Why does every community need several skills to survive and thrive? What are the benefits of specialization?
In The Rational Optimist, Matt Ridley emphasizes a key benefit of trade: specialization. According to Ridley, when societies engage in trade, individuals can specialize in activities where they have a competitive advantage.
Keep reading to learn what society and individuals gain out of the specialization process.
How Trade Leads to Specialization
Before trade, every individual or community needed to master all skills necessary for survival. This approach wasn’t efficient, writes Ridley, because it dissipated the efforts and time of each individual and community across a wide array of tasks, each requiring a different skill set. For example, before trade, a single community might have needed to cultivate crops, hunt, weave clothing, and construct shelters. According to Ridley, the dawn of trade ushered in a dramatic change. If one community was adept at farming and another excelled at tool-making, they could each specialize in these tasks and trade their surplus with each other. That’s just one of many benefits of specialization for communities that need to improve with changing times.
| Specialization and Affordability Specialization among early trading communities led to increased efficiency and competitive advantage for those communities. However, in a more modern context, some economists note that specialization in an industry can make certain regions unaffordable for those not employed in that industry. In San Francisco, the city’s specialization in tech has led to an influx of highly paid tech workers to the city. These tech workers—who earn more than double the median US wage—are able to pay much higher prices for housing, driving up living costs all across the city. This leaves non-tech workers, who earn less on average than their tech-employed neighbors, increasingly unable to afford San Francisco. |
The Importance of Specialization
Ridley writes that specialization brought more meaningful benefits by: 1) improving the quality and quantity of goods available, and 2) creating an opportunity for people to innovate and advance within their chosen specialties.
Specialization improved the quality and quantity of goods available by boosting efficiency. When individuals began to focus on tasks that matched their skills, they produced more than when they’d divided their attention across all aspects of survival.
Moreover, it created opportunities for people to deepen their skills in a chosen field by giving them greater freedom to think, experiment, and refine their craft. This led to enhanced techniques, tools, and products over time. And with this output of new and better goods, specialization accelerated the trade boom by creating bigger surpluses for communities to trade with their neighbors. This trade enabled further specialization, which led to even more trade, as part of a continuous and virtuous circle.
(Shortform note: Although regional economic specialization can drive innovation and spur experimentation, it can also make communities vulnerable to disruptions in trade. Throughout the 20th century, Detroit’s economy heavily depended on the auto industry. However, Detroit’s status as a one-industry town set the stage for economic crisis when the US economy shifted away from manufacturing and the domestic auto industry struggled to compete with foreign automakers. At the same time, the auto industry began moving factories and jobs out of Detroit to suburban, rural, and even international locations to reduce costs. As a result, Detroit saw massive job losses, significant population decline, and sharply reduced tax revenues.)
