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Specialization and Trade by Arnold Kling: The bottom line

Trade is one sensitive topic today, between strategical and polemical. So, what is global trade about? How do things work out there? What are the basic principles?

Here is a reading suggestion: in his book Specialization and Trade, Arnold Kling gives us the basics. Kling starts from the theories of Adam Smith, but then he elaborates on additional theories and overall explains what you need to know to have a correct understanding of economic theories.

Specialization and Trade is a little complex but it is a very insightful book. Very relevant to those interested in learning more about economic theories and the way they do – or do not – apply in today’s world. Read my book review to find out more!

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Book Suggestion & Review: Specialization and Trade, a Re-introduction to Economic’ – Arnold Kling.

An interesting book to read! Specialization and Trade, a Re-introduction to Economics by Arnold Kling is an insightful thought leadership book for those interested in learning more about economic theories and the way they do – or do not – apply in the real world.

Let’s say that Specialization and Trade is one of those books that gave me the idea of writing this books blog.

I bought the book because the economics of free trade talk to me, they’re an important aspect of my job. Beyond my job, though, the topic is very relevant at the moment. Especially considering all the criticism against globalization and trade negotiations around the world.

In other words? The topic is complex but the book is spot on. For instance? Well, you’ve heard of Adam Smith, right? What do his theories look like nowadays? There you go. Important, but complex. But important!

So let’s dig in.

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Kling on Specialization and Trade: a brief book review (for starters).

Specialization and Trade by Arnold Kling is an insightful book, very relevant to those interested in learning more about economic theories and the way they do – or do not – apply in today’s world. The book is rather small – exactly 200 pages. Perfect if you’re trying to get the big picture on how things work.

The book discusses …

… specialization as an economic doctrine. It starts with the economic theories of Adam Smith, who first elaborated on the ideas of free trade and specialization. It then comments on how specialization has evolved over time and explains the functioning of market economies by the same token.

The style …

… is fairly accessible despite the technicality of the subject matter. The author writes well and shares his thought in a clear and well-structured manner. However, the discussions contained in the book may at times be difficult to follow. Kling refrains from using complex formulas (there are a couple of them at the end of the book, that’s it). And he uses a clear language as well as examples to guide the reader throughout the book. Still, the book sometimes becomes technical. Specialization and Trade is not a bedside table, that’s for sure. Hence, the least experimented readers are advised to approach the book with care.

About the Author?

Arnold Kling is an economist who worked for the United States’ Federal Reserve from in the years 1980 and is part of the libertarian movement. Kling is attached to two organizations.

First, the ‘Cato Institute’ is a public policy research foundation which fosters debates on liberty and peace. In short, life should be free from ‘government encroachment’ and immune from the permanent public intrusions against individual rights and civil liberties.

Second, Kling also makes part of the Libertarian School of Thought (www.libertarianism.org) according to which liberty is the core political value of modern civilizations and works together with a complex system of values, including justice, prosperity, responsibility, as well as cooperation, toleration, and peace.

In other words? Arnold Kling is interesting because he has the guts to defend a very liberal perspective on things – when others such as Noam Chomsky rather take the opposite approach.

Again, feel free to disagree and dislike it, that’s not the point. The point is to get the various arguments. And this exactly what my book reviews are about! So let’s keep going!

Now, I’m getting into the details with a much more comprehensive book review below (keep reading!), but to finish the brief overview here is what the book is about:

 

Kling on Specialization and Trade: the comprehensive book review.

A book that provides an alternative way of thinking about economics.

Arnold Kling develops various arguments en marge of the arguments traditionally developed by mainstream economists.

The book begins with a quote of Adam Smith, who introduced the idea that specialization is the key to progress and economic development.

Simply put? The ability to exploit individual talents and specialties allows making the most of everyone. It helps moving forward.

Kling elaborates on the idea that today’s world confirms Smith’s doctrine. His point is that specialization and trade are the reasons why modern societies have reached their current level of development.

Issues remain.

Important issues however remain. In his opinion, mainstream economists propagate large misunderstandings.

Specialization mechanisms are not properly described. They are not assessed as they should be. Traditionally, economists have discussed the ‘comparative advantages’. They have talked about production (one specialized worker produces X or Y value), scarcity and choice.

The wrong factors?

Kling, in contrast, finds that these factors fail to deliver. For instance? They do not take into account the complexity of urbanization. They fail to consider social evolution as a relevant variable. And they ignore modern trade factors such as globalization or offshore production.

Specialization is also ignored. Yet, it creates fluctuations worth mentioning. Our societies need to adapt to innovation. They need to adjust to variables such as employment, global financial markets volatility…

Hence, Kling’s book (as its title shows) is an attempt to re-introduce economics. From a modern perspective, using specialization as a pillar. In his words… “specialization is the most essential fact in economics” because “we enjoy goods and services that require hundreds of millions of workers all over the world”.

The book in bullet points

Arnold Kling explores these major themes:

• Modern economic theories
• The importance of specialization regarding innovation
• The role of price and profit towards innovation
• Global Governance

He also asks a variety of questions, including:

• Are the laws of offer and demand still relevant as the main economic paradigm?
• Can prices and profits be considered as a new paradigm that promotes innovation and specialization?
• Can we keep relying on the current model?
• Does it make sense to treat markets and the economy as predictable machines that can allegedly be analyzed through equations?
• How can specialization be coordinated?
• What is the role of trust?
• What to think about finance and market fluctuations?
• Can public policies produce optimal results?
• Can specialization contribute to creating more sustainability?

Specialization and Trade builds on nine chapters which discuss a variety of topics. For instance? The difficulty to create adequate frameworks for economic development analysis. The idea that price and profit are key factors, in contrast with the traditional demand and offer paradigm, etc.

For the purpose of this review, I am however regrouping those chapters into three major themes. Keep reading!

Specialization and Trade – Theme #1:  The economic models are wrong.

Kling first discusses the lack of robust economic models nowadays.

Wrong methods.

In his opinion, economic research and theories lack legitimacy. Why? Well, because the traditional methods are biased.

Currently, he argues, economic research builds on “many unverifiable assumptions”. Kling argues that traditional economists fail to prove what factors have an influence. They pick parameters depending on their needs, capabilities, and biases. And they discard the parameters they cannot assess or master, even if they could have an impact.

In short, they “fill the framework” with variables they understand but ignore the rest. Many alternatives are ignored, and the models are hardly conclusive.

Need for more.

At the end of the day, that is to say, classic methods are partial. They suggest that economics are not a form of science based on experiments. In fact, Kling questions the very idea that economics is a social science!

To the contrary, an economic analysis needs robust frameworks of interpretation. Those frameworks must be capable of testing theories. They must help spotting anomalies and they must prevent creating economic fantasies. In short? Kling argues that new modern frameworks are necessary.

No automatic machines…

Kling also questions the complexity of mathematical models. He finds them overly mechanistic!

Kling for instance criticizes the idea that economic methods treat markets and the economy as an automatic whole…. “as if they were simple machines” which behavior can be anticipated through equations.

To him, again, current models fail to show the complexity of our modern societies. At best, mathematical models can help to assess. But they cannot guarantee that we are in reality making adequate choices.

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Specialization and Trade – Theme #2:  Price, specialization and innovation.

The second important idea in Arnold Kling’s book relates to the role of price. Simply put? Kling suggests that price, specialization and innovation are intimately related.

From coordinating specialization to explaining the role of prices and profits towards innovation.

There are several elements worth noting here.

Price as an incentive.

First, Arnold Kling looks at the role and power of “instructions and incentives”. His argument, here, is that specialization can be coordinated. The point is discussed in Chapter 3 of the book, which is one of the most interesting aspects of the whole discussion. Kling asks what makes the value of segmented (specialized) work.

Traditional economic models deal with offer and demand. Kling introduces profit and price. Traditional models ignores them. He describes them as key coordination mechanisms.

In more simple words? Well… would you specialize and innovate without a high price and some profit? There you go… That makes a difference!

Traditional models suggest that the price demonstrates a correlation between offer and demand. But Arnold Kling sees price as an independent factor. A factor which conditions investment, specialization, and production.

Price isn’t just where offer and demand meet! In reality, price is the reason why there is an offer in the first place! Price creates a margin for the producer as well as an incentive for the consumer. So both the price and profits have a role to play!

For instance, price has a role to play in terms of innovation. Why? Because future profits give incentives to conduct costly experiments. Price also tends to promote sustainability. It pushes sellers to create products that will produce value in the long term. Value justifies the price. Price and profits finally create competition, specialization and permanent progress. Kling talks about a “dynamic efficiency”, i.e. a system in which new ideas are a source of improvement.

 

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Price, profits, and the test of political models.

Second, Kling tests the argument with a question. Can price and profits can influence modern political models?

The point is explored in Chapter 4 (‘Choices and Commands’). There, Kling explores whether political and economic models based on either price or command can promote innovation and development.

The concept is a little bit complex, so Kling takes examples. In what he calls socialist utopias, the society is economically open. But it looks for equality at every level. So? The system goes for fair prices (profits are bad, remember?) and no commanding authority. But… the lack of price and command also leads to no effort. Without price and profit incentives, no innovation.

Kling also looks at non-market economies (or command economies). In those systems, governments control economic dynamics. Prices become artificial or subsidy-dependent, so there is no freedom in fixing prices. Information is also limited (how much can you sell at price X or Y?). Again, the system does not promote innovation because there is no room for profit.

 

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Kling finally looks at decentralized model where governance follows markets. Here, prices and profits are the origin of innovation and investment. In market economies, state intervention is limited. Prices and profits act as benchmarks. They provide market information. And… they create incentives for investment and innovation.

Hence, Kling points at a very interesting correlation between prices, profits, competition, production management and… political freedom.

 

>> Related reading: for a similar approach to profit and innovation, see also Schumpeter on Capitalism, Socialism and Democracy.

 

 

Specialization and Trade – Theme #3:  specialization and governance.

The third important topic in Arnold Kling’s book relates to governance.

The discussion is interesting and practical. Why? Well… because it actually leads to non-economic considerations and touches rather political issues too.

Specialization and stability.

First, the author devotes a chapter (Chapter 5) to sustainability. Many criticize specialization and globalization for being the source of economic turmoil nowadays. So this point is very timely and Kling formulates a series of questions. What does it mean to be sustainable? What responsibilities do we have towards the next generations?

Again, his argument is that the long-term profits create durable patterns. Making profits tomorrow requires investing in innovation today, while price competition requires efficiency. As mentioned before, specialization creates competition. It leads to developing more sustainable patterns in the long run. It helps to preserve resources…

Trade and Trust.

Second, Arnold Kling discusses the relationship between ‘trade and trust’. In Chapter 6, he describes trust as a key aspect of modern basic social rules. In short, Trust is the cohesive pillar of modern market mechanisms.

The chapter pushes you to consider the role of various factors. Religion, legal systems, reputation, cooperation and punishment of defectors… You name it. But it is one of the must-read chapters of the book. Interested?

Financialization.

Third, Arnold Kling discusses finance and fluctuations.

In Chapter 7, he writes on the role and contribution of financial intermediaries. He explains their specific (specialized) role. Especially when it comes to mitigating financial risks for the consumer… Financial services are criticized for their greedy and irresponsible behaviors nowadays. So this argument is worth emphasizing.

Kling also talks about the definition of what money is and describes it as a form of intermediation that allows interacting across time (today or in ten years) and with a variety of different actors (contractors, lawyers, grocery shops, etc.).

The topic also gives him a chance to discuss and define various financial terms. Investment, shareholders, stakeholders, debt, repayment, equity, etc. Kling focuses on more technical considerations here. He explores the natural recurrence of fluctuations. He explains why investors and intermediaries tend to shift their management methods from safe to risky over time…

Policy issues.

Finally, Arnold Kling discusses ‘policy in practice’. In Chapter 8, he comes back to the idea that mainstream economists rely on wrong models. Again, the markets are not predictable!

He argues that, in reality, no political process allows promoting specialization. Why? Well, governments deal with failures instead of preventing them. They cope with problems but fail to set up adequate policies.

Kling also formulates interesting questions on specialization-based models and their policy implications. For instance, are public policies able to produce results? And, if yes, what institutions would be able to produce the best results?

Employment and inflation?

The last chapter (Chapter 9) furthers this discussion by focusing on macroeconomics.

In more practical terms? Kling discusses the relationship between employment, consumption, interest rate fluctuations and GDP growth. Again, he suggests that the current models fail to consider specialization variables. This is the most complex part of the book, with formulas and very technical matters. If you want more, I invite you to read the chapter directly.

Arnold Kling comes to the following conclusions.

• The laws of offer and demand are not sufficient anymore.
• Markets and the economy cannot be considered as predictable machines. They can’t be analyzed through equations. In fact, equations fail to take into account the various complexities of our modern societies.
• Specialization can be coordinated through market mechanisms such as prices and profits. These are the major determinant or innovation investment and capacity-building. Hence, current models are not enough.
• Trust is a key element of trade.
• Financial intermediaries and money have a major role to play. They provide people with a way to exchange over time while mitigating risks.
• Public policies cannot produce effective results. Leaders tend to hide behind crisis instead of trying to mitigate them.

So, let’s finish this book review with some food for thought!

Specialization and Trade re-introduces economics with a modern twist.

As mentioned before, the book starts with Adam Smith. The famous economist, philosopher, and author who created during the 18th century the basis of today’s economic model… For Smith, the ability of someone to produce a specific good was an opportunity for someone else to make the most of his own specialty. In other words? Buy your shoes from a shoemaker and you will have time to focus on those things you are good at.

Overall …

This connection between Adam Smith and Arnold Kling is very important. Why? Because the role of specialization is the core topic of Specialization and Trade!

Kling elaborates on the importance of the concept of specialization for modern economies. And his argument is that modern economic models need improvement. The cornerstone of his argumentation is that today’s economists propagate misunderstandings. Biased misconceptions of economic realities.

In sum, traditional economic models are unreliable… and Kling proposes various ways to re-consider economic models.

A major way to do this is to complement the traditional offer and demand model with more variables. Prices and profits, in particular. An argument which as a matter of fact makes a lot of sense.

All in all, the book is a little technical. Not a bedside table book, that’s for sure. But I find it is a good way of getting relevant arguments and food for thought these days. Especially considering the polemics surrounding trade and globalization.

The book works very well with the current context.

The discussion is interesting because it touches upon non-economic and political issues. If you need an example, take a look at the trade negotiations which made so much noise in 2017.

Why would states try and negotiate free trade agreements on regional scales? Why did President Trump decide to withdraw from such negotiations? And why did he promise to renegotiate the existing agreements?

To some, free trade agreements are a way of finding new markets for their domestic productions. Why? Because they believe that their competitive advantages in specific industries give them opportunities.

To others, those agreements are threats. Why? Because they consider that their industries cannot compete! Hence, they come to the conclusion that their economies won’t benefit.

So, is specialization always perceived as a source of freedom, profit and development? Is the market economy model supported equally by political leaders and populations? Are European countries decided to build a fair internal trade market? Without social dumping? Or is Europe facing a crisis because of a lack of trust in policymakers? Price and profits are key here.

More food for thought. Keep reading!

Are the United States and Europe happy with Beijing’s policy on subsidized coal and steel? Definitely not! Because a fall in prices flowing from Chinese subsidies has shifted trade to another part of the world. Prices falling have killed profits and stopped investment and innovation. Prices, profits, innovation, again.

Did you say innovation?

Another topic with which Specialization and Trade relates is the topic of innovation.

There are lots of discussions at the moment on the future of technologies. Some commentators point at great developments. Others expect dramatic consequences, particularly in terms of employment. Specialization and Trade is also about that. On this topic, I particularly recommend my review of Klaus Schwab’s book The Fourth Industrial Revolution, as well as my review of Martin Ford’s book The Rise of the Robots.

There you go. Kling’s Specialization and Trade, a Re-introduction to Economics discussion on trade, prices, profit, competition, and sustainability does matter.

Economics, politics and all that

If you are interested in macro topics like economics and politics, another book is absolutely worth reading: Politics by David Runciman. That book doesn’t explain economics (even though it also talks about financialization) but politics, as its title suggests. For more, read my article Food for thought: Interesting things David Runciman says on Politics.

 

 

In sum?

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Your turn now, get the book!

That’s it for now, but don’t stop here! My reading notes are meant to give you a very comprehensive overview of the books I read and some food for thought for the month. That’s why I’ll Make You Think SMART is the Kick-Ass Book Reviews blog after all!

Having said that, the next step for you is to keep digging! Remember, books are a cheap way to learn new things and to benefit from the experience of others at no cost. Not to mention the stories you’ll be able to tell after a good read!

So, if my book review picked your curiosity, you only have one choice: go for it! Get the book and READ IT! Don’t postpone or you simply won’t… Usual disclaimer: yes, this is an Amazon Affiliate link which means I’ll get a percentage of everything you buy on Amazon. That supports my blog, and it won’t cost you a cent! Thank you!

As always, I hope you enjoyed this book review! Please let me know what you think in the comment box down the page. Especially if you read the book, if you feel like buying it, or if you simply enjoyed my review!

Cheers!