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The Specialization Myth

From Project Syndicate by Ricardo Hausmann:

Some ideas are intuitive. Others sound so obvious after they are expressed that it is hard to deny their truth. They are powerful, because they have many nonobvious implications. They put one in a different frame of mind when looking at the world and deciding how to act on it.

 

One such idea is the notion that cities, regions, and countries should specialize. Because they cannot be good at everything, they must concentrate on what they are best at – that is, on their comparative advantage. They should make a few things very well and exchange them for other goods that are made better elsewhere, thus exploiting the gains from trade.

 

But, while some ideas are intuitive or obvious, they can also be wrong and dangerous. As is often the case, it is not what you don’t know, but what you mistakenly think you know, that hurts you. And the idea that cities and countries actually do specialize, and that therefore they should specialize, is one of those very wrong and dangerous ideas.

 

When an idea is both intuitively true and actually false, it is often because it is true on one level but not on the level at which it is being applied. Yes, people do specialize, and they should specialize, too. Everyone benefits from each of us becoming good at different things and exchanging our knowhow with others. It is not efficient for a dentist and a lawyer, for example, to be the same person.

 

But specialization at the individual level actually leads to diversification at a higher level. It is precisely because individuals and firms specialize that cities and countries diversify.

 

Consider a rural medical facility and a major city hospital. The former probably has a single general practitioner who is able to provide a limited suite of services. In the latter, doctors specialize in different areas (oncology, cardiology, neurology, and so on), which enables the hospital to offer a more diverse set of interventions. Specialization of doctors leads to diversification of hospital services.

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