Thursday, September 08, 2005

Specialization and the wealth of nations

Econbrowser provides a pithy summary of what makes countries wealthy: specialization.
Econbrowser: On the nature of economic recessions

The level of prosperity in an advanced economy results from a high degree of specialization of labor, capital, and most importantly, the institutions (shops and firms) that coordinate their activities. What happens in an economic recession is that the market's success at coordinating this specialization breaks down. Firms and workers suddenly find that the activity for which they are uniquely suited is no longer in demand, and the degree of specialization makes it infeasible to redirect these productive inputs immediately to other sectors. These sudden demand shifts can occur, for example, if sharp energy price changes and the uncertainty accompanying them produce dramatic changes in consumers' purchases of items such as cars.
Small companies, startups, and some privately owned companies may yet value generalists and "personalities", but I believe most well run large publicly traded companies will be increasingly designed around modular, interchangeable, specialist units of labor. These labor units may be aggregated and outsourced, or replaced by similar units -- as the market requires.

Just as in nature, there are many paths to success. Standardized specialized labor units may be the dominant paradigm for very efficient 21st century corporations.

No comments: