The Law Of Comparative Advantage and Priorities

Over a decade ago I had written about two kinds of employees – those who offer “competitive advantage” and those who offer “comparative advantage”.

Quoting myself:

So in a “comparative advantage” job, you keep the job only because you make it easier for one or more colleagues to do more. You are clearly inferior to these colleagues in all the “components” of your job, but you don’t get fired only because you increase their productivity. You become the Friday to their Crusoe.

On the other hand, you can keep a job for “competitive advantage“. You are paid because there are one or more skills that the job demands in which you are better than your colleagues

Now, one issue with “comparative advantage” jobs is that sometimes it can lead to people being played out of position. And that can reduce the overall productivity of the team, especially when priorities change.

Let’s say you have 2 employees A and B, and 2 high-priority tasks X and Y. A dominates B – she is better and faster than B in both X and Y. In fact, B cannot do X at all, and is inferior to A when it comes to Y. Given these tasks and employees, the theory of comparative advantage says that A should do X and B should do Y. And that’s how you split it.

In this real world problem though, there can be a few issues – A might be better at X than B, but she just doesn’t want to do X. Secondly, by putting the slower B on Y, there is a floor on how soon Y can be delivered.

And if for some reason Y becomes high priority for the team, with the current work allocation there is no option than to just wait for B to finish Y, or get A to work on Y as well (thus leaving X in the lurch, and the otherwise good A unhappy). A sort of no win situation.

The whole team ends up depending on the otherwise weak B, a sort of version of this:

A corollary is that if you have been given what seems like a major responsibility it need not be because you are good at the task you’ve been given responsibility for. It could also be because you are “less worse” than your colleagues at this particular thing than you are at other things.

 

 

Comparative advantage and competitive advantage

So there are two reasons why you could be employed. Comparative advantage and competitive advantage. Let me explain.

In international trade, there is a concept called “law of comparative advantage“. Let me explain with the classical (and simple) example. Robinson Crusoe is marooned on an island with Friday. Now, let us assume there are two productive activities on the island – catching fish and cutting wood. Now, Crusoe can catch 10 fish an hour, while Friday can catch 5. On the other hand, Crusoe can cut 3 trees an hour, while Friday can cut 2. Clearly Crusoe “dominates” Friday, and the latter is much more inefficient. So does that mean that Crusoe can just have Friday for dinner one day?

While the intuitive answer might be a “yes”, the law of comparative advantage shows otherwise. While Friday might be inferior to Crusoe in both activities, he is “less worse off” at chopping trees than he is at catching fish. For example, let us say that if left to himself, Crusoe would spend 3 hours fishing and 2 hours chopping wood every day. That would produce 30 fish and 6 trees of wood.

Now, if Crusoe were to spend all his 5 work hours exclusively catching fish, he will have 50 fish and no wood. He can trade the extra 20 fish for 8 logs of wood from Friday (Friday demands 5 fish for every 2 logs of wood, since that’s his opportunity cost). So net-net Crusoe is better off by 2 logs of wood. The trade similarly leaves Friday also better off (compared to the situation if he were alone on the island). Now you see why Friday keeps his job.

So in a “comparative advantage” job, you keep the job only because you make it easier for one or more colleagues to do more. You are clearly inferior to these colleagues in all the “components” of your job, but you don’t get fired only because you increase their productivity. You become the Friday to their Crusoe.

On the other hand, you can keep a job for “competitive advantage“. You are paid because there are one or more skills that the job demands in which you are better than your colleagues. You have a “competitive advantage” in those skills, and that is what you are paid for. Here you can expect to be treated better than your comparative advantage colleague would. You can even expect for some of your “comparative advantage” colleagues to be assigned to you to take your load off on those tasks you don’t enjoy a competitive advantage in. And again I’m not saying you need to “dominate” your colleagues.  All you need is one “axis” along which you are clearly superior. And you’ll get the “competitive” treatment.

Pause for a moment and ask yourself why your job exists. Check if you work because you have a competitive advantage, or if it is merely because of the “comparative advantage” – that your presence frees up time for the more efficient people. If your job belongs to the latter category, I think you have reason to be more worried.