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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 specialization 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 the common 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.

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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