Generalization vs Specialization

"What I do have are a very particular set of skills, skill acquired over a very long career."
--Bryan Mills (Taken)

From an economic standpoint, the natural state of the world is scarcity. This scarce state is reduced through production. Production combines labor, materials, and technology into outputs that can be consumed.

Two general strategies are available to producers. One strategy is to generalize. People who are 'jacks of all trades' are generalists, meaning that they produce many different things. If someone is isolated from others (e.g., the Robinson Crusoe scenario), then that person has no choice but to diversify production. If the isolationist does not produce a variety of outputs such as shelter, food, drink, and clothing, then this individual is unlikely to survive much less thrive.

Achieving a state of self-sufficiency could be desirable when markets are uncertain or underdeveloped. But self-sufficiency has its costs as well. Because they frequently shift between products, generalist producers lack the learning-by-doing repetition that permits mastery. Standard of living may therefore suffer.

The second general strategy available to producers is specialization. Specialists focus their productive efforts on limited types of output. Focusing production enables the learning-by-doing that improves productivity (i.e., more output per unit of input) over time.

Specialization is of little use in isolationist situations since, by definition, the specialist cannot produce the variety of output necessary to satisfy even basic existence.

However, when it is possible to trade with others, the specialization strategy becomes particularly interesting. Multitudes of people can focus their efforts on narrow product lines and achieve high levels of productivity through specialization. If these individuals can subsequently exchange their specialized output with the specialized output of others, then standard of living is likely to rise for all.

This, of course, is the essence of trade theory. People are better off when they employ specialization production strategies, and then trade their output on the market.

But trade theory has its problems. One common assumption is that markets are unhampered. Producers are free to choose their production strategies, and buyers and sellers are free to engage in totally voluntary exchange. But we know that modern markets are not free; they are hampered to some degree. They are subject to government interventions that restrict volunatary production and exchange. These interventions distort decision-making among both producers and consumers.

Even if markets were in fact unhampered, then trade theory seemingly still has problems. Free markets are processes of creative destruction, where competition among producers drives innovation that renders current methods and outputs obsolete. The more dynamic the market, the less likely a specialization seems likely persist.

Here is what I'm wondering. Does trade theory have it backwards? Is it truly a good idea to pursue specialization production strategies in free, unhampered market contexts? Don't free market dynamics penalize specialization in the long run and reward at least some degree of generalization that permits adaptability?

In fact, is there not an argument to be made that hampered environments are actually better fits with specialization--at least in the short run? After all, hampered environment reduce competition and impair innovation, thus slowing down the 'creative destruction' engine that puts specialization at risk. Managers may be more likely to want to specialize when there is less perceived risks to specially configured operations. When market rules are being 'fixed' by government, then specialization may abound.

Many other important issues seem to trail this line of thought. For example, in addition to gains in standard of living from specialization, there are likely some losses due to 'creative destruction.' How the gains and losses net out over time seems an interesting issue. Moreover, in hampered market environments, producers might over-specialize if they are lulled into a false sense of security by regulatory regimes. The spectacular rise in outsourcing, an expression of specialization, in the midst of ever-increasing government intervention of the past few decades, might be indicative of this. The false sense of security comes from incorrectly relating near term stability that might accompany a set of government intervention with long term instability that comes from pent of market forces 'letting go.'

The other implication of this thoughtstream is that there may be more merit to generalization than meets the eye...

More in future posts.