Specialization and Free Markets

I break tradition
Sometimes my tries
Are outside the lines
--Natasha Bedingfield

Specialization, or focusing production on a narrow set of outputs, is often proposed to flourish in free market environments. Specialization involves repetitive work; this repetition enables learning-by-doing improves productivity over time. The result is typically the high volume/low variety model of mass production. And there are few symbols more associated with free markets than the mass producing operation.

High levels of commitment to particular technologies are required to enact specialized production strategies. Because repetitive work can often be automated, specialized production processes usually carry high amounts of capital equipment designed for narrow use. Moreover, repetition is habit forming, and habits are hard to break. As such, significant capital commitments tend to lock producers into their strategies, and inertia makes their repetitive habits difficult to revise if environments change.

Problematically, environments are constantly changing in free markets. Competition drives innovation that, as Schumpeter famously observed, destroys existing production structure as it creates new production structure. This dynamic is likely to wreak havoc on specialized producers locked into narrow production technologies and rigid in their ways. High degrees of specialization in free market environments seem a risky proposition.

Perhaps high degrees of specialization are a better fit with environments that are stable and predictable. Stability and predictability are common objectives of interventions that characterize hampered markets. The Federal Reserve, for instance, intervenes in markets in the name of 'price stability.'

One would think that specialized producers would in fact encourage interventions that institutionalize stability. Indeed, we see 'big business' (i.e., specialized high volume producers) partnering with government to 'stabilize' markets. (too big to fail, anyone?)

One would also think that markets perceived as stable would attract specialized operators in droves. Indeed, we see 'big businesses' engaging in epic levels of outsourcing peripheral operations in order to focus more on their 'core' specialties.

The 'common wisdom' proposition is this: The less hampered the market environment, the higher the degree of specialization.

Here, we're exploring the plausibility of a rival proposition: The more hampered the market environment, the higher the degree of specialization.

More exploring to follow...