Specialization and Trade: A Re-introduction to Economics
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Last annotated on June 16, 2016
IntroductionRead more at location 64
In a primitive society, people are self-sufficient. Each family gathers its own food, makes its own clothing, and finds its own shelter.Read more at location 67
In a modern economy, no one is self-sufficient. Instead, people are specialized. The work you do probably does not produce something you could consume.Read more at location 69
Your daily life depends on the cooperation of hundreds of millions of other people.Read more at location 71
Moreover, in order for society to progress further, patterns of specialization and trade must continue to evolve.Read more at location 73
However, specialization and trade are often misunderstood.Read more at location 73
TV announcer asks you to consider what you would need to do to make your cerealRead more at location 77
We carry on our lives not really conscious of the complexity of that specialization. In fact, when it enters our minds, we often resent it. We praise ourselves for our urban gardens and our do-it-yourself home projects. We urge one another to “buy local,” and we berate business executives for moving jobs overseas. Of course, if we took such sentiments to their logical conclusion and tried to eliminate commerce with strangers entirely, we would have to return to primitive hunting and gathering.Read more at location 90
Even economists generally lose sight of specialization. We do teach an important concept, called comparative advantage, which shows that with two products and two producers, more total output can be produced when each producer specializesRead more at location 93
Even if the surgeon can mow lawns faster than an unskilled worker, it still makes more sense for her to focus on performing surgery while the unskilled worker mows her lawn.Read more at location 95
I want to emphasize that comparative advantage is not the only source of specialization.Read more at location 97
Consider Cheryl, a fictional computer programmer at a bank, who works on a system to track payments made to the bank by mortgage borrowers.Read more at location 97
Her experience with the bank’s particular system means that she specializes in firm-specific knowledge. Her familiarity with mortgage terminology is more useful to a bank than it would be to a company that develops video games.Read more at location 100
If Cheryl’s bank no longer needed a mortgage payment processing system, her value would be reduced.Read more at location 103
That last hypothetical is extreme, but the point is that specialization is subtle, deep, and highly dependent on context.Read more at location 106
Unfortunately, once they have taught the simple example of comparative advantage, with two producers and two tasks, most economists are done with the issue of specialization.Read more at location 108
Scarcity and choice are certainly important concepts, but making them the central focus can lead to economic analysis that is simplistic and mechanistic.Read more at location 111
economics that took hold after World War II treats the economy as a machine governed by equations.Read more at location 112
The mechanistic metaphor is inappropriate and even dangerous. A better metaphor would be that of a rainforest.Read more at location 114
Economists used to focus on the “hardware” of the economy, such as factories and equipment. More recently, we have come to realize that intangible factors, such as social norms and cumulative innovation,Read more at location 116
That vast web gives us many insights and issues to consider:Read more at location 119
Even in the United Kingdom, the most advanced economy at the time, the average income per person was only about $2,500 in today’s dollars.Read more at location 122
We owe our much greater well-being today to the millions of people who indirectly work to supply us with goodsRead more at location 124
The more you specialize, the more you need to trade to obtain what you want.Read more at location 126
The standard measure of economic activity, known as gross domestic product, or GDP, is an attempt to measure the total market value of goodsRead more at location 127
Social complexity increases with specialization.Read more at location 132
Improvements in transportation accompany specialization.Read more at location 134
As Adam Smith pointed out, specialization expands with the extent of the market.Read more at location 138
Because we specialize in production, our well-being is much more affected by changes in the market for what we produce than it is by changes in the market for any one of the many goods and services that we consume. That makes us strongly disposed to favor restrictions that restrict competition in the market where we produce.Read more at location 140
As a consequence, political lobbyists representing producer interests are more heavily engaged than are lobbyists for consumer interests.Read more at location 143
That favoritism can be seen in the resistance of many local governments to Uber as an alternative to taxis,Read more at location 145
Specialization means that we rely on tasks performed by strangers. If we cannot trust what strangers do, then we cannot specialize.Read more at location 152
An increase in capital intensity accompanies an increase in specialization.Read more at location 154
specialization increases the number of steps in the production process.Read more at location 158
The roundabout process (or high capital intensity) creates a gap of time between the initial steps in the production process and the final sale of goods and services.Read more at location 163
As the economy becomes more specialized and the production becomes more roundabout, the financial sector takes on more significance.Read more at location 166
financial intermediation entails trust over time.Read more at location 168
If people lose trust in financial intermediaries, then financial intermediation can decline precipitously. That sharp decline can have a broad effect on the structure of production in the economy.Read more at location 168
The purpose of this re-introduction to economics is to make specialization the main character in the story.Read more at location 170
In my view, that specialization is the most essential fact in economics.Read more at location 195
we enjoy goods and services that require hundreds of millions of tasks performed by millions of workersRead more at location 196
The phenomenon of specialization helps explain why we observe markets, firms, property rights, money, and finance.Read more at location 197
Entrepreneurs constantly test new types of specialization, leading to what Joseph Schumpeter called creative destruction, meaning new enterprises that drive old firms out of business.Read more at location 199
New patterns create new opportunities, but other patterns can become unsustainable. When patterns of specialization become unsustainable, the individuals affected can face periods of unemployment.Read more at location 201
Fluctuations in economic activity may be amplified by feedback involving financial intermediation.Read more at location 204
Some patterns of specialization and trade depend on the public’s trust in financial intermediaries.Read more at location 205
At times, intermediaries may enjoy more trust than they deserve, enabling them to finance an unsustainable boom. Once the fragility of the intermediaries is exposed, the level of trust falls,Read more at location 205
I suggest that economics differs from the natural sciences in that we have to rely much less on verifiable hypotheses and much more on hard-to-verify interpretative frameworks.Read more at location 209
