Remember when you were a kid and your mom told you that you’re special?
Well she was right.
You are special.
Everyone is special.
But how does this apply to economics?
Well, in this tutorial we’ll take a look at specialization, and why it is so important
to consider in order for an economy to function properly and prosper.
As we learned in the previous tutorial, we get many things through trade.
This is because most people consume very little of what they produce and produce very little
of what they consume.
In other words, it is far more sensible to specialize in a few things and get the rest
from trade.
Think about it.
Most of us will likely only become really good at one, maybe two things.
After you graduate from high school, you don’t pursue twenty different careers.
Most people generally pursue one career.
In addition, if you’re really good at something, you’ll typically want to share those skills
with a community, because apart from the sense of purpose, you are likely to be appropriately
compensated for it.
Let’s look at an example.
Sue is an auto mechanic.
She specializes in fixing cars.
Not only that, but she specializes in repairing old Hondas.
However, Sue owns just one 1986 Honda Civic, and it’s in great shape, so she opens up
a shop to fix other Hondas.
This is how she ends up earning an income.
Now Frank is a plumber.
Frank does not know much about how to repair old Hondas, but he likes to drive them, and
he takes his 1989 Honda Prelude to Sue’s shop to get repaired.
Later, when Sue’s bathroom sink is spraying out dirty water, she calls Frank to her shop
to repair it.
This is because Frank is a plumber who specializes in fixing faulty sinks.
That was a very obvious and relatable example of specialization.
In essence, specialization is when an individual, company, or country, focuses on producing
one thing or performing one part of a task, and relies on others to produce everything
else or to complete the other parts of that task.
So because specialization causes an individual, company, or country to concentrate their productive
efforts on producing a limited variety of goods or services, they must rely on obtaining
other goods or services through trade.
A country’s specializations can be illustrated by its exports.
Again, exports are the goods and services it produces and sells abroad.
Within a single country, different regions may also specialize in certain economic activities.
Kansas may specialize in producing airplanes, while Oregon specializes in producing electronics.
Let’s go one step further.
Remember, specialization also occurs with human capital for an individual that is part
of a company or larger community, as again, most humans will only get really good at one
or two things throughout their adult lives.
Since we said that Kansas specializes in producing airplanes, let’s consider a large company
in Kansas that produces airplanes.
Within this large company, there must be a division of labor, which occurs when the production
of a good is broken down into several separate tasks, with different workers performing each
task.
One person might specialize in assembling the wing.
Another might specialize in assembling the propeller.
Yet another might specialize in painting the plane.
So why is specialization important?
First, it leads to efficiency and productivity in the use of land, labor, and capital.
It is better for a person to get really good at one task or a few tasks rather than to
be mediocre at a lot of tasks.
Specialization also helps companies.
Focusing on a limited number of related goods or services lets them use their limited capital
and labor more efficiently, and produce a higher quantity of quality goods or services.
Because of this, companies, and therefore entire countries, are interconnected and rely
heavily on working together through mutually beneficial trade.
Most importantly, specialization leads to higher standards of living for more people
than would otherwise be possible.
For example, if Juan wants a table, he can either make it himself, pay someone to make
it, or simply buy one.
Well, Juan is a musician who not only wants to write and play songs, but is also quite
good at it.
If Juan builds the table himself, he’d be spending several miserable hours of his life
first figuring out how to do it, and then doing it, when he could be spending happy
hours playing music instead.
In fact, even if Juan took the time and watched every YouTube tutorial imaginable aimed at
helping him build his table, that table probably wouldn’t end up as high quality as one he
could simply buy.
Therefore, earning capital through his specialization and using it to purchase the table is a much
more efficient solution, leading to time saved and a happy Juan.
We want Juan to be happy.
In fact, we want everyone to be happy.
And that is why specialization is so important.