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Ricardo’s Law and the Key To Productivity

A London Member of Parliament and stockbroker in the early 1800’s David Ricardo was also an avid student of economics, ultimately succeeding Adam Smith as Britain’s pre-eminent economist. His influence dominated the aims and methods of the discipline throughout the nineteenth century.

Ricardo is perhaps best known for his Theory of Comparative Advantage of Nations, which suggested that specialisation leads to wealth and self-sufficiency leads to poverty. He recognised that two countries can benefit from trade even if one of them is better at producing everything than the other. The example most often cited was England and Portugal. Portugal could produce both wheat and wine cheaper than England (giving them an absolute advantage in both commodities). However, delving deeper into the economics of these two industries, Ricardo found that one unit of wine in England cost the same amount to produce as two units of wheat while in Portugal, the production cost of one unit of wine was the same as 1.5 units of wheat. In other words, Portugal had a comparative advantage in the production of wine and England had a comparative advantage in the production of wheat. Ricardo went on to show how both countries could benefit by trading these two products with each other, with Portugal focusing on the production of wine and England focusing on the production of wheat. Another perspective is that, even though Portugal could produce wheat cheaper than England, every unit of wheat it produced cost the country the opportunity to make a higher profit by producing a unit of wine. This is known as the lost opportunity cost.

The Law of Comparative Advantage applies in our individual lives as well. To the extent that if we invest our time and energy in activities that provide anything but the highest possible payback, we incur a loss of opportunity cost. This is why in The Winning Way in Business we stress the importance of determining your highest value tasks – the 20% of things you do that yield 80% of your desired results – and then focusing on these high-value tasks, delegating or eliminating the rest. Another lens through which to view this principle is your hourly rate. Anything you do for which you would not pay someone your desired hourly rate leads to a loss of opportunity cost. As with the 80-20 Rule, such tasks should be delegated or eliminated.

Perhaps the greatest challenge in delegating an important task is the belief that no one else can do it as well, or as economically, as you. In fact, you may be right. But this is an example of your absolute advantage, just as in the case of Portugal’s ability to produce wheat cheaper than England. The answer to maximising the return on your efforts is to capitalise on your understanding of Ricardo’s Law of Comparative Advantage by focusing on those activities that yield the highest return to you – in economic terms, the highest net value per unit of work – and to allow others to do everything else.

This is the key to sound time management; to increasing your productivity. Free up every minute possible for doing those things that yield the highest return on your efforts. Delegate everything that someone else can do at least 75% as well as you at a lower hourly rate than you earn – or want to earn. This is often described as doing more by doing less. When you diligently apply Ricardo’s Law of Comparative Advantage in this way, you are well on your way to doubling your productivity.

The purpose of this blog post is to help focus your attention on those areas of your life upon which we will work during our time together. This act of observing – focusing upon – these critical life elements ensures maximum return on your investment of time and energy.

What one action will you commit to take as a result of this blog post?
How will you follow through on this commitment?
If so, what benefit(s) do you intend to realize as a result of this action?
If you do not follow through, what consequences will you encounter and what will that ultimately land up costing you?
When will you complete this action?

I commend your high level of commitment and promise to do my utmost to support your growth. If you feel that anyone you know of could benefit by receiving our newsletter please get them to log onto www.WinningWay.com.au and they shall receive a free e-book as well as a copy of the ongoing monthly newsletter.

Kind regards,

Ronnie Kagan

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