Monday, January 13, 2014

Specialization and diversity

Ricardo Hausmann has a superb article on cities and specialization.  The takeaway is that specialization is a myth.  Cities that focus on specialization are too often losers, and that the true key to a city's success is diversity.  Money quote:

But specialization at the individual level actually leads to diversification at a higher level. It is precisely because individuals and firms specialize that cities and countries diversify.

This is why the idea that cities, states, or countries should specialize in their current areas of comparative advantage is so dangerous. Focusing on the limited activities at which they currently excel would merely reduce the variety of capabilities – or “letters” – that they have. The challenge is not to pick a few winners among the existing industries, but rather to facilitate the emergence of more winners by broadening the business ecosystem and enabling it to nurture new activities.

I recommend reading the whole thing because I largely agree with the thesis.  Many big cities in America have declined.  Those that were more diverse were better able to weather the destruction that the 1970s wrought.  Chicago has lost a number of important industries over the years; from meat packing to steel many of Chicago's specializations have disappeared.  Being large and diverse was important for Chicago's survival.  Today it is more important than ever.

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