Babe Ruth – why he switched
from pitching to hitting
The story here is one of comparative
advantage.
1
Let’s say that in a production setting during each hour that you
can make either
2 cookies or 3 pretzels.
Also say that during each hour I can make either
1 cookie or 2 pretzels.
It is obvious that in an hour you are better at both cookie making
and pretzel making. When someone can produce more of an
item than another in the same amount of time that person is said
to have an absolute advantage in producing the item. You have
an absolute advantage in producing both cookies and pretzels.
Earlier in his career Babe Ruth was an outstanding pitcher.
Maybe the best in his day. He was also an excellent hitter.
Maybe one of the best ever. So, Babe Ruth had an absolute
advantage in both hitting and pitching during the time he played
baseball.
2
Let’s focus on what happens if each of us makes cookies. When
you make cookies you can not make pretzels, and the trade-off is
you give up 3 pretzels when you make 2 cookies. Another way to
say this is that each cookie you make means you give up the ability
to make 1.5 pretzels.
In this case we say the opportunity cost for you in making 1 cookie
is 1.5 pretzels.
Note for me the opportunity cost of 1 cookie is 2 pretzels.
So, in cookie making you have a lower opportunity cost and thus it
is said that you have a comparative advantage in cookie making.
But, when the focus is on making pretzels, when you make pretzels
you give up 2/3rds of a cookie for each pretzel made while I only
give up 1/2 of a cookie for each pretzel made.
So, I have a comparative advantage in making pretzels.
3
WOW, while you are absolutely better than me in both cookie and
pretzel making, I have a comparative advantage in pretzels!!!!
So, when you look back at the Babe Ruth story, we can now say
Babe Ruth had a comparative advantage in hitting and thus it
made sense for him to give up pitching. The team he would play
for would be much better off with him as a hitter.
In the cookie/pretzel example let’s say you and I can trade cookies
and pretzels in the ratio 1 cookie = 1.75 pretzels (called the terms
of trade).
Since you have a comparative advantage in cookies you should
make only cookies and then trade for pretzels if you want some.
Here is why. If you want pretzels and you make them on your own
you only get 1.5 pretzels per cookie you don’t make. But if you
make cookies you get 1.75 pretzels for each cookie you trade. 4
Since I have a comparative advantage in pretzels I should only
make pretzels and then trade for cookies if I want some. Here is
why. If I want cookies and I make them on my own I only get .5
cookies per pretzel I don’t make. But if I make pretzels I get about
.57 cookies for each pretzel I trade.
So, if each of us specializes in the item in which we have a
comparative advantage and trades for the other item (as long as
the terms of trade are good) each of us will be better off.
The team that Babe Ruth played for was better off with him hitting
because he had a comparative advantage in hitting.
5