Specialization

Focus is key.

Warren and I avoid doing anything that someone else at Berkshire can do better.

—Charlie Munger[1]

If you try to do everything, it’s hard to do anything well.

As economies develop, people’s livelihoods become increasingly specialized. Greater division of labor tends to lead to increased efficiency and lower costs.

“Specialization” is when a person, group, or nation focuses on producing a particular good or service, intending to be able to do it in less time, at a higher quality, and/or at a lower cost. For an individual, it’s microeconomic specialization; for a nation, it’s macroeconomic specialization. Specialization in one thing involves a trade-off because it means not specializing in something else.

“What do you want to do when you grow up?” is a common question people ask children. Whatever the answer, it’s expected to be something specific—not “whatever mixture of skills I need to survive.” The reason for choosing a specific job is that specializing in our careers is the norm. Most people choose a particular area to work in and study or train accordingly; then, they get steadily better at that work over time, building up resources like contacts or respect within a field.

Adam Smith famously summarized the benefits of the division of labor in The Wealth of Nations when he described a pin factory. A single, untrained worker could never manage to make even twenty pins a day and would be more likely to complete just one. But the pin factory’s productivity increases by several orders of magnitude if several workers each take on one part of the process. Then, ten workers can make 48,000 pins a day. One worker draws out the metal wire, another makes it straight, another cuts it into lengths, and so on. No one involved needs much training or skill. And the more the labor is divided up, the greater the overall production per person. Smith also believed that there is a direct correlation between how economically developed a country is and how specialized the typical job within it is, with this relationship being a feedback loop, both a cause and an effect.[2]

How many of the objects you touch on an average day did you make yourself? There’s a good chance the answer is zero—or at best just a few. Yet this is a recent development in human history. Most of the people to have ever lived made most of their possessions themselves, or owned things that were made by people they knew personally. And if you’ve ever learned how to make yourself a dress or a table or a wooden spoon, you can appreciate the sheer range of skills required for each item.

It’s worth noting that specialization, as in Smith’s pin factory, has been criticized as creating work that is boring and mind-numbing. Specialization also creates a sense of alienation from the products of our labor, because we don’t see them consumed, and from the labor of others, because we don’t see them produce what we consume. So there is a balance between the benefits we receive from being able to specialize (more variety and cheaper goods) and the sometimes unappealing conditions that extreme specialization produces. There is no doubt, however, that on balance, specialization has maximized the effectiveness of the resources we have and was a critical component of the significant, though uneven, rise in global living standards over the last two hundred years.

Specialization goes hand in hand with trade; the two create a feedback loop. Eric D. Beinhocker writes that “one of the great benefits of trade is that it enables specialization”[3]—you can’t specialize if you can’t trade for the other things you need but don’t produce. Specialization, in turn, reinforces trade: once you specialize, you can produce goods that you don’t need for yourself, making them available for trade.

We must remember, however, that solving problems often leads to new ones. One of the aspects of increased specialization that must be managed is that it leads to increased coordination costs and requires ever more effort to avoid cascading failures. In his book Human Capital, economist Gary S. Becker states, “The cost of coordinating a group of complementary specialized workers grows as the number of specialists increases.”[4] It’s much easier to organize the work and exchange of a small group in, say, a kitchen—where the chef, sous-chef, pastry chef, line cook, and dishwasher can all figure out how to adjust their actions to complement the others’ roles—than to map out the most effective intersections in a multinational organization.

The increased interdependence created by specialization is both a benefit—it encourages cooperation—and a cost, as it results in vulnerability. The more you need others to do what you can’t do yourself, the more you need to produce something yourself that others need. But the problem is obvious: your inability to produce everything you need creates a dependency. If your needs stop being produced by others, you’re in trouble. At the extreme of this problem come cascading failures: you can’t meet your needs, so you stop producing your specialization. Those who rely on you are thus themselves jeopardized. If a society has too many gaps, in terms of requirements that can’t be produced, the result is widespread instability.

Specialization also requires trust. The more specialized people’s jobs become, the more specialists are required to bridge communication gaps. When trust isn’t possible, because people don’t personally know one another, specialization also requires legal frameworks and enforcement mechanisms.

Overspecialization leads to poor nonsense detection. The more narrow our own focus is, the harder it can be to know if someone else is being honest or even knows what they’re talking about. Overspecialization can also lead people to put up barriers to protect their specialization, such as by requiring expensive licenses to practice the skill. Indeed, specialists may be incentivized to exaggerate how distinct their knowledge is in order to protect their advantage.

Consequently, the mental model of specialization illustrates the value of cooperation. We’re usually better off doing what we do best and working with someone else for the rest. We just have to be mindful of the vulnerabilities that specialization creates and not put ourselves in a position where we can’t adapt if we need to.

The more complicated the whole structure becomes, the more important it is that each element fits in its appropriate place.

—Friedrich A. Hayek[5]