Episode #2 in Review: Specialization and Trade

Crash Course’s second episode was pretty agreeable.  It explained why free trade is mutually beneficial, gave a good explanation of the Production Possibilities Frontier, and it even knocked down common political arguments that are demonstrably false.  Let’s start with their explanation of specialization.

Specialization is a Pizzeria?

pizzaCrash Course gives a visualization of specialization with the analogy of a pizza-making assembly line.  I hope that this example is effective for those unfamiliar with specialization, but what I was thinking when I saw this was “couldn’t each of these guys very easily switch to a different position at the pizzeria without much fuss?  Is the guy cutting vegetables really that much better at doing this task than anyone else?”  I wasn’t sure if this example was advocating for specialization or just an assembly line business model.

farm

Their best example comes from showing what one person would have to do to make a pizza by himself.  This is a modern take on Leonard Read’s I, Pencil, and it gets the point across faster even than it would take you to read Read’s short essay.

National Trade

model

Understanding the Production Possibilities Frontier is challenging.  They explained the model quickly, and although I was able to follow along in real time, I needed to pause the video after this segment to visualize and absorb the lesson again in my head.

Their conclusion from the model was direct:

You might hear a politician or someone on the news argue that international trade destroys domestic jobs, and even though it may seem counterintuitive, economists for centuries have argued that trade is mutually beneficial to whoever is trading.

To be fair though, international trade may destroy particular domestic jobs, but not the total number of jobs.  In Crash Course’s example, the American shoe industry would suffer as a result of free trade, and the airplane industry would grow.  People hate making less money or getting laid off, even if you explain to them that the economy is better off for it.  Just ask the cab industry.

Let’s go back to that final line: trade is mutually beneficial to whoever is trading.  While true, it’s important to compare this statement to the opposite argument: trade is a zero-sum game where one party wins and the other loses.

There are a fair amount of people who believe that as people get rich, these people are necessarily making others poorer (the money has to come from somewhere right?).  With the exception of thieves, who actually do increase their wealth at the expense of someone else’s wealth, people get rich because a lot of other people have wanted to trade with them.  Bill Gates is not rich because people are poor, he’s rich because a lot of people value his products more than holding on to cash.

The episode gave two good examples of the national benefits of free trade: Japan and Taiwan.  While these examples are good, Japan and Taiwan also have a fair amount of natural resources, and Japan has historically been a developed country.  Instead of these examples, I would look at Hong Kong and Singapore.  These countries are closer to the size of a city, with very few natural resources, and just 60 years ago would be considered poor underdeveloped countries.  But from decades of free trade policies (they are currently #1 and #2 most economically free countries in the world), these tiny countries now have a greater GDP per capita than the European Union’s average.

Not much objection in this week’s episode, and we even have a teaser of next week:

Next time we’ll show you how some of these ideas get turned into economic systems, and how these systems contribute to differences between countries.

Looking forward to hearing about Venezuela.

Crash Course Economics – Episode #1 in Review

Episode 1 of Crash Course gave a brief introduction to how the course is designed, who your co-hosts are, and some basic principles and definitions in economics.  There was a mix of good and bad economic conclusions, so let’s dive right in:

How Does Crash Course Define Economics?

Our first co-host, Mr. Clifford, defines economics as “the study of people and choices”.  This is a pretty great definition, especially considering the alternatives.  Depending on his preferred school of economic thought, he could have easily said economics is the study of “classes and prosperity,” “institutions and planning,” or “statistics and predictions”.  Instead, Mr. Clifford went with people and choices which will become important later on when the show gives examples of choices.

The Good

The first example of what a human choice looks like couldn’t be more relatable to the audience: watching a YouTube video. YouTubers compete for your attention, and by proxy, ad revenue.  YouTube content is a serious business as our hosts know, and the popularity of some channels over others will determine the actual wealth of the content creators.

Our second co-host, Adriene, even goes into defining opportunity cost: “the cost of watching this video is the video you’re not watching.”

I would have been satisfied with this explanation, but Adriene goes so far as to give a great example of opportunity cost in having a large military state:

Military spending in the United States is over $600 billion per year.  That’s close to what the next top 10 countries spend combined…the opportunity cost of [each] aircraft carrier could be hospitals, schools, and roads.

This statement is pretty profound in one sense, considering that some people and economists continue to write that any kind of government spending is good for the economy regardless of what it is, even if it’s for a fake alien invasion.

What is not mentioned, however, is that the opportunity cost of these aircraft carriers could also be non-government spending in the marketplace.  In other words, if the money spent on aircraft carriers were refunded to taxpayers (or never taken in the first place), people could decide for themselves what they would prefer to spend that money on.  It could be towards their healthcare bills, their kids’ college tuition, or buying consumer goods, any of which might be more important to them than another aircraft carrier.

This is a good example of Bastiat’s broken window argument or “the unseen”, which says that it’s easier to see the stuff paid for (in this case, the aircraft carrier) than that which could have paid for.

The Bad

The YouTube video selection example was a great illustration of the marketplace, but I thought next examples were a little strange.

“But what if I’m watching this at school,” you ask.  “What if I’m forced to watch this?”  Well, you weren’t forced to go to school.  You could ditch, you could drop out, you could move to a country that doesn’t have compulsory education.

Wait, isn’t that a contradiction?  Doesn’t something legally compulsory require coercion or force?  Parents have a legal obligation to send their kids to school, under the threat of significant fines or jail time, sometimes for the student.  It doesn’t matter if school gives you anxiety or you’re being bullied, you still have to go.  And you obviously can’t just move to another country; runaways are sent back to their legal guardians.

This is quite different from choosing which YouTube video to watch.  You don’t get fined or jailed for not watching a YouTube video.  To a child, compulsory education is not the marketplace.

Another problem I had with the videos was a lack of distinction of individual and government action:

Is there a way to ensure there will never be another traffic fatality?  Yes, we can crush all the cars, close the roads, and force everyone to walk.  Do you want to decrease the number of people convicted of murder?  You could decriminalize murder.  You want to end the unethical treatment of elephants? You can kill off the elephants, in an ethical way of course.

Are these questions directed at me?  I can’t do any of these things.

can choose one YouTube video over another, but I cannot choose an alternative road system, legal system, or what other people do with their elephants.

You know driving has risks, that you might get in a car accident, but you still drive.

Adriene has now switched the subject to what I personally decide to take as my transportation method.  The power to choose whether to drive is different from deciding to crush all the cars and force everyone else to walk.  I have control over myself and my actions, but I don’t get to decide how other people act.

Assessment

I was pleased and entertained by the introductory episode of Crash Course Economics.  The big economic principles it taught are generally unobjectionable, but some of the word selection and examples are either confusing or misleading.  The 10-minute video has a lot more to unpack, and I’ll try to expound on some of the interesting choices of words and implications before the next video comes out.  I’ll also include some thoughts from other economists I’ve asked to contribute to the blog.

Like what I wrote?  Hate what I wrote?  Feel free to comment below.