Some Thoughts on Comparative Advantage

This morning, a boy from our neighborhood knocked on our door. He was looking for yards to mow and he offered to mow ours for $15 a pop.

Our yard takes roughly an hour to mow with our push mower. I tend to enjoy the process, actually, as it gives me a good excuse to get exercise. I often come in pretty sweaty after mowing on a hot summer day.

So I turned the boy down.

Now, are there tasks I would pay someone $15 per hour to take care of around our house? Yes, but it depends on the task and the situation. The real question is will I get an additional $15 of net earnings or $15 of life enjoyment out of that hour as compared to just doing the task?

This idea is called competitive advantage, and thoroughly understanding it can be a huge benefit for your finances. I wrote about this idea three years ago and largely concluded that one should simply look for opportunities for comparative advantage in their life, but what does that mean, exactly?

Here’s an example. Let’s say there’s a job in my home that I get little or no value out of doing. Washing dishes comes to mind, actually, as does doing the laundry. Now, if I have something that purely generates more than $15 worth of post-tax earnings or more than $15 worth of life value that I can do in the hour that I’ve gained by paying someone to do that task, then I should do that. What generates such value? A guest article on another website might do the trick, as might an hour spent playing tee ball in the yard with my children.

Where things get more difficult is when I start looking at replacing stuff that does have value for me, like mowing the lawn. How much is mowing the lawn actually worth to me, considering the exercise I get out of it? I have to know that before I can really consider hiring someone to do it for me, because then I would be losing not only my (minor) enjoyment from mowing the lawn, but also the cost of paying someone to do it. I’d have to gain more than I would for hiring someone to wash the dishes.

Simply put, you can make your life a lot better through maximizing comparative advantage, but it requires you to have a real understanding of how you value things in your own life and realistic assessments of how you can earn money in your spare time.

For example, if you’re paying someone $50 to do three hours of cleaning in your home, are you gaining $50 in value out of those three hours you’ve gained? If you’re just sitting there watching whatever happens to be on television, you’re not gaining that value, but if you’re doing something that improves your career or something that deeply improves your personal relationships, you’re gaining far more than $50 of value out of that time.

Comparative advantage is a stark example of how self-analysis can lead directly to a richer and more well-rounded life. The better you know your life – what you value, how much you value it – the more you can take advantage of comparative situations.

The best part of this kind of self-analysis is that you can do it all the time as you move through life. Ask yourself consistently how much this experience is worth to you, or how much you’re actually earning from this hour of work.

Soon, you’ll begin to get a sense of how much various things are worth to you, which makes it easier to find points of competitive advantage in your own life.

What’s more valuable to me: staying up for another half an hour to watch this show, or going to sleep a half an hour earlier?

What’s more valuable: spending all day the day before my child’s wedding prepping a meal for forty or hiring a caterer to take care of the whole thing?

What’s more valuable: driving an extra thirty minutes round trip to shop at a warehouse store or paying a bit more to buy several items at a nearer store?

What’s more valuable: hiring a babysitter to watch your three children so you can go out to eat with your spouse or taking the family to a family restaurant instead?

Such choices become easier and more clear the better you know yourself and what you value, and when you’re making better choices consistently, your life becomes better.

I think I’ll go mow my yard now and work up a good sweat.