Specialization and Wealth

Human history reveals that specialization is the best way to use resources efficiently, and the efficient use of our resources is the way to increase the wealth of society. Our distant ancestors were generalists. They hunted game, they caught fish, they snared birds, and they gathered fruits and vegetables. This may not have been Hobbes’s state of nature, but life was pretty much poor, nasty, brutish, and short. The Neolithic village had the first specialists: potters, fletchers, and metalworkers. Human society was on its way to civilization and the standard of living we know today.

In 1776, the year of the American Declaration of Independence, Adam Smith published his great work in economics, The Wealth of Nations. We might call The Wealth of Nations a declaration of interdependence, because Adam Smith saw in the division of labor the means to increase productivity. When workers divide up the tasks, each one specializes. Specialists are more proficient at their tasks. Greater proficiency means greater productivity, and greater productivity means more goods to be distributed in the society.

19th Century companies became more efficient by locating their factories near supplies of critical material or energy sources. These companies specialized in what they could do best and most profitably. Farmers, too, stopped growing all of the various foods and fibers they needed and specialized in the crops that would maximize their incomes. Specialization, based upon the advantages of each place for producing particular things, was the path to increased production and a wealthier society.

Countries, too, have advantages in the production of certain goods. If sugar is grown in those places best suited to sugar cultivation, and wheat is grown on the best wheat land, the total amount of both goods will increase. Similarly, if Germany specializes in high-quality, high-priced manufactured goods, Great Britain specializes in financial services, and Italy produces high-fashion clothing, the standards of living in all three countries can be increased.

The production of goods and services can be maximized through specialization. This increased production can be shared through commerce. In such a situation, every nation benefits through having the broadest possible market for what it produces and the widest range of sources for what it consumes. The obvious corollary is that restrictions on trade inevitably reduce the total supply of goods and services we share.