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20161126 – Specialization and Trade

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MAIN IDEA:

The main idea of this book is to look at economy from the angle of specialization and division of labor that become the key feature of contemporary economy. In process author demonstrates impossibility of central planning and government controlled economy to produce effective and efficient results. Author also provides suggestions for solutions mainly in form of promoting better balancing between market and government controls in mixed economy.

DETAILS:

Introduction

Author defines it as re-introduction to economics with specialization being the main character in the story. He refers to Adam Smith and his famous example of specialization leading to dramatic increase in productivity, but does not stop there. He also stresses dynamic character of specialization bringing in Schumpeter’s “Creative destruction” to demonstrate that lots of events in economics could be explained by detailed analysis of specific changes in specialization patterns over time.

 

1.Filling in Frameworks

This is about meaning of economics as whether it is a science or not. Author’s infer that it is not a science strictly speaking, but rather interpretive framework for understanding economic events because any economic statement always starts with “all other things being equal”, which is in and by itself moves it out of possibility for falsification because all other things are always unequal. Obviously any theoretical construction, which is not subject to falsification, is not strictly scientific.

2.Machine as Metaphor

This is the critic of the idea of economics as machine, subject to engineering. The point here is that economics actually deals with human action, which makes mechanical approach invalid.

3.Instructions and Incentives

This is the critic of the idea of planning as controlling tool for economics even at the enterprise level. The reality is that the prices derived from supply and demand processes define economics and coordinate human actions within its framework. The planning, even if conducted with supercomputers, could not possibly handle complexities of the real live because of distributed character of relevant information, leading to grave mistakes and producing staff that nobody needs, while neglecting staff that people want.

4.Choices and Commands

This is a comparative analysis of market system and central planning, which historically failed in resolving information problem, incentives problem, and innovation problem. Here author provides a nice small 2×2 table of what one could get by using/not using price system and/or commands:

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Obviously we are mainly in “Mixed system” with huge variances in proportion of mix, but quite stable pattern of results: minimizing commands and maximizing pricing consistently leads to better economic outcomes.

5.Specialization and Sustainability

This is a very interesting discussion about market price being the only tool that could support sustainability of economics and any attempts to override it leads to failure.

6.Trade and Trust

This chapter is directed against strict libertarians who believe that market by itself is solution for everything. Author’s opinion is that government together with NGOs is absolutely necessary to force people to play by the rules.

  1. Finance and Fluctuations

This is about financial intermediation, the value it brings to economy, and its necessity for maintaining stable patterns of specialization and trade.

  1. Policy in Practice

This is critic of typical approach to “market failure” using housing crash as an example.

  1. Macroeconomics and Misgivings

This is restatement of idea that that economy is way too complicated to try Keynesian approach for controlling it. It also provides author’s suggestions on using analysis of specialization in trade to provide subtle corrective impulses, as needed, rather than use crude Keynesian and/or monetarist tools.

  1. Concluding Contemplation

The main conclusion is that we live at the time of extreme specialization that created correspondingly complex economy, which could not be effectively managed by using Keynesian equations because these equation way too simplified to match complexity levels of reality. Author’s proposed alternative is to use small intervention needed to promote trust in trade, overcome inherent instability of financial system, and establish better balance between constructive and destructive forces in economy needed to avoid or at least alleviate boom and bust cycles.

MY TAKE ON IT:

This book’s ideas are pretty much consistent with my thinking on economics in terms of its high level of complexity that makes it impossible to manage effectively by using simplified mathematical modeling, socialist central planning or even Keynesian government interventions. However I do not agree with ideas of even minimal government controlling interventions because it would always and inevitably going to be done by human bureaucrats in their own interests distorting economic reality and decreasing effectiveness of the system as whole. I believe that violence and coercion (government) should be used only to protect property, enforce legally admissible contracts, and collect information that some participants in the system would try to hide so everybody would make decision based on reality rather than illusions.


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