amoeba Challenge. Keat Chuan is the assistant managing director (AMD) for EDB (enough said). Now let's just assume, with good reason, that Keat Chuan can blog better than Linan does on matters related to EDB, and hence will make a better blogger for the EDB Amoeba Challenge than Linan. After all, he doesn't even need to listen to the 4 modules to be able to write an essay on each one of them. Let's also assume, with absolutely good reason, that Keat Chuan is better in directing EDB than Linan does. We don't think we need to elaborate on that either. But why does Linan still do the blogging for now, even though Keat Chuan is better than Linan in blogging?

Keat Chuan stays as a full time AMD because his time is better spent directing EDB. On the other hand, for Linan, even though he does blogging lousier than Keat Chuan does, Linan continues to blog because he would be more suitable to do blogging than Keat Chuan. But why is the time "better spent" and why is Linan "more suitable"? That is because if Keat Chuan were to do blogging, the opportunity cost incurred by him not directing EDB is huge. Similiarly, we know that even though Linan is lousier in blogging and directing, but the opportunity cost of him blogging is not really high because he isn't that good in directing any way. In other words, though Keat Chuan is better than Linan in both things, Keat Chuan is far better than Linan in blogging, but only slightly (oh dear Linan's really boasting) better than Linan in blogging. For the geeks, go work out the maths using PPCs, relative costs and what not. For pragmatists, let's move on. We would say that Keat Chuan has absolute advantage over Linan in both areas, but only comparative advantage in directing. Linan has comparative advantage over Keat Chuan in blogging.

Hence in the ideal scenario, Keat Chuan concentrates fully on directing and not get tired of it (or what we call constant returns to scale). Same goes for Linan, who will never get tired of blogging. Then if Keat Chuan specialises totally in directing, and Linan blogs exclusively for the entire event, then the duo would be able to generate much more value than if Keat Chuan did both, and Linan did nothing. If Keat Chuan did do both, the high opportunity cost of him doing blogging would cause him to produce value that would be lesser than if he had specialised in directing.

If you got our drift by now, excellent. You have just made it through half of most MBA programs. Your commentator Linan has something against MBA programs. He often compliments business programs by saying that MBA is dumbed down applied economics stripped of any mathematics beyond the 4 simple operations, built for CEOs who had trouble understanding proper academic papers. But personal issues aside, if you still don't realise why this lesson is important, think about your presentation.

We hate artists who paint a painting, then write an essay to dictate to viewers what the painting is about. We prefer to wonder why Munch screamed. But there is little multifariousness in the interpretation of this anecdote. We shall shamelessly explain ourselves. There must be people in your team that are good in everything. Even if everybody is good in some particular thing, there will always be a polymath in your team. But everybody has their comparative advantage. Capitalise on that, and we promise that the product of your team will be larger than the vertical sum of your individual works.