All economics is either footnotes to Adam Smith or wrong

We’d not want to have to defend, wholly and precisely, that headline but we do think it a useful starting point. The truly interesting parts of the subject are those few findings which are neither. Say, Coase on the private production of public goods.

So, we’re not hugely surprised when empirical research shows that Smith was right:

We carry out two policy experiments based on our calibration. First, an industrial policy (e.g. a tax/subsidy) that induces all firms to specialise would have increased real income, so the equilibrium is inefficient (firms don’t internalise the externality of their adoption decision on others). That income increase is significant if the policy was implemented in 1987 but negligible in 2007 since, by the latter period, trade and technical change had induced sufficient specialisation. Second, we compute the impact of an increase in trade costs of 16 log points, similar to the recent trade war, and show it increases the labour share but reduces market size and real income substantially – almost half way to the predicted effect of the US shutting all trade.

The background to this is that trade allows the division and specialisation of labour - the very thing which raises productivity and therefore living standards. Allow trade with more people in more places and more division and specialisation happens thereby raising real incomes. Real incomes being the same thing as living standards.

The resulting economy of scale at the firm level captures one aspect of Smith's (1776) specialisation argument: when markets are larger firms have an incentive to specialise their labour into a subset of tasks where they are most productive.

Quite so, one of those footnotes to Smith and also, not by chance, correct.