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The Power of Specialization

Two people marooned on a tropical island trying to collect fresh water and catch fish each day, can almost always do better by specializing—have one person do the fishing and the other do the water collecting. And this holds even when one of the two people is better than the other in both tasks.

David Ricardo’s treated countries as if they were individuals and came to the same conclusion—England and Portugal can both do better by having England produce wool and Portugal produce wine. His idea came to be called comparative advantage.

We teach this idea to our students in virtually every introductory economics class in the country. But how can it possibly apply when there are millions of individuals doing millions of potential tasks? What’s the meaning of "doing what you’re relatively good at" in such a situation.

In this essay, the second in a two-part series, I try and explain the relevance of Ricardo’s insight for how we live our lives. I look at how specialization creates wealth and the strange parallels between trade and technology for transforming our standard of living.