a market economy encourages specialization: We become very good in a narrow set of skills or products, and exchange them for millions of other things we have no clue how to do or make. As a consequence, we end up doing remarkably few things and buying everything else from others.
Pointer from Mark Thoma.
The Book of Arnold starts this way. Hausmann’s main point is that industries that compete in world markets tend to progress more rapidly than local industries.
One thought I have is that national retail chains have forced retail to become more competitive. The resistance of some countries, such as Japan, to competition in retail have held back their economies.
Another thought I have is that there is much resistance to competition in the U.S. in health care and education.
This is related to my theory of the “Income Trap” and the convergence pause.
If most of the labor force in every nation is reallocating into the provision of those ‘proximate services’ with the lowest rates of labor productivity growth, then they have nothing to trade or offer foreign customers from afar. As a result, the average income level of a country becomes dependent on the output of the sectors that produce things that can be traded across borders and (1) in which that country has comparative advantage, and (2) only to extent that the return to capital stays domestic, which you won’t get if you don’t have much domestic capital.
After the end of the cold war, and with the advent of super-cheap shipping, there was a period of time in which capital and production was able to move to places where it made more economic sense, but that transition phase is mostly over now.
The only kind of capital left to move, but which can’t for political reasons, is human capital, which probably significantly delays further factor price equalization. And that’s why there’s so much migration pressure these days.
At any rate, having most of the domestic population working in proximate services also allows governments to regulate the provision, pricing and competitive environment of those services without any fear of the discipline of international competition or worry about generating some international incident. Maybe a few of your citizens will engage in ‘medical tourism’ or education abroad, but most wont, and if you’ve got a captive audience you can do what you want to them.
The more that people specialize the harder it is for them to recover from “shocks” to their job niche. It’s one reason recessions drag on forever now. It’s not so much “sticky wages” as sticky skills. Mid-career specialized workers don’t have time, even if they have the energy, to learn a new specialty– plus their Bayesian estimate often is that doing so wouldn’t pay off– so they extend their search for remaining jobs in their niche and apply for unemployment insurance and disability insurance in the meantime. As their period of unemployment lengthens, the current very strong predjudice against hiring idle workers makes them unemployable even in their old specialties.
Even for workers who are not yet, or just recently, unemployed, specialization is a problem. They may see the layoffs on the horizon but it’s still hard to shift specialties because when unemployment is high firms indulge in being very picky. Many workers try to pick up new-specialty credentials by going to school but firms discount adult-education credentials heavily and schools exploit desperate students mercilessly, essentially pricing tuition to capture all the expected gain from any new job the student might acquire plus all the available government subsidy (which commonly comes in onerous forms like student-loan guarantees that pay the school but leave the sucker, I mean student, on the hook forever even if his new credential is worthless).