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Economics of Trade and Specialization

Russ Roberts, host of EconTalk, does a monologue this week on the economics of trade and specialization. Economists have focused on David Ricardo's idea of comparative advantage as the source of specialization and wealth creation from trade. Drawing on Adam Smith and the work of James Buchanan, Yong Yoon, and Paul Romer, Roberts argues that we've neglected the role of the size of the market in creating incentives for specialization and wealth creation via trade. Simply put, the more people we trade with, the greater the opportunity to specialize and innovate, even when people are identical. The Ricardian insight masks the power of market size in driving innovation and the transformation of our standard of living over the last few centuries in the developed world.

Updated on April 01
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Key Smash Notes In This Episode

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In context of economics, self-sufficiency is the road to poverty, while specialization and trade makes us rich. The modern society has evolved to function in such a way where prosperity is anchored on trade between billions of individuals.

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By stealing from others, you will not enrich yourself. Instead, you will only negatively impact another person's desire to create wealth, and make them more protective of what they already have. Theft reduces production and makes it harder to take more.

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Diversity. Trade takes our differences and encourages us to cooperate for a common good. One can get better at doing a certain task, or producing a good, and thus trade it with someone else, who is better at something else. Even if all of us are the same at everything, with addition of technology, it still makes sense to divide tasks between specialists, and to trade.

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We have to leverage our human ability with technology, but it is important to realize that the tools used to increase productivity have to match the size of the market.

[Editor's summary] If you need to plow a veggie patch, you do not need an industrial tractor, but neither will you able to efficiently plow a field with a single shovel.

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Before the existence of markets for goods and services, people had to learn various skills for themselves just to be able to do those things.

Now that we can trade in anything, it makes more economic sense to specialize, so you could trade your specialty with someone else's.

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