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Specialization, along with the complementary concept of the division of labor, occurs when the innate inequalities of human productive output are intensified along different skills. An individual becomes economically specialized when he focuses his productive efforts on an increasingly narrow range of tasks. The most obvious economic impact of specialization can be seen in the tendency for individuals to choose different vocations that are more in line with their interests, skills, opportunities and education.

Adam Smith, who is often referred to as the father of economics, believed that specialization and the division of labor were the most important causes of economic progress. Total output is increased when one worker specializes in one type of activity and trades with other specialized workers, said Smith. He pointed out that specialization could occur at the individual level, along different firms or even countries.

Economic actors that specialize in a task become more proficient at it. It's the same reason why professional athletes practice before a game or why children write their letters over and over again in preschool; repetition and muscle memory increase productivity. Rather than having every actor practice at producing all different kinds of goods or services, human beings naturally tend to specialize in narrow fields and then trade with one another. This creates the division of labor.

Even if someone were naturally better at producing every kind of good or service than everyone else – what economists call an "absolute advantage" in trade – it still makes sense to specialize in just one area and trade with those who are less productive.

To illustrate why this is the case, consider the following example. An attorney has a secretary in her law office. Suppose she can type faster, file faster and use a computer faster than her secretary. When it comes to doing secretarial work, her labor productivity is higher than that of her secretary. However, that isn't her most valuable work; her most valuable work is practicing law. Every hour that she spent doing secretarial work is an hour that she couldn't spend being a lawyer, so she trades with her secretary to maximize her earnings as an attorney.

To see how specialization and division of labor improves the output of both the secretary and the attorney, imagine that the secretary has a labor productivity of $20 per hour doing secretarial work and $0 per hour practicing law. The attorney has a labor productivity of $30 per hour when performing secretarial work and $150 per hour practicing law. Even when the attorney buys $20 of labor per hour from the secretary, she is still better off by $100 because she can spend that hour practicing law (net $130 earned as an attorney versus $30 earned as a secretary). The secretary is better off accepting the $20 rather than being unemployed.

The aggregate impacts of specialization on the economy are massive. Occasionally, people who specialize in a field develop new techniques or new technologies that lead to huge increases in productivity. Increased specialization ultimately leads to higher standards of living for all those involved in economic exchanges.

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