Matt Ridley’s "The Rational Optimist" is out and although its sitting on my desk I haven't managed to find the time to start reading it yet. But I find Mike Gibson's review of the book a good place to start on reflecting about Ridley's underlining premise of the book that trade and specialization are the key factors in prosperity. But here I've often pointed out that trade and specialization will only get you so far, you also need innovation and new ideas. You need creativity. And these are two different things. The case behind trade, specialization, division of labor, and the greater economic wealth it creates is pretty solid. But the case behind what creates creativity and innovation is weaker because we haven't pinned down what makes one society more creative than another and how that translates into innovation and economic growth. Some can argue that it's cultural tolerance, but that's still a weak case that is only starting to build a movement behind it.

On the other hand, perhaps the case that trade and specialization are limited is overdone. Yglesias notes that the "miracle" that is China's economy is still largely attributed to specialization and changes in the economy that don't depend on innovation.

The basic story is that living standards ultimate derive from productivity, and there are two ways for an undeveloped country like China to obtain productivity growth. One is to simply shift people out of a low-productivity sector (like farming in China) and into a higher productivity sector (in China, factory labor). Another would be to actually raise the in-sector productivity by getting better at farming or manufacturing or what have you. In the specific case of China, it’s crucial to note that the productivity wedge between sweatshops and rice paddies is enormous which strongly suggests that a huge amount of what China’s achieved has been achieved through the former method. And with agriculture still employing over 35 percent of the Chinese labor force, there’s a great deal more China can achieve through this path. And it’s not a path I think should be slighted. Growth achieved through this method isn’t mythical—the higher living standards are very real. What is mythical, however, is the sense of the miraculous. For the reasons Krugman lays out, there’s nothing miraculous about this and there are real limits to how far you can go with it.