Trade, Innovation, and Development: The Role of Diversification in Driven Economic Systems

10 Pages Posted: 6 May 2017

See all articles by Dan Ciuriak

Dan Ciuriak

Ciuriak Consulting Inc.; Centre for International Governance Innovation (CIGI); C.D. Howe Institute; Asia Pacific Foundation of Canada; BKP Development Research & Consulting GmbH

Date Written: May 5, 2017

Abstract

This note seeks to shed light on how economies develop by reconciling the apparent conflict between diversification and specialization as the path to development, and alternative conceptions of an economy as an equilibrium system of optimizing agents versus a driven system dependent on underlying sources of economic “energy”. Diversity and specialization are two sides of the same coin: diversity at the system level enables specialization at the individual agent level. We can observe the potential for a positive feedback loop with increased specialization reflected in increased diversity of specialized agents and specialized products, which in turn enable a further additional expansion of diversity through recombination. The greater the diversity of existing capabilities, the greater the number of possible recombinations. Trade between progressively larger sets of individuals – grouped within a firm, within a city, within a country, within the global economy – intensifies these positive feedbacks. Mainstream economics, couched in terms of optimizing agents in an equilibrium setting, describes the structure at any point in time; however, to describe the trajectory of a system over time requires a driven model where the scale is determined by the power of the driving force. The economic system, like the biosphere in which it is embedded is a driven system. Based on this understanding, the note draws inferences for trade policy.

Keywords: comparative advantage, specialization, diversification, development, innovation, evolutionary economics, equilibrium system, driven system

JEL Classification: F10, F13, O10

Suggested Citation

Ciuriak, Dan, Trade, Innovation, and Development: The Role of Diversification in Driven Economic Systems (May 5, 2017). Available at SSRN: https://ssrn.com/abstract=2963723 or http://dx.doi.org/10.2139/ssrn.2963723

Dan Ciuriak (Contact Author)

Ciuriak Consulting Inc. ( email )

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Canada

Centre for International Governance Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
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C.D. Howe Institute ( email )

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Toronto, Ontario M5E 1J8
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Asia Pacific Foundation of Canada ( email )

Canada

HOME PAGE: http://ciuriakconsulting.com/

BKP Development Research & Consulting GmbH ( email )

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München, 80639
Germany

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