Division of Labor
One can make a pretty strong case that people living
before the nineteenth century were unaware of economic
growth. They were aware that there were periods and places
in history that had much higher standards of living than
other places and periods. The classical world of Athens and
Rome were recognized as being more prosperous than Western
Europe was in the 8th century. Prosperity was seen as the
ebb and flow of civilization, not as some long-term process.
Adam Smith was trying to explain prosperity, not growth,
when he wrote his book, The
Wealth of Nations
(1776). A key idea for Smith was that prosperity was due to
and the division of labor. If we each focus on one task that
we can do well and then learn to be even better at it with
practice, as a group we will be more productive than if we
each try to produce many different things. Further, the
extent of division of labor was limited by the extent of the
market. If only a few people trade with one another, only
limited specialization can take place and prosperity is limited. With larger markets more specialization is possible and hence greater prosperity.
We tend to ignore the importance of specialization and
division of labor because the effects are so pervasive and
common that they have become invisible to us. Milton
Friedman tried to illustrate their importance by examining
pencil and asking how many people had some role in
creating the pencil that we use. The wood must be cut and
shaped and the graphite must be mined as must the metal in
the ring that holds the eraser. The eraser and the paint
come from complex chemical processes. All the components
must be transported, assembled, and distributed. It would be
virtually impossible for any one individual to produce a
similar pencil without the aid of others.
What are implications of specialization and division of
labor? One that Smith saw was that wider trade was good.
Improved roads or new canals (an important form of
transportation before the railroads) extended markets and
allowed for greater specialization, thereby increasing
wealth. Smith argued that government restrictions on
international trade, justified by what was called
mercantilism as a way of making a nation wealthier, in fact
made the nation poorer. If we try to understand the wealth
of ancient Rome, a good deal of it must have been due to the
extreme specialization that unified political rule (the
Pax Romana) allowed. (To see how extensive trade was,
search the Internet for Mount Testaccio or Monte Testaccio.)
And, of course, a contemporary implication is that
globalization increases wealth by increasing specialization
and division of labor. This assertion often seems
controversial to politicians and journalists, but it is not to economists.
More than two centuries after Smith, economists are still
trying to understand why some countries are prosperous and
others are poor. Today the gap between the rich and the poor
is vastly greater than it was in the time of Smith because
of modern economic growth. Although there are other explanations for the gap,
division of labor is still recognized as a source. For
example, Jeffrey Sachs has stressed the importance of
geography in explaining poverty.1 Areas that are
remote with low population densities and poor transportation
will be limited in the amount of specialization they can
have and hence tend to be poor.
Hernando De Soto is another author who stresses the
division of labor.2 He argues that a pervasive
problem in poor nations is that many of the poor work and
live in the extra-legal sector and do not enjoy the
advantages of the larger market. The U.S. has a relatively
small extra-legal sector because access to the legal sector
is easy. Examples of the extra-legal sector in the U.S.
include selling drugs and sex and doing work off-the-book
for tax avoidance, but it can also include operating a
barbershop or a taxicab without a proper license. In some
nations the extra-legal sector is huge and most of the
activities being performed there are also being performed in the legal sector.
In many nations the influx of rural people into the cities resulted in most people squatting on public lands and building houses. Many of these people do not have legal
titles to their homes. De Soto argues that the people operating in the
extra-legal sector without officially recognized property
rights are limited to a small market. Without the
property-rights system that those in the U.S. take for
granted, people cannot easily borrow or enter into
contracts. Try to imagine how successful you could be in
business if you could not use the court system to enforce
any contracts, and if you were to because successful, you
could be "shaken down" by the local authorities.
De Soto argues that the challenge for the poor nations is
to give legal status to the many extra-legal activities that
have grown up spontaneously. Unfortunately, these changes
usually harm some established interest and so are opposed.
1 Jeffrey Sachs, The End of Poverty: Economic Possibilities for Our Time. Penguin, 2006.
The idea that geography matters in development is a very old explanation for why countries in the tropics have grown so slowly compared to countries in the temperate zone. The hot temperatures affect ability to work and the tropics are home to diseases and parasites that are absent in temperate regions.
Jared Diamond's Guns, Germs, and Steel: The Fates of Human Societies
(1999) has a different geography argument. Because larger groups will have more random innovations than smaller groups, the loose interconnections along the east-west axis of Eurasia gave that area a decisive advantage that bore fruit in the modern world. Diamond never mentions specialization or division of labor, but his argument has a Smithian flavor to it.
2 Hernando De Soto, The
Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books 2003.
Copyright Robert Schenk