The Division of Labor Is Limited by the Expansion of the Market

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The scale of the operation has a huge impact on what technologies are sensible to employ, how much capital you should employ. It's not productive to use a grain thresher when you have a plot of land that's 20 feet by 30 feet. You got to have a big farm to make a wheat harvester or some sophisticated piece of modern technology profitable. Sceems toe there's more or more specialization in each task being done by one person.

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.