Comparative Advantage and Smart Frugality

Whenever I see a long list of frugal activities, I immediately toss out most of the items on that list, not because the list is bad, but because I filter the items on that list pretty quickly.

First of all, there are items on the list that simply aren’t “worth it” for me. They don’t earn enough of a financial return for the time and effort invested to make me want to do it. One great example of this is the idea of washing Ziploc bags for reuse – I might save a dime or so in doing this, but it’s going to take me multiple minutes to turn the bag inside out, clean it thoroughly, make sure it’s very dry, make sure that it’s not leaking (because what’s the point if it’s just going to leak), turn it back to its correct dimensions for use, and store it. That’s just not worth the time or effort in order to save a dime.

Second, there are items on the list that rely on something I’m just not very skilled at. For me, a great example of this is any task that requires a lot of very fine detail work. I have enormous hands, so doing things that require me to firmly grip tiny objects tends to go very slowly. I can do them, but I just can’t do them with any speed or with any quality. I usually pass off tasks that take advantage of smaller hands and fingers to my wife (and she takes advantage of my height quite often in exchange).

Different people are going to read such a list differently. They may have a different threshold for what makes something a worthwhile frugal task for them. Even more important, they may have different skills and talents than me that make some tasks more efficient for them – hemming a pair of jeans comes to mind.

This is where the economic concept of comparative advantage pops in.

Comparative advantage, in simple terms, means that someone (or some group) has the ability to make a product or produce a result more efficiently than another person (or another group). For example, if Sarah and I are both trying to hem a pair of jeans, Sarah is simply going to do it faster than I will and will probably produce a more skillful result. On the other hand, when it comes to going through items stored on high shelves, I have a large comparative advantage over Sarah because I can simply grab boxes while standing there whereas she has to go get a step stool.

All of us have things that we happen to be good at. One of my brothers is incredibly adept at spotting things (think of a Where’s Waldo book) and he uses that skill to hunt for morel mushrooms in the forest or to find arrowheads or fossils. I can walk with him in the woods for several hours and find maybe one mushroom and he’ll come out with a sack of mushrooms, six arrowheads, three fossils, and probably some strange artifact from a pre-Columbian group. He’s done this many times – I’ve witnessed it.

Thus, if my goal is to get some morel mushrooms for dinner, I’m far better off trying to convince my brother to go out there for an hour and pick some for me than for me to wander around in the woods for several hours and not find nearly as many. He has a large comparative advantage over me in that department.

So where do I have a comparative advantage over him? Well, I could tutor his children in a variety of school subjects. I can fix most electronic devices quite efficiently. I’m good at food prep and can make a lot of food that can be stored for a long time.

Those are all skills that I have that he might not otherwise have. So, what I might do is this: I’ll go to my brother and say, “Hey, I’ll hook you up with a few jars of pickles if you go mushroom hunting with me for an hour and let me keep the proceeds so I can make a big batch of sauteed morels for my friends next weekend.”

So, what happens here? My brother gets a bunch of jarred pickles that would have taken him a lot of time to produce, especially since he doesn’t grow cucumbers, while I get a ton of morels for just an hour spent in the woods. We both get a ton of value out of an hour or so of our time.

Without each other, I would have spent several hours stumbling around in the woods without a whole lot of success (it would be fun, but not real productive), while he would have bought some mediocre pickles from the store with his hard-earned money.

That’s comparative advantage at work. I’m taking the product of something I’m skilled at or have some other kind of advantage with – growing cucumbers and transforming them into jars of pickles – while he’s taking the product of something he’s skilled at – finding morels in the woods – and we swap those advantage. Thus, my brother gets to effectively have the advantage of growing cucumbers and jarring pickles without any of the work and I get to effectively have the advantage of being absurdly efficient at finding morels in the woods. We both save a ton of money and time.

This idea has a ton of applications for frugality, so let’s walk through some of them.

There are some things in life you are simply better at or are more prepared to efficiently achieve than others. If you have a garden, for example, you’re far more prepared to have a bounty of vegetables in the summer than your friend who does not have a garden. Perhaps you have a particular natural talent or a skill you’ve built over time, like my father’s skill at chopping down trees and cutting wood – even at his age, he’s still incredibly efficient at producing a truck bed full of firewood, far, far more so than I am.

It is well worth your time to figure out some of those things for which you have a comparative advantage. What are you good at or particularly well prepared to do, things that your friends or neighbors might be able to do themselves but with much lower efficiency? You can actually make a list of those things if you’d like.

You might want to also consider things that your friends and neighbors and family members hate doing but that you don’t mind, or things that they’re indifferent towards that you actually enjoy, because you’ll be getting a comparative advantage in personal pleasure out of that activity compared to the people around you.

Make a list of these things if you’d like, but it’s usually just enough to identify some of your comparative advantages you have over others.

What if you don’t know where to start? Here are a few things to ask yourself.

Do you have any particular skills or talents that others sometimes want or are even willing to pay for?

Do you have any equipment that others sometimes want or need to use?

Have you made or grown anything that others sometimes may want or need and will pay for?

Is there anything you can do surprisingly quickly or with higher quality results than the people around you?

Is there anything you enjoy doing that many other people find to be drudgery?

When I look at myself, I can find all kinds of things for each category. Like I said above, I’m good at fixing electronic equipment and doing small repairs. I’m also good at writing marketing copy or short written pieces for various things. I’m good at tutoring children and adults one on one on subjects that they’re struggling with due to (I think) a mix of empathy, humor, and solid understanding of many topics. I have lots of different pieces of equipment that people sometimes want to use, like our snowblower and our high-powered stand mixer. We almost always have a garden that’s full of vegetables and we often preserve and store those vegetables. I can make excellent breads. I actually kind of enjoy folding laundry and find it to be really meditative, and the same is true for mowing grass. Those things just scratch the surface.

Those are my comparative advantages.

Great, you might be thinking, but what use is that?

Well, the next step is to know how to leverage those comparative advantages to save money (and make money, too, but that’s another subject). You can, quite simply, turn the things that you’re particularly good at into spectacular advantages in other areas of your life where you may not be quite as skilled.

How do you do that? Bartering.

I gave a pretty clear example of bartering above when I described swapping my comparative advantage in making pickles for my brother’s comparative advantage in finding morel mushrooms, but you can do the same thing with almost every comparative advantage you have with the comparative advantage that almost everyone in your life has.

Do you have an abundance of garden vegetables? Swap them with your neighbor for use of his snowplow this coming winter, saving you a ton of time and effort shoveling your own driveway (or the cost of your own snowplow).

Do you have a strong skill when it comes to adjusting and fixing clothes? Offer to hem up your sister’s clothes for her in exchange for a few jars of her homemade salsa, which saves you the cost of buying premium salsa at the store.

Do you have a membership at a warehouse club? Offer to buy your sister’s family a bunch of warehouse club items at a discounted price for her in exchange for her using her discount at work to get you a better price on a new cell phone.

Do you know how to change the oil on a car quickly and easily? Change your brother’s oil in exchange for him spending the time that the oil is dripping helping you repair the railing on your deck because he’s got a knack for simple carpentry.

Over and over again, the comparative advantages you have in your life can be used to get far more value out of that advantage than you would otherwise because you’re willing to barter that advantage with friends and neighbors in exchange for their comparative advantages.

What do you need to do to make this a part of your frugal routines?

First, spend time thinking about the comparative advantages that your friends bring to the table. What skills do they have that you do not, especially ones you might pay for? What equipment do they have that you do not? What do they make or produce that you might otherwise pay for? What are they able to do really efficiently that takes you a long time to achieve?

I know, for example, that I have a few friends who are avid gardeners, so I often plan ahead with them and grow different things so that we can trade our comparative advantages. I look at our big cucumber patch not as a bunch of cucumbers, but as a few cucumbers and the ability to trade for a lot of additional vegetables and other things we might need.

I have a friend that’s good at entertaining children by making balloon animals, so I’ve swapped with this friend before, giving some things of value to her in exchange for this service. My friend has shown up and blown up a ton of balloon animals for kids at a party in exchange for some of my help.

As I mentioned above, I have family members that are extremely adept at finding certain types of gourmet foods in the wild. I have friends who are very well equipped to watch a dog for several days. I have friends who are good at carpentry and woodworking and electrical wiring. Those are all things that are really useful for me.

Second, have a strong understanding of what comparative advantages you can offer that are useful to the people in your life. Know what you can offer that takes you substantially less effort and worry than what others have to invest to receive the same thing, or what equipment you have that saves you a ton of time on a task that your friends may invest a lot of time in, or what goods you can acquire at a much lower price than your friends (like garden vegetables).

This requires a healthy amount of self-analysis. What are you good at? What can you really offer of value to others? Can you offer your time? Your energy? Your strength? Your knowledge? Your possessions? What do you have that is more efficient than what your friends and family can offer?

Third, never be afraid to suggest trades to friends or family. I do this quite often, especially when they have something I want or need and I have something they could find useful. I’ll always offer to give someone a jar of pickles in exchange for using their drill or a basket of garden vegetables in exchange for some of their best peppers.

If your friend recognizes that the thing you’re wanting is relatively low effort for them and the thing you’re offering has notable value for them, they’ll almost always take you up on that offer, and when that happens, you both benefit. That’s the value of comparative advantage – you both get something that’s more valuable to you than what you give away.

Let’s spell out a clear example of what I mean. Giving a jar of pickles to a friend in exchange for using his corded drill for a few days means I don’t have to shop around for one or invest the money in buying one. On the other hand, letting a friend take something out of my garage for a few days that I won’t be using in exchange for some food that I’ll most definitely enjoy is quite a bargain, indeed.

That’s how most trades of comparative advantage work. You give up something that costs you little in exchange for something that has a greater value for you because it’s easy for you to give up the thing you’re offering but hard for you to get the thing you’re receiving. Your friend does the same thing, but in reverse. You both win.

So, whenever you see any instance where you can trade with a friend by borrowing something or lending something or giving away something that was very low cost to you but of much higher value to a friend, do so.

Fourth, don’t be afraid to offer help. Quite often, if I see a friend who needs or wants something, I’ll just give it to them, especially if it’s something that’s of relatively low value to me. I lend stuff out all the time. I give away food items I’ve made. I give away garden vegetables. I give away my knowledge and expertise.

What do I get in response? I don’t get anything directly, nor do I expect it. However, my friends know that I have just given them something that they value, and good friends don’t forget. When they see a window to reciprocate, they usually will. I have a belief – not an expectation – that my friends will help me when I need them to and they’ll sometimes surprise me with good things, and I’m usually right.

I earn two other, more subtle things as well. One, I earn a stronger friendship, especially if giving without strings attached is a pattern. Two, I earn some good feelings, because at my core I believe the world is a better place when people give of themselves when it makes sense and try to contribute positivity to the world. Those things have real value, and I get them in return whenever I offer help or give things away to people, especially people I care deeply about.

In the end, comparative advantage is an incredibly valuable tool in a frugal person’s toolbox. It allows us time and time again to get more value out of the bigger things we have – our expensive items and our personal skills – and to be able to swap some of our seemingly simple items for things of much more value, thereby amplifying the value of our possessions, time, and skills. Don’t be afraid to share your talents and useful possessions with your friends and they’ll be likely to share back, which will create a ton of value for you and produce a lot of goodwill and good feelings in the process.

Share and share alike, especially when it comes to things of value that you can easily produce.

Good luck!

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