The Hindu Business Line : Cooks, cleaners and free trade

It was almost a year since Wafers had qualified. The hustle bustle at the KPO where she worked had often made her wonder whether life as an intern hadn't been far better. But she didn't complain. For, the opportunity to learn at work was immense.

She was in Chennai for the weekend and looked forward to the following week when she would work on an assignment that had David Ricardo's theory of comparative advantage as its basis.

Yes, she had read about the theory in her PE-1 but all she now remembered of that was what her professor had told the class: "If India produced rice at a lower cost than Pakistan and if Pakistan produced wheat at a lower cost than India, India should import wheat from Pakistan and Pakistan should import rice from India."

He had given some numerical example to prove his point but it had gone over her head because she had been more interested in that day's India-Pakistan cricket match.

This Saturday evening she was meeting China and felt that she could pick some gyan from him on the subject. China may be an engineer from IIT but his knowledge of economics, as of engineering, was phenomenal.

And so over a plate of French fries and a cup of cappuccino, Wafers asked China whether he could explain Ricardo's theory in layman's terms.

Questions First

"Sure. But for that you must answer a series of questions," remarked China ever happy to get into the lecture mode. "Done," said Wafers.

"Where do you have your food and who does the cleaning at your apartment?" opened China. "Now what does that have to do with the theory of comparative advantage?" asked Wafers. "You promised to answer questions," said a smiling China.

"Well, on weekdays I have my breakfast and lunch at office and carry home the dinner cooked at the office pantry. You see that's the perquisite of a 24X7 office. But on weekends the office is a strict no-no. My company believes in work-life balance and prohibits anyone from turning up at office on holidays. So during weekends I do my cooking, clean up my apartment and read for my forthcoming CFA exams."

"Great. Let us focus on the cooking and the cleaning. Now between you and me let us say I am better at cleaning and you are better at cooking. That means I take less time to clean the apartment and you take less time to do the cooking." So saying, China picked up a piece of paper and drew up some numbers

"Suppose we did our cooking and cleaning in our respective apartments. How much time will it take us?" The question was rhetorical. For China himself supplied the answer. "It would take each of us six hours of work. But, instead, if I decided to clean both the apartments, yours and mine, and you agreed to cook for both of us, what would happen?"

`Eureka'

"Simple; you would take 2+2=4 hours to clean and I would take 2+2=4 hours to cook" said Wafers. Saying so she jumped from her seat screaming, "I got it. I got it," in the manner of the Archimedes' "Eureka, eureka". "From working six hours each we now work four hours each, saving two hours per person."

China smiled. "Yup; that's the joy of collaborative working. That's the heart of the theory of comparative advantage. I do for you and me what I am best at. And you do for you and me what you are best at."

"Wow, great. But for collaborative working to benefit, one of us has to be better at cooking and the other at cleaning, right? If you were better at both cooking and cleaning there would be no benefit from collaborative working, isn't it?"

"Wrong!! I could be better than you at both cooking and cleaning and still we could work out a mutually beneficial relationship." Saying so, China drew up another set of numbers and asked Wafers to interpret it.

"If we worked independently, you would take five hours to finish your cooking and cleaning while I would take 10 hours to finish my cooking and cleaning. Total 15 hours. So where is the benefit?" asked Wafers.

"Look closer," said China. "Remember, `I do what I am best at and you do what you are best at. Suppose I do all the cooking and you do all the cleaning I would take 2+2=4 hours and you would take 4+4=8 hours. Total 12 hours. I save one hour while you save two hours. Total saving: Three hours."

"Wow," said Wafers. "So collaborative working can bring in benefits even if one of us is better than the other in everything?"

"Yup. That's precisely why free trade between countries happen. That's why the US is game for free trade even with Bangladesh, a typical Third World country."

For Wafers it was another "Eureka". She had learnt at her CA classes that synergy happens in the case of mergers and acquisitions if a company strong in manufacturing and weak in marketing merged with a company which was strong in marketing and weak in manufacturing.

Now she realised that that even if one company was stronger than the other both in manufacturing and marketing, there could still be synergy gains.

She smiled. She was certain that the following week when she worked on her assignment she would be able to bring to it a greater deal of professionalism thanks to China's inputs. She also understood why companies swore by teams.

Next time around should someone blanch at the idea of teamwork she would come out with China's math.

Racy@TheHindu.co.in

http://Racycases.blogspot.com