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Volume 3, Episode 1
SPECIALIZATION AND TRADE
By Donald J. Boudreaux, PhD
George Mason University
cloth that’s in the clothes you are wearing or stitch together the denim
to make your jeans. You didn’t, with your own hands, build the house
or apartment you live in. You didn’t vaccinate yourself against polio, or
grind the lenses in your eyeglasses. You didn’t make the chair you’re sitting in or cobble together the shoes now on your feet. You didn’t write
this essay that you’re now reading.
Other people did these things for you.
Actually, tens of millions of other people everyday help to make your
standard of living possible. Some people specialize in growing wheat;
others in turning wheat into flour; others in turning flour into bread;
others in supplying insurance to the baker to protect him against unseen
hazards; others in supplying the fuel so that all the ingredients the baker
uses to bake his bread are delivered to his bakery on time; others in cutting down the wood used to make the lumber that is used to build his
bakery. And on and on and on.
SPECIALIZATION SURROUNDS US
The number of different specialized jobs in today’s economy is huge.
Nearly every worker specializes in producing only a very narrow slice of
Our standard of living completely and utterly depends upon specializa-
the goods and services that are part of our everyday life.
tion and trade. Indeed, any such standard beyond abject poverty unrec-
Consider one obvious example, specialization within medicine. Today,
ognizable to modern societies requires specialization and trade.
we don’t have simply “doctors.” While some physicians are family physi-
Ask yourself, “How many of the things that I consume in my daily life
cians, most are specialists: dermatologists, oncologists, cardiologists,
could I make from scratch?” Your answer should be, “Almost nothing.”
pediatricians, gastroenterologists. And we not only have simply pedia-
You didn’t grow the food you eat. Even if you’re a farmer, you specialize
tricians and gastroenterologists, but “pediatric gastroenterologists.” (I
in growing only vegetables, or only corn, or only chickens. So even as a
have personal experience. Several years ago my son, then three years old,
farmer you grow only a fraction of what you eat. You didn’t weave the
nearly died from a digestive disorder. His life was saved only by the deep
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knowledge and specialized skills of the pediatric gastroenterologist who
that make for a top- notch heart surgeon. He or she need not divert any
attended him.)
part of his or her attention to learning also about dentistry or podiatry or
pediatrics. As a result, that person becomes a much better heart surgeon.
“The number of different specialized jobs in today’s economy is huge.
What’s true for health care is true throughout the whole economy. 
Nearly every worker specializes in producing only a very narrow
Our prosperity depends upon workers specializing in narrow tasks
slice of the goods and services that are part of our everyday life.”
and then trading their specialized outputs to each of thousands, or
millions—or even billions—of other people specialized in other tasks.
The larger markets are and the larger the labor supply is, the more
As the example of doctors reveals, a larger market encourages the
workers are specialized. The only physician in any small town in the
deeper specialization of labor that permits each worker to achieve higher
1890s was a general practitioner. That’s because the number of people
productivity. More buyers means larger markets; larger markets means
in each town suffering, say, serious skin diseases was too small to en-
deeper specialization; deeper specialization means more productive
able anyone to earn a living by specializing as a dermatologist. But as the
workers; and more productive workers means a larger total output for
population of towns increased (and the cost of traveling long distances
the economy as a whole—that is, a bigger economic pie.
decreased), the number of potential patients for someone specializing as
a dermatologist grew to be large enough to make it profitable for some
TRADE AND SPECIALIZATION GO HAND-IN-HAND
physicians to specialize only in dermatology.
With near-unanimity, economists have long supported free trade among
nations. One reason is the recognition that when trade is not free—when
SPECIALIZATION RAISES PRODUCTIVITY
it is forced to remain within political borders (say, within the United
An obvious benefit of specialization is that tasks that are performed by
States)—the size of the market for producers and consumers is kept
specialized workers are performed better than if those tasks were per-
unnecessarily small. For the same reason that the smallness of markets
formed by non- specialists. If you’re having open-heart surgery, would
for health care in little towns discourages specialization of physicians in
you prefer that the surgeon be a specialist devoted fully to perfecting
those towns, keeping markets smaller by blocking trade with foreigners
his skills at heart surgery, or someone who spends only part of his time
discourages increased specialization of producers generally.
doing heart surgery while dividing the rest of his time between fixing
Suppose a pharmaceutical firm could eventually develop a pill that
broken bones, fitting people for eyeglasses, and delivering babies?
cures a deadly but rare disease if that firm today invests tens of millions
Clearly, you want the specialist in heart surgery. By focusing exclusive-
of dollars hiring and training researchers to work full-time on developing
ly on heart surgery, the specialist can better polish the particular skills
such a cure. That firm will make this investment only if it believes that
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it will eventually sell enough pills to allow it to recover all of its upfront
of, say, steel are better than others. So the larger the number of steel pro-
research and development costs.
ducers competing for customers, the more likely it is that the best, most
If the firm’s market is limited to only the U.S. it is less likely to under-
creative, hardest-working steel producers will be discovered and thrive.
take this vital research than if its market is the whole world. The reason
is that the number of potential customers for the pill is much larger if
the market spans the globe than if the market is confined exclusively
to America.
“The larger the market for the output, the greater the opportunities
for each of us to specialize at producing the good or service
that we produce best.”
So the larger the market the more likely it is that pharmaceutical firms
will pay researchers to specialize in researching diseases that they would
not pay to research if the market were smaller. And what’s true of
pharmaceutical research is true for nearly every other tasks in an
economy: The larger the market for the output, the greater the opportunities for each of us to specialize at producing the good or service that
we produce best.
What’s true for steel is true for every good or service you can name.
A weekly contest in The New Yorker magazine makes this point nicely.
INCREASING THE POOL OF CREATIVE IDEAS
Every week, the magazine publishes a single-frame cartoon containing
A related benefit of free trade is that it maximizes the flow of entrepre-
no caption. People are invited to submit captions and, for each cartoon,
neurial creativity that people in any one country can tap into.
New Yorker editors choose three submitted captions that they judge to be
Resources—land, oil, iron ore, even human labor—are not automati-
the funniest to accompany that cartoon.
cally productive. They are made productive only by human creativity
Readers then vote on which one of these three captions is the best—
and constant effort. Producers must use their creativity and hard work to
that is, which caption makes the cartoon as funny as possible. The person
transform resources into goods and services that satisfy consumers (that
submitting the winning caption receives a small prize and recognition in
is, that raise our standard of living). Naturally, of course, some producers
the magazine.
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Importantly, you don’t have to subscribe to The New Yorker to submit
tions than would be the case if only New Yorkers—or even only Ameri-
captions. Anyone can participate. And people from all across the world
cans—were allowed to submit captions.
do so. The result is an amazingly wide variety of hilariously funny
Think of each uncaptioned cartoon as the domestic – say, the Ameri-
captions.
can – market. Without entrepreneurs and businesses competing to create
But suppose that The New Yorker allowed only residents of New
value for consumers in that market, no value is created. By allowing
York to submit captions. No doubt many captions, when added to the
entrepreneurs in America to serve American consumers, value is created.
cartoons, would produce the intended humorous result. Editors of the
But what if the entrepreneur with the best idea for satisfying a particu-
magazine, however, would have a much smaller pool of contributions
lar consumer demand lives in Canada or in China? Trade policies that
from which to draw.
exclude that non-American entrepreneur from competing in the U.S.
What if, for a particular cartoon, someone living in Connecticut had
market prevent as much value as possible from being created for con-
an even better idea for a caption than even the best idea submitted by a
sumers in the U.S.
resident of New York? By prohibiting non-New Yorkers from contribut-
As big as America’s population and economy are, fewer than five
ing their caption ideas to the cartoons, the caption that would have been
percent of the world’s people live in America. There’s no more reason to
submitted by the person in Connecticut—the caption idea that would
believe that the best ideas for satisfying consumers will come only from
have added to the cartoon even more value than is added by the best cap-
Americans than there is to believe that the best captions for each New
tion from New York—never is added. Thus, the cartoon fails to be made
Yorker cartoon will come only from New Yorkers. Just as the New Yorker’s
as valuable as it would have been made had citizens of Connecticut been
policy of freely accepting captions submitted from anywhere on earth
among those who were permitted to submit captions.
increases the value (in this case, the humor) of each cartoon, a policy of
Sadly, though, no one ever learns this fact. The winning caption sub-
freely accepting goods and services offered for sale from anywhere on
mitted from New York might be judged by everyone to be excellent. But
earth increases the value available to consumers in the domestic market.
because the even better caption from Connecticut is not allowed, no one
ever discovers just how much funnier that cartoon could have been with
TRADE AND JOBS
a different caption.
Our everyday lives supply ample evidence that trade encourages each
If the goal is to ensure maximum value of this particular resource (a
person to use his or her productive talents as effectively as possible for
weekly cartoon), clearly it’s advisable to have as large a pool as possible of
the benefit not only of himself or herself but for the multitude of people that
people able to submit clever captions. With everyone in the world free to
he or she trades with.
contribute, each cartoon is joined with cleverer and more creative cap-
It’s only because many people are willing to pay pediatric gastroenter4
ologists a premium over what they pay to internists that some medicalschool graduates devote more years of their lives to the study of pediatric
gastroenterology and then devote all of their working hours to caring
only for children with digestive disorders. The additional benefit to patients of having specialized care is high enough to make it worthwhile for
them to pay extra money for specialized care, and the higher pay from
practicing a medical specialty is what makes it attractive to many physicians to specialize. Both the specialized laborer (in this example, a pediatric gastroenterologist) and the people who consume his or her services
are made better off by this specialization.
But doesn’t trade have costs—downsides that must be weighed against
these upsides?
The answer is no, at least when considered over the long run. There are
two reasons why the answer is no.
Likewise, imports of oil kept gasoline prices lower than these prices
The first reason is that nearly every job that might be destroyed by
would have been without such imports. And lower gasoline prices meant
trade was itself created by trade. It’s true, for example, that some Ameri-
higher demand for automobiles. Without oil imports, the demand for
can autoworkers suffer unemployment, for a time, if American consum-
cars would have been lower— and, hence, fewer Americans would have
ers switch to buying more foreign cars and fewer American cars. And for
had the opportunity to work in American auto factories.
each of those workers, job loss is a genuine misfortune.
Because nearly every job in today’s highly complex, global economy
But from the start, American auto producers have relied upon foreign
depends to some degree upon imports for its creation and continuation,
suppliers to make U.S. auto production profitable. Imports of steel, rub-
it is misleading to label as a cost of trade the loss of a job that would never
ber, and chemicals helped keep the cost of producing cars in America
have existed in the first place without trade.
low enough to make the sustained operation of Ford, G.M. and other U.S.
The second reason why it is a mistake to identify jobs “destroyed” by
automakers possible. Without these imports, fewer cars would have been
imports as a cost of trade is that there’s nothing unique about interna-
made in America—and, hence, fewer Americans would have had the op-
tional trade in creating and destroying jobs. Nearly all changes in pro-
portunity to work in American auto factories.
duction technologies, supplies of resources, and consumer tastes create
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and destroy jobs. And—especially in a country as large as America—
those dollars in America. What else are U.S. dollars good for? Not much!
most such changes occur domestically.
Foreigners accept dollars in exchange for the valuable fruits of their risk-
Changing diets, for example, destroy jobs. As Americans have be-
taking and hard work only because they (or someone else they antici-
come more health- conscious over the past few decades, demand for
pate trading with) want eventually to spend those dollars on goods and
beef has fallen relative to the demand for chicken. As a result, some
services produced in America.
jobs on American cattle ranches and in U.S. slaughterhouses have been
Although complexities arise with the timing of how foreigners choose
“destroyed,” while more jobs raising and processing chickens have been
to send their dollars back to America as demand for U.S.-produced out-
created.
puts, these complexities exist also for how Americans themselves choose
Likewise, American engineering schools and researchers have created
to use their dollars. (Kansans can stuff dollars into their mattresses the
new technologies that enable machines here in America increasingly to
same as Koreans.) But these complexities don’t alter the fundamental fact
substitute for human workers. These new manufacturing technologies are
that foreigners sell stuff to Americans only because they want to buy an
by far the chief reason why U.S. manufacturing employment has fallen for
equivalent amount from Americans.
the past four decades while U.S. manufacturing output continues to rise
And that’s reason enough not to worry that foreign trade means fewer
to record highs.
American jobs.
Anytime a new production technology is used, some jobs are de-
END
stroyed; anytime consumers change how they spend their money—say,
by buying fewer cigarettes and more exercise equipment—jobs are destroyed. Trade across international borders is not at all the only, or even
the major, force that destroys jobs.
Fortunately, the very act of destroying some jobs creates others: the
money people save when technology, or trade, make goods and services
less expensive is spent buying new goods and services. Workers are
eventually hired to produce these new products.
An even easier way to see why imports don’t destroy jobs is to ask what
foreigners do with the dollars they earn by selling products to Americans. The answer is as simple as it is powerful. Foreigners do with dollars exactly what Americans do with dollars: they either spend or invest
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