Analysis of Adam Smith’s Theory of The Division of Labour and Its Benefits

Introduction

Adam Smith was an 18th Century Economist who was most famous for his books "An Inquiry into the Nature and Causes of the Wealth of Nations". In his first book he sets out the importance of the division of labour which he calls "the greatest improvement in the productive powers of labour" (Smith, 2001). While the theory of division of labour had already been well established, Smith was the first Economist to amplify the importance of the division of labour saying that it was the main factor in the causation of economic growth. Division of labour is defined as the breaking down of the productive process into individual parts, in which labour specialises in a particular role in the process of manufacturing a good or service. In division of labour, instead of a worker producing a product from start to end he or she works on one aspect along the chain of production. This has the added benefit in the increase of labour productivity and therefore output. Whilst Smith earlier on was overtly positive about division of labour, later he appears to contradict himself even criticising the theory. Economic growth is the process where a country experiences an increase in real output usually measured in GDP (Gross Domestic Product) which is a measure of the total monetary value of all goods and services produced within an economy over a specific time frame (usually a year). Overall, this essay will argue that Smith was positive of the theory division of labour (despite later criticisms) and that it is quintessential in the role of economic growth.

Adam Smith's Division of Labour

Adam Smith broke the benefits of division of labour into three distinct parts. Firstly, "the improvement of the dexterity of the workmen" (Smith, 2001). As workers repeatedly perform the same task they naturally get better as they become more accustomed and specialised in the process, whereas a worker who performs multiple tasks along the productive process will never truly get accustomed to any process. Secondly, by performing only one function in a productive process workers save time otherwise spent switching between tasks. Thirdly, through concentrating their minds on one task workers will "soon find out easier and readier methods of performing their own work" (Smith, 2001). By this Smith means as worker's concentrate on a specific task it is easier to learn and invent more productive ways of performing this task, thereby increasing output per worker. According to Smith these three factors would contribute to one of the largest increases in labour productivity (measured as output per worker within a period). To illustrate this, Smith used the example of a pin factor where one worker producing from start to finish could not make one pin in a day whereas ten workers individually working on a productive process could make "upwards of forty-eight thousand pins" thereby showing a rapid increase in output and increasing marginal returns (when the increase in output yielded from a productive process is subsequently larger than the increased inputs).

For division of labour to occur, Smith foresaw two primary requirements. Firstly, the market must be large enough. In small towns and villages, firms producing with division of labour will be too effective as firms will produce too many goods for the area to be able to consume. Smith used the example of a workmen producing nails. In a small market if the workman specialises in making nails he could make "three hundred thousand nails in the year", however the worker would be unable to sell anywhere near a thousand nails a day in such a market. As a result, workers in these areas are "obliged to apply themselves to all different branches of industry" so that they produce a lower quantity but larger range of goods that are more likely to be sold. While this trade will be similar, there is still the inability to capture the full productive potential of division of labour within these circumstances. In comparison larger, more rapidly growing, wealthier cities can do this because of the much larger market and therefore much larger buying force.

Secondly, a society must have a monetary system that is beyond barter. The use of coins as a medium exchange removes the double coincidence of want that takes place under bartering for goods (this being that to purchase a good you must have a good that the seller wants in return). In its nature, division of labour limits the quality of goods a worker can exchange for another meaning that "exchanging must frequently have been very much clogged and embarrassed in its operation". A monetary system removes this caveat by providing a common medium of exchange between workers, who might not have otherwise been able to trade their produce with one another.

Real economic growth occurs due to the improvement in the quality or quantity of factors of production (capital, enterprise, labour, and land) which are the inputs used to produce goods and services within an economy. An increase in either unit of factors of production will thus lead to more and possibly higher quality goods and services produced within an economy. This is likely to lead to a higher monetary value of all the goods and services produced within an economy. Using this definition, it is easy to concur why Smith explained in achieving economic growth that "The core of it lies in his emphasis on the division of labour". Smith saw the division of labour as the largest contributor to labour productivity which implies a significant increase in the quality of a factor of production (labour) and thus economic growth as a result.

While division of labour maybe a feature of increasing economic growth, Smith believed that "it is the accumulation of capital that drives it". Workers (who live off subsistence levels) and landowners (who do not own productive capital) have a low propensity to save and therefore they do not invest in capital prevents potential economic growth. Capitalists, on the other hand, are owners of productive capital and to increase future profits they invest heavily in capital. This investment increases economic growth through the accumulation of more and higher quality fixed and circulating capital which produces more goods and services within a nation. Overall, this represents an increase in the capital factor of production within an economy which means higher productivity (and therefore output) per machine. Without this an economy will be significantly held back from future productive potential.

Between Adam Smith's first and fifth book there is a change in opinion in his analysis of the division of labour. Whilst his first book clearly explains that division of labour makes a man more intelligent when saying "easier and reader methods of performing their own work" (Smith, 2001) implying focusing the mind on one process increases intellect and innovation, he later takes the opposite opinion in book five saying it makes people become "as stupid and ignorant as it is possible". This momentous change in conclusion within the two books also affects the analysis of its role in the theory of economic growth as it assumes a reduction in the quality of the labour (a major factor of production). Potentially, Smith's second conclusion means that division of labour is not the core factor in increasing economic growth, however, this is unlikely. In reality, "The Division of Labour can have both positive and negative effects, and Smith considered as dominant the positive effects" meaning that it while it has its constraints division of labour is still the key factor in the role of economic growth.

Conclusion

Overall, Smith believed that society had to have two prerequisites in place for division of labour to function. These were large enough markets so that suppliers were able to sell as much of the good as they made and a monetary system so that individuals wouldn't have to produce a range of goods in order so they could have more effectiveness through bartering. In addition to this Smith felt broadly positive about division of labour despite later "giving the opposite argument in that the division of labour is morally degenerating". In a nutshell Smith saw division of labour as a necessary part of any "improved society" in that it is in our human nature (through self-interest) to maximise satisfaction. By rapidly increasing output Smith saw division of labour as the primary way of reaching this lifestyle. Any attempt to prevent it out of concern it will make the human mind "stupid and ignorant" is therefore useless. Smith realised that division of labour would result in one of the largest expansions in the productivity of its workers and therefore a rapid rise in real output which would cause expansive economic growth. However, this could only be achieved if accompanied by high capital accumulation which could only be achieved if a large sum of the nation's wealth was fed back into the capitalists who had a higher propensity to save and invest in capital. In achieving economic growth capitalists, governments and a competitive labour market needs to "push real wages down to subsistence levels" ensuring a high proportion of national income is reinvested into the economy. To achieve economic growth, Smith thought that you couldn't just have one without the other.

Bibliography

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