The modern economy is one of specialization of labor. Consequently, development within the current economic paradigm is a deepening of the specialization of labor, which is the primary model of development that we call scientific and technological progress. A necessary condition for this type of progress is innovation: the appearance of new products and new techniques for producing old ones. This model was first described in the 17th century in the works of the early mercantilists. A slowing or stopping of the process by which the specialization of labor takes place is perceived as a crisis in the modern economic model. A simplification of the specialization of labor system (or degradation of the system), as happened in the 1990s in the Soviet Union, is perceived as an economic catastrophe.
A deepening of the specialization of labor invariably results in an increased risk for manufacturers, who must engage in a process (manufacturing)
chain of ever increasing complexity. If there are no mechanisms to reduce this risk, the specialization of labor will at some point stop deepening, and the system moves into a state of profound crisis.
In a closed economic system (one that does not interact with the rest of the world), a natural deepening of the specialization of labor can occur only to a certain extent, at which point innovation ceases to be beneficial and scientific and technological progress first slows and then comes to a halt. This hypothesis was first put forth by Adam Smith in the early 18th century and the topic was further developed by Rosa Luxemburg in the framework of Marxist political economy in the late 19th–early 20th century.
As we have seen, development within the paradigm of scientific and technological progress is possible only when mechanisms are employed to reduce risks for producers. Three such mechanisms have been devised: producer credit (risks are partially borne by the financial system);
broadening of markets for product distribution (producer risks are reduced in the initial economic system);
and consumer credit. It should be noted that only the physical broadening of markets actually reduces risk throughout the economic system;
the other two mechanisms merely redistribute the risk.