Wednesday, March 29, 2006

Specialized Obsolescence

Global Specialization.  How the specialization of market niches is bringing the world closer together—and closer to conflict.


The process of specialization, of the evolution of economies from generalists to specialists isn’t a new phenomenon.  It’s not even remarkable.  Adam Smith described it/prescribed it in 1776 with the seminal tract on economics.  It has been explored and tweaked by the likes of David Ricardo and Allyn Young. 


For a long time, large countries had economic advantages over small countries—not just because they were likely to have more resources (the U.S. has more space to fit trees, iron ore, gypsum, oil, and arable land than Ireland does, for example)—but also because the size of the economy allowed for great specialization.  The guy the mined the ore didn’t also have to smelt it, and then turn it into a kitchen knife.  One person for each process meant that each process was done better (and cheaper) than if one guy did all three processes. 


The lowering of international tariffs and the subsequent increase in trade has allowed countries that are not large to specialize and compete with countries that are large: South Korea and Japan have economic power unimaginable based on size, only 80 years ago. 


There is a broader problem here that I don’t know is being considered—but I would love it if someone could point me in the right direction to learn more about the thinking that is happening—and that is the consequence of national-specialization on the stability of the international order.


The world, for a long time, consisted of a couple of super powers who did everything well, quite a few middling powers who did many things decently, and a bunch of bottom-countries who might have done one or two things well, but mostly just trundled along from one day to the next.  Not so any more.


We have ultra-specialist countries/jurisdictions now in several sectors.


Hong Kong, Singapore, and Dubai are international Trade specialists.  The Swiss, and Caymans do banking.  India is cornering the market on anything between front desk and delivery-of-finished product.  Countries in the Gulf region are specialists in Energy.  Korea and Japan are specialists in electronics and automobiles.  China specializes in low-cost consumer goods.  Insofar as it has a specialty, the United States specializes in information: collecting it, storing it, analyzing it.


What concerns me here is that we are moving towards conditions for monopoly.  Just like JP Morgan built an unprecedented financial empire over a century ago because he had the most control over a highly desired commodity within a single market—Oil in the U.S.—the specialization of the world’s countries makes it increasingly likely that one of them, by design or by coincidence, will start exerting undue influence over the world. 


I don’t know how it would happen—exactly.  I don’t know what it would look like, or what sector it would be in (or I’d be rich and not have time to write this blog).  But I think there is value in stopping to consider the fate of animals that become extreme specialists in their ecosystems: when the eco-system changes, the animal likely dies.  In the example, the world economy is the eco-system, and single-market countries are the uber-specialized animals.  Is there value in a diversified economy, even if there isn’t profit?

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