Oliver Hannaoui
GDP — Macroeconomic Theory pt

One of the first lessons taught in introductory economics classes is the idea of opportunity cost, the value of your next best alternative. The simple idea behind the applications of opportunity cost is assessing what you give up in order to engage in an activity and allowing this to dictate your decision making.

Let’s say you are binge watching the latest episodes of the Disney+ hit series The Mandalorian the night before your calculus exam. The opportunity cost of watching the TV series in this case is studying for the calculus exam. Depending on the type of student you are, you may forgo studying for the exam because catching up on the series offers you a greater benefit than any additional studying. If you feel unprepared for the exam, you may deem the opportunity cost of watching the series too high and put the show aside for a later date to study for your exam.

The Mandalorian became the most-watched television series in the US in November 2019. Photo by Artur Tumasjan on Unsplash

Opportunity cost is also useful in understanding the idea of comparative advantage. A conventional method used in understanding the idea of comparative advantage is analyzing international trade. In China, labor is abundant, giving the country favorable conditions to be an efficient producer of electronics (representing approximately 27% of its total exports for a total value of roughly $664 billion in 2018). The US on the other hand, owns vast oil reserves making it one of the largest producers of crude oil in the world. Both countries in this case own a comparative advantage in the production of a specific good.

The US and China choose which goods to specialize in producing based on the goods in which they have lower opportunity cost of production, their respective comparative advantages. Each country decides to specialize in producing in a certain good since their innate advantages allow them to sacrifice less to produce that good. To put it less abstractly, the US sacrifices less resources than China in the production of oil due to its natural resources. Therefore the US is able to produce the same amount of oil as China while sacrificing less labor and capital. This is the essence of comparative advantage, specializing in an action in which you are marginally more efficient in than a counterpart.

This idea of specialization can be explicitly applied to the job market. Choosing what skills you focus on can be as simple as assessing what subject or skill you own a comparative advantage in.

Why Specializing in a Skill Will Keep You Employed

Common Business-Oriented Language (COBOL) is a programming language primarily used by government agencies and financial companies developed in 1959. Chances are this is your first time hearing of this programming language. While scarcely taught in university curriculum, according to Reuters, 3 trillion dollars in daily commerce flow through COBOL systems.

Created over 60 years ago, the COBOL mainframe language is still alive in large part thanks to the baby boomer generation. Photo by Foto Sushi on Unsplash

The result: a major shortage of COBOL developers. With an average salary of $86,631 a year, job security for COBOL developers is only getting better as the few COBOL developers remaining age out of the working population. What the market of COBOL developers helps illustrate is the value of specialization and obtaining specific knowledge.

Examples of specified knowledge leading to high wages and low unemployment are prevalent across all industries. Simple supply and demand helps explains this phenomenon. Experts in a sub-field will always be in high demand and low in supply due the difficult nature of being the “top” of any field.

As Naval Ravikant states on his podcast on the subject:

The first thing to notice about specific knowledge is that you can’t be trained for it. If you can be trained for it, if you can go to a class and learn specific knowledge, then somebody else can be trained for it too, and then we can mass-produce and mass-train people.

This is the reason why top talent gets paid top dollar. While this fact may not necessarily explain why CEO pay has risen almost 1000% since 1978 (which can largely be attributed to the re-emergence of stock buybacks), it’s surely a major explanatory factor. Regardless of the wages paid to CEOs one thing is for certain: the path to this position can only be obtained by acquiring skills that cannot be taught.

Identifying Your Specific Knowledge

If you’re a frequent listener of NPR’s “Planet Money” podcast you may remember listening to an episode on Sperm Banks.

The podcast highlights the story of Ole Schou, founder of Cyros, an independent international sperm bank responsible for approximately 75,000 offspring.

Ole’s story begins in a rather peculiar fashion: a dream about frozen sperm. Consumed by this dream, Ole spends the following months studying sperm and conducting various experiments. With time, Ole makes the groundbreaking discovery that heat is bad for sperm.

Using this information Ole starts his own sperm bank clinic in Denmark in 1987. Within 15 years Cyros would go on to expand beyond Denmark, eventually opening a sperm bank in Orlando by the University of Central Florida (UCF).

The story of Ole Schou serves to explain the essence of specific knowledge acquisition: pursuing your curiosity. By pursuing his curiosity, Ole found a passion in creating the “creme de la creme” of sperm. This allowed Ole to gain a comparative advantage in the industry of sperm banks. Not only did Ole’s discovery allow him to give instructions to his donors to create the best sperm, but it taught him another invaluable lesson: college students are big donors. This inspired the bank location by UCF, the largest university in the United States with over 60,000 students, and allowed Ole to become an innovative multimillionaire founder of the world’s largest sperm bank and revolutionize the industry..

Why Specialize?

Whether it be through a fascinating dream or thanks to a genetical inclination for a certain subject, like math, finding your specialization is as simple as pursuing your passion. While pursuing the hottest field of study may seem enticing, gaining a definitive edge in industries in which you are not genuinely curious and passionate will leave you vulnerable to being outperformed by individuals who possess the true passion necessary to gain an edge. Additionally, while pursuing these lucrative prospects without true passion may seem enticing in the short-term, this leaves one susceptible to the long-run implications of regret towards ones career choice and an overall lack of fulfillment.

As Naval puts it simply:

Building specific knowledge will feel like play to you

Photo by Noah Silliman on Unsplash

Often times building specific knowledge arises from the events experienced at a young age. Maybe it’s growing up as an avid baseball card collector that ultimately pushed you into a career as a sabermetrician or maybe it was frequent visits to art exhibitions with your mother in your youth that ignited a passion for art and led to a career as an art historian. Whatever it may be, choosing to specialize in a field in which you have a comparative advantage in may just be the path to a fulfilling and financially independent life

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