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How does specialization improve an economic's standard of living?

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bhumxineaa profile image

By itself, it doesn't. But it does allow for a number of other factors to improve productivity and hence the standard of living.

Traditionally, in economics, there are two arguments taught about specialization:

  1. Adam Smith's description of the pin-making process: how it is broken down into separate steps done by different people, and how this leads to increased productivity.

  2. Ricardo's argument about international trade and comparative advantage.

Both turn out to be badly flawed.

In international trade you don't see country A producing bread and country B producing cars and trading one for the other, you see Germany, the U.S., Japan, Korea, etc. all producing cars and all trading cars with each other.

Paul Krugman recently won a Nobel prize in economics for explaining this:


As for Adam Smith's pin factory, traditional societies, such as China, India, and Japan had had that kind of specialization for hundreds of years without it leading to increased productivity or an increased standard of living. (Just think of the untouchables who specialized in dealing with dead animals, tanning leather, etc. generation after generation)

What specialization does do is increase the incentive for other improvements. If all of your income is from weaving cloth, then you are going to be a lot more interested in learning how to weave better cloth faster than if only 10% of your income came from weaving cloth, you could afford to make a bigger investment in improving your productivity, etc.

So if your social/economic system lets you benefit by improving your productivity, then specialization increases the incentive to improve and hence the general welfare and the welfare of the people making the innovations.

If, on the other hand, you are slave, all of whose production goes to your owner, you have no interest in improving your personal productivity, no matter how specialized your work is.