Adam Smith, Allyn Young, and the division of labor.

Author:Chandra, Ramesh

The division of labor is central to Adam Smith's explanation of growth. (1) For Smith the division of labor is the chief source of productivity gains, in his famous pin factory example, (2) if each man specializes in some particular aspect of pin making, it renders possible a dramatic increase in total output and output per man. On the other hand, if there is no specialization so that every man is involved in all the aspects of pin making, output and productivity are minimal. Smith in his Wealth of Nations listed three advantages flowing out of the division of labor: increase in skills and dexterity of each worker, saving of time while going from one kind of work (or process) to another, and, finally, invention of machinery which facilitates and abridges labor. (3)

The division of labor itself arises because of the propensity of human beings to truck, barter, and exchange. This tendency is found only in humans, not in animals. Secondly, the full potential of the division of labor can only be exploited in an exchange economy. In a society of hunters, or in a subsistence economy, or in a rude state of society some kind of exchange is possible but since the total produce exchanged is quite limited, the possibility of the division of labor also becomes limited. Therefore, since the division of labor arises as a result of exchange, it essentially becomes limited by that power which gives rise to it. In other words, the division of labor is limited by the size of the market.

Not only Smith's theory of growth but also his theory of international trade was based on the concept of the division of labor. International trade widens the market and gives vent to the resources which, in the absence of trade, would remain unemployed or underemployed. International trade, by overcoming the narrowness of the domestic market, ensures that the division of labor is carried to the highest perfection. This in turn increases the productive powers of a nation and augments its annual produce to the utmost. A country produces products for which it is best suited (i.e., for which its absolute costs are lower) in terms of natural or acquired advantages and exchanges its surplus produce with the produce of other countries for which there is a demand in the home market. Free trade not only ensures gains to the consumers who get a product at a lower price but it also ensures more productive deployment of domestic capital. Indeed, Smith argued that the total industry of a country cannot be out of proportion with its total capital. So any artificial direction to economic activity, say by tariffs or import restrictions, misdirects a country's capital from more productive employments to less. (4) This indeed is why Smith was against the mercantilist policies of governmental interference and the associated parasitic apparatus they spawned. For Smith, therefore, the theory of growth and the theory of international trade were two sides of the same coin. As Hla Myint argued, "Smith's theory of foreign trade is so closely interwoven with his theory of domestic economic development that the two have to be considered together" (1977, 231).

Ever since David Ricardo couched his explanation of trade in static terms, the valuable insights of Smith regarding growth and international trade and their link with increasing returns became almost forgotten. Ricardo's explanation of trade was in terms of comparative advantage, which showed only the static gains from trade. The neoclassical theory of comparative advantage, which predominates now, is essentially Ricardian in spirit as it bypasses the role of the division of labor in international trade. As James Buchanan and Yong Yoon observed:

Despite its recent re-emergence to analytical importance, the phenomenon of increasing returns remains outside the central core of neoclassical economics. The history of this idea (or set of ideas) might have been quite different if Adam Smith's explanation of the origins of trade had not been replaced by that of Ricardo. To Smith, mutually beneficial exchange emerges because of specialisation, which, in its turn, implies the presence of increasing returns to the size of the exchange nexus. In the Ricardian logic, by contrast, trade presumably emerges because productive resources differ in their capacities to create economic value.... Comparative advantage ensures mutuality of gain. But, in this explanation, there is no direct linkage between the size of the exchange network and the degree of specialisation that is viable. There is no need to introduce increasing returns. Comparative advantage may be present even if there are constant returns to scale, both for the economy and for its separate productive sectors. (2000, 43) The principle of comparative advantage is an advance on that of absolute advantage in the sense that a country suffering absolute disadvantage in the production of every commodity could still gain from trade. However, the comparative advantage theory bypasses the importance of the division of labor in the explanation of trade as well as growth. It is possible that Ricardo was only interested in putting forward additional arguments for free trade so as to avert the declining rate of profit and consequently the onset of the stationary state, for which the theory of comparative advantage came in handy. In any case, Ricardo's main concern was not to develop a theory of international trade but to show how distribution of income among various classes affected capital accumulation and growth. Also, in his preface to The Principles of Political Economy and Taxation he mentioned that he wanted to confine himself to aspects of political economy on which he differed from Smith. It is therefore possible that Ricardo did not develop the theme of the division of labor as an explanation for growth or international trade because he saw no reason to differ from Smith on this. While Ricardo may have thought of comparative advantage as an additional insight to the explanation of trade, the subsequent literature on the subject made it a focal point of trade.

The importance of the relationship between the division of labor and the size of the market remained almost lost until it was resurrected by Allyn Young in his famous paper "Increasing Returns and Economic Progress" (1928). There he wrote: "In fact, as I am bound to confess, I am taking it as the text of this paper, in much the way some minor composer borrows a theme from one of the masters and adds certain developments or variations of his own" (529). It was characteristic of Young to underplay the importance of his own contribution. (5) This statement gave the impression that while Smith's contribution was immense his own contribution was relatively modest.

This paper argues that Young's contribution was in fact much more than what he, in his modesty, was prone to admit. Smith was more concerned with the institutional aspects of the division of labor; he wanted to study the conditions which brought out the full potential of the division of labor in a society. While Smith concerned himself with the establishment of the competitive conditions, Young was interested in the mechanics of the whole process. Young took the institutional arrangements of a competitive market system as given and extended the concept of the division of labor in important ways. His main concern was to see how the process of growth tends to be self-generating. He cast the theory of growth in terms of cumulative causation, in which departures from past trends and movements away from equilibrium far outweigh the equilibrating tendencies of the system. The objective of this paper, therefore, is to show that while Smith and Young both made important contributions on the subject of the division of labor, the nature of their contributions was different. While Smith concentrated on the need to develop appropriate institutions, (6) Young showed how competitive market forces made growth self-perpetuating. While it is true that both Smith and Young viewed growth as endogenous in the sense that it arises due to forces within the system, Young went into the mechanics of the endogenous growth process more fully. While Sraith concentrated on establishing the system of natural liberty as a precondition for endogenous growth, Young was more concerned with how the system of natural liberty actually works to produce endogenous growth.

Smith and the Division of Labor

Institutional Order

The idea that a market system contains the seeds of its own growth is inherent in Smith. Smith discussed various systems starting from a rude state of society to a system of natural liberty. The distinguishing feature among the various systems relates to the state of the division of labor. In his introduction to The Wealth of Nations Smith observed that per capita supply of necessaries and conveniences in any country is regulated by two factors: "first by the skill, dexterity, and judgement with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed.... The abundance and scantiness of this supply too seems to depend more upon the former of those two circumstances than upon the latter" (Smith 1776, vol. 1, 1-2). In a society of hunters and fishers, although the proportion of usefully employed people is large they still live in want, poverty, and disease] Civilized and thriving nations, on the contrary, were abundantly supplied with necessaries and conveniences of life even though a great number of people there do not labor at all. Further, because of the better division of labor in a system of natural liberty, an industrious and frugal peasant, in addition to food for his subsistence, was able to enjoy such things as a woollen coat, a coarse linen shirt, shoes, a kitchen grate, knives and forks and kitchen utensils, earthenware or pewter plates, and...

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