I think I am beginning to understand how specialization is rewarded in the economy. Entities that specialize are essentially collecting the premium from selling put options on the dimension in which they are specializing. They are very vulnerable to abrupt state-changes and they are rewarded for this risk.
In case you are unfamiliar with put options: they are simply insurance against the drop in value of some asset or variable. Buying a put option against a stock is like buying insurance in case the stock goes below a certain threshold. This insurance comes at a cost: the premium you pay for the put option. Options sellers pocket the premium upfront but expose themselves to the risk that the option will be triggered if the asset or variable drops below the threshold.
People, organizations, or countries that specialize are selling insurance (put options) against the dimension in which they are specializing. A country that follows Ricardo’s law of comparative advantage and decides to specialize completely in agriculture even with some mineral and mining resources available, will find itself extremely vulnerable to an abrupt change of state (say a crop disease gets entrenched in the country) when agriculture becomes impossible and the lack of investment in mining infrastructure renders it suddenly uncompetitive in the global economy.
In terms of careers, abrupt state-changes historically have included the growth of outsourcing, changes in the economy (IBM in 1990), and new technology (ice sellers and refrigerators).
Specialization comes with increased rewards, but it is a tradeoff with a decrease in robustness against the unknown. In other words, the premium on specialization can come from money borrowed from destiny.
I’m not sure people recognize this as a tradeoff, as hordes of youngsters are encouraged to begin specializing earlier and earlier without a second thought.
Thinking about it in these terms makes it so clear. People who specialize are making an extremely concentrated bet that the area under question will still be relevant many years from now, if not, they are toast. That’s a pretty big risk if you consider it on a long enough time-line.
PhD students are dare-devil risk takers. Who would have expected it?
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