The Economy's a Scale

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If i'm producing enough sandwiches, it can be possible for me to add technology. And so this is just an enormous way that we leverage ore our potential as human beings. The modern standard of living comes from our ability to interact with tens of millions,. which allow us to see the incredible specialization we see in society today. But even if we're all identical, we could have this potential for specialization and open up a better world.

Russ Roberts, host of EconTalk, does a monologue this week on the economics of trade and specialization. Economists have focused on David Ricardo's idea of comparative advantage as the source of specialization and wealth creation from trade. Drawing on Adam Smith and the work of James Buchanan, Yong Yoon, and Paul Romer, Roberts argues that we've neglected the role of the size of the market in creating incentives for specialization and wealth creation via trade. Simply put, the more people we trade with, the greater the opportunity to specialize and innovate, even when people are identical. The Ricardian insight masks the power of market size in driving innovation and the transformation of our standard of living over the last few centuries in the developed world.