Economic Concepts #2 - Specialisation

What do I mean by specialisation?

Specialisation occurs when tasks are divided up and performed by people that are relatively more proficient at performing these tasks than others. For example, a person trained as a hairdresser cuts hair rather than mows lawns for a living. In reality, people cannot always do the tasks that they are most proficient in or even trained in. For example, a person trained as a hairdresser may end up mowing lawns if there are no hairdressing jobs available.

This takes us to another concept that is closely related to specialisation and that is ‘Comparative advantage’. Comparative advantage occurs when someone is relatively better at one activity compared to somebody else.

For example, we have two people, Mary and Sue. They both have two skills, collecting wood and picking apples. If Mary dedicates an entire hour to picking apples, she can pick 20 apples. If she dedicates an entire hour to collecting wood, she can collect 100kg of wood. If Sue dedicates an entire hour to picking apples, she can pick 8 apples. If she dedicates an entire hour to collecting wood, she can collect 80kg of wood. Mary is more efficient at picking apples and collecting wood than Sue. Mary has an absolute advantage over Sue but that does not mean she has a comparative advantage.

Can specialisation still take place? If so, what should Mary and Sue specialise in. For every apple Mary picks, she could have collected 5kg of wood. For every 10kg of wood Mary collects, she could have picked 2 (20/(100/10) apples. For every apple Mary picks, she could have collected 5kg (100kg/20) of wood. For every apple Sue picks, she could have collected 10kg (80kg/8) of wood. For every 10kg of wood Mary collects, she could have picked 1 (8/(80/10) apple. Sue has a comparative advantage of collecting wood over Mary but Mary has a comparative advantage of picking apples.

Who should pick apples?

Based on comparative advantage, Mary should specialise in picking apples and Sue should specialise in collecting wood. Let’s see if specialisation works using comparative advantage. Let’s say the girls work for 8 hours.

Scenario 1

If Mary picks apples for eight hours and Sue collects wood for eight hours, how many apples and how much wood do we have?

Mary would pick 160 apples and Sue would collect 640kg of wood.

Scenario 2

What if Sue picks apples for eight hours and Mary collects wood for eight hours, how many apples and how much wood do we have?

Sue would pick 64 apples and Mary would collect 800kg of wood.

Scenario 3

What if Mary spends four picking apples and four hours collecting wood and Sue does the same, how many apples and how much wood do we have?

Mary would pick 80 apples and Sue would pick 32 apples and Mary would collect 400Kg of wood and Sue would collect 320kg of wood. We would have a total of 112 apples and 720kg of wood.

Has specialisation using comparative advantage paid off?

It is not immediately obvious from the numbers produced as we are comparing apples with wood. What if apples and wood could be traded, would that make it clearer if specialisation through comparative advantage works. For Mary, effort to collect 1 apple is equivalent to effort to collect 5kg of wood and for Sue, effort to collect 1 apple is equivalent to effort to collect 10kg of wood. Mary would therefore trade 1 apple if she could receive more than 5kg of wood. Sue would trade 10kg of wood if she could receive more than 1 apple. If 1 apple could be traded for between 5kg and 10kg of wood, Mary would trade all her apples and Sue would trade all her wood. Let’s assume that 1 apple can be traded for 7.5kg of wood.

Scenario 1

Mary trades 160 apples for 1200kg of wood and Sue trades 640kg of wood for 85 1/3 apples.

Scenario 2

No trades are made, Mary has 800kg of wood and Sue has 64 apples.

Scenario 3

Mary trades 80 apples for 600kg of wood, she has a total of 1000kg (400kg collected by herself) of wood. Sue trades 320kg of wood for 42 2/3 apples, she has a total of 74 2/3 apples (32 apples collected by herself).

It is now apparent that specialisation using comparative advantage can result in higher output if trade is possible. That is if the 1 apple can be traded for between 5kg and 10kg. If apples trade for less than 5kg both Mary and Sue will only collect wood. If apples trade for more than 10kg both Mary and Sue will only pick apples. Specialisation is still taking place but it is other people with greater comparative advantage for either picking apples or collecting wood that are influencing the price.

In the real world

Specialisation occurs all the time in the real world. It can be between business, people, and even countries. Specialisation through competitive advantage is a good method of producing the highest output. This does not mean that specialisation produces the highest amount of satisfaction or utility.

People with adequate resources and/or support are able to learn new skills that can give themselves both a comparative advantage as well as an absolute advantage altogether. There are others that are less fortunate and are born into an environment where comparative advantage lies in production that requires low cost labour.

Specialisation can be a doubled-edged sword. If done correctly, production output and efficiency are improved. On the flipside, pressure to follow a fixed specialised path can be quite a restriction on your own freedom. This is especially so if specialisation is forced upon you. Aldous Huxley’s ‘Brave New World’ is an example of where specialisation and compartmentalisation have gone mad; this can make life unbearable for many.

Conclusion

This has been a mostly theoretical post. I have outlined what is meant by specialisation and how comparative advantage can be used to enhance specialisation. I have explained that through specialisation output can be increased and efficiency of production can be improved. I could elaborate further on how specialisation can help shift the production possibility frontier (PPF). I decided that should be left to another post.

Specialisation can work well in regards to increasing output (most likely in the short-run); it is also possible that specialisation could reduce moral and eventually reduce output. Specialisation, though, does not work so well for those that are trapped and are unable to acquire the skills they want to be able to have greater freedom.

I hope you enjoyed this post. I have several more economic concepts that I will be explaining in posts to come.