Saturday, August 30, 2008

Bad Ideas: Diversifying the Economy

CNN Money reports the bad idea:
"Michigan has been talking about the need to diversify its economy for a long time, but it has not happened," Blank said.
Diversification. Sounds like a good idea, doesn't it? We all know that is the first rule of building a successful portfolio, so why not an economy?

Repeat after me: "Wealth is produced, and production arises from specialization and the division of labor, both of which are limited by the extent of the market."

Should you, personally, diversify your employment? Should you try to split your months up into different jobs over the year? Over the day? That would be diversified, but it would probably not be a good personal plan for your prosperity. Better for you to specialize at what you do well.

Can you specialize? How specialized should you become? That depends on how many trading partners exist in your "world." Can you think of a state, that more than Michigan, has had a larger fraction of its population push for public policies banning foreign trade, intentionally and artificially limiting the extent of the market?

2 comments:

Anonymous said...

I think Rebecca Blank's comment is not against specialization and the division of labor. One thing is to specialize and become more efficient. It is another thing entirely to limit your source(s) of income. The more sources of income that you have (or potentially have), the less risk you are exposed to (hence, the reason we diversify our portfolios). If Michigan had a wider variety of strong industries, then the state as a whole would probably not be suffering as much. I agree that eliminating trade barriers will help Michigan, but as long as Michigan is reliant on one industry (I assume it is), then, it will always be exposed to risk (unless it insures itself against the risk).

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